Cost Reductions To Offset Impact Of Lower Gold And Copper Prices On Newmont’s Q2 Results

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Newmont Mining (NYSE:NEM) will announce its second quarter results on July 22 and conduct a conference call with analysts the next day. [1] We expect lower gold prices in Q2 2015, as compared to the corresponding period last year, to negatively impact the company’s results. In addition to weak gold prices, the prevailing subdued copper pricing environment will negatively impact the results of the company’s copper mining operations. In response to the weakness in gold prices, Newmont has divested a number of high-cost, non-core assets, since the middle of 2013. These non-core asset sales have helped lower the company’s cost structure and have put it in a position to operate more competitively in a subdued gold pricing environment. Lower operating costs are expected to at least partially offset the negative impact of weak commodity prices on the company’s Q2 earnings. In this article, we will take a look at what to expect from Newmont’s second quarter results.

See our complete analysis for Newmont Mining

Gold Prices

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Gold prices have fallen over the course of the last twelve months, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program and expectations of an interest rate hike. The tapering of QE implied strengthening U.S. economic growth. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and led to a fall in prices of the metal. London PM Fix gold spot prices, which averaged close to $1,300 per ounce in Q2 2014, have averaged close to levels of $1,200 per ounce in Q2 2015. [2] Revenues from gold sales accounted for around 90% of Newmont’s total revenues in 2014. [3] Thus, lower gold prices are expected to negatively impact the company’s revenues and profitability in Q2 2015.

Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. [4] However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [5] An interest rate hike is likely to lead to a decline in gold prices, as investors shift towards higher yielding assets. The downward trajectory of gold prices so far this year is illustrated in the chart shown below.

Gold Prices in 2015, Source: Kitco

Copper Prices

Copper prices have declined sharply from their levels in the middle of 2014, mainly due to concerns over copper demand from China. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for the metal. [6] Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors. A slowdown in Chinese economic growth has negatively impacted Chinese demand for copper. Chinese GDP growth is expected to slow to 6.8% in 2015, from 7.4% in 2014. [7]

London Metal Exchange (LME) copper prices averaged roughly $6,000 per ton in Q2 2015, as compared to approximately $6,800 per ton in Q2 2014. [8] The weakness in copper prices will adversely affect Newmont’s year-over-year quarterly results.

Portfolio Optimization

Newmont has made efforts to optimize its portfolio of mines through the sale of non-core assets. The company has raised nearly $1.3 billion through non-core asset sales since 2013. [9] Newmont intends to redeploy capital into projects that offer better returns. Asset sales and operational improvements have helped lower the company’s all in sustaining costs (AISC) metric, which stood at $849 per ton in Q1 2015, as compared to $1,034 per ton in the corresponding period of 2014. [10] The AISC metric captures all of the expenditures incurred to discover, develop, and sustain production. AISC includes costs applicable to sales, remediation costs, general and administrative costs, advanced projects and exploration expenses, treatment and refining costs, sustaining capital expenditure, and other miscellaneous expenses. This metric helps investors better gauge the company’s performance. Focusing on its low-cost, core gold mines has lowered Newmont’s average costs of production, as well as increased its flexibility to operate in an environment of subdued gold prices. Thus, just like in Q1, the company is likely to report lower year-over-year AISC figures in Q2 as well. Given that gold prices are unlikely to increase significantly in the near term, these steps will stand the company in good stead in 2015.

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Notes:
  1. Newmont Announces Second Quarter 2015 Earnings Call, Newmont Mining Website []
  2. Gold Price Charts, Kitco []
  3. Newmont’s 2014 10-K, SEC []
  4. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters []
  5. Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal []
  6. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  7. World Economic Outlook, IMF []
  8. LME Copper Prices, LME []
  9. Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico, Newmont News Release []
  10. Newmont’s Q1 2015 Earnings Presentation, Newmont Mining Website []