Newmont Earnings Review: Cost Reductions Boost Q2 Results Despite Weak Gold Prices

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Newmont Mining (NYSE:NEM) announced its second quarter results on July 22 and conducted a conference call with analysts the next day. ((Newmont Announces Second Quarter 2015 Earnings Call, Newmont Mining Website)) Despite lower gold prices, the company’s adjusted net income, which excludes the impact of non-recurring items on earnings, rose from $101 million in Q2 2014 to $131 million in Q2 2015. [1] Given the subdued gold pricing environment, Newmont’s cost rationalization efforts played a major role in boosting the company’s quarterly results. The company’s revenues rose to $1.91 billion in Q2 2015, up from $1.77 billion in the corresponding period last year, primarily as a result of higher copper shipments. [1] In this article, we will take a closer look at Newmont’s second quarter results.

Gold Prices and Shipments

Newmont’s average realized gold price for Q2 2015 stood at $1,179 per ounce, around 8% lower as compared to the average realized price in the corresponding period last year. [2] Revenues from gold sales accounted for 90% of Newmont’s total revenues in 2014. [3] Thus, the fall in gold prices negatively impacted the company’s results.

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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. 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.

Gold prices have averaged roughly $1,200 per ounce so far this year. Prices have weakened considerably with expectations of an interest rate hike putting downward pressure on prices. The downward trajectory of gold prices so far this year is illustrated in the chart shown below.

Gold Prices in 2015, Source: Kitco

Newmont’s gold shipments declined marginally to 1.16 million ounces in Q2 2015 from 1.17 million ounces in the corresponding period last year. [1] The company’s gold production and shipments remained largely unchanged year-over-year despite a loss of around 100,000 ounces in production as a result of the divestment of high-cost mines. [2] This was primarily because of an increase in gold shipments from the Batu Hijau mine in Indonesia, as a result of the resumption of normal operations in Indonesia, after the standoff between the company and the Indonesian government over the issue of export taxes ended in Q3 2014. [2]

Copper Prices and Shipments

Newmont’s copper shipments rose sharply to 81 million pounds in Q2 2015, as compared to 36 million pounds in the corresponding period last year. [1] This was primarily due to the mining of higher grade ore at the company’s Batu Hijau copper mining operations in Indonesia in the second quarter this year. In contrast, the company operated at reduced production rates in Q2 2014 as it negotiated with the Indonesian government over regulatory changes which impacted the company’s operations in the country. Normal operations resumed at Batu Hijau at the end of September. However, the impact of an increase in copper shipments on the company’s results was partially offset by a fall in realized prices.

The company’s average realized price for copper fell to $2.41 per pound in Q2 2015, as compared to $3.01 per pound in Q2 2014. [2] The fall in realized prices was mainly due to weakness in demand for the metal, particularly from China — the world’s largest consumer of copper, where slowing economic growth has dampened demand for the metal. Chinese GDP growth is expected to slow to 6.8% in 2015, from 7.4% in 2014, which has negatively impacted demand for the metal from China. [6] The downward trajectory of copper prices over the course of the last twelve months is illustrated by the chart shown below.

Copper Prices, Source: LME

Costs

Newmont’s efforts at cost reduction and productivity improvement were mainly responsible for an improvement in the company’s quarterly results. The company’s All-in Sustaining Cost (AISC) metric for gold production fell to $909 per ounce in Q2 2015, around 14% lower than the AISC for the corresponding period of 2014. [2] 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.

The improvement in the company’s AISC metric can be attributed to the company’s cost reduction initiatives and the sale of high-cost mining assets, in addition to the mining of higher grade ores at various mines, most prominently the Batu Hijau. In addition, the strengthening of the U.S. Dollar against global currencies lowered the costs of the company’s international gold mining operations, since costs for these operations are denominated in the local currencies.

Outlook

Given the higher than expected production from the company’s Indonesian mining operations and the acquisition of the Cripple Creek & Victor gold mine, set to be completed next month, the company has revised its consolidated production guidance range upwards by 3% from its previous guidance to 5.35-5.79 million ounces for 2015. [1] In addition, the company lowered the AISC guidance for its gold mining operations for 2015 by around 4% from its previous guidance to $920-980 per ounce. ((Newmont’s Q2 2015 Earnings Call Transcript, Seeking Alpha)) This is not surprising given the divestment of high-cost mines and a strong U.S. Dollar, which has helped lower costs for the company’s international operations. Taking into account the pending sale of the Waihi mine, Newmont has generated nearly $1.6 billion through the sale of non-core assets since 2013. [7] Given the prevailing subdued gold pricing environment, a lower cost structure will stand the company in good stead for the rest of the year and beyond.

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Notes:
  1. Newmont’s Q2 2015 Earnings Release, SEC [] [] [] [] []
  2. Newmont’s Q2 2015 Earnings Presentation, Newmont Mining Website [] [] [] [] []
  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. World Economic Outlook, IMF []
  7. Newmont’s Q2 2015 Earnings Call Transcript, Seeking Alpha []