Newmont Mining’s Q3 Earnings Preview: Cost Reductions To Partially Offset Impact Of Weak Gold Prices

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Newmont Mining (NYSE:NEM) will announce its third quarter results on October 28 and conduct a conference call with analysts the next day. [1] We expect the decline in gold prices over the course of the last twelve months to negatively impact the company’s results. Apart from weak gold prices, the prevailing subdued copper pricing environment will also negatively impact Newmont’s results. In response to the weakness in gold prices, Newmont has divested a number of high-cost, non-core mines since the middle of 2013. The sale of these non-core assets has helped lower the company’s cost structure and put it in a position to operate more competitively in a subdued gold pricing environment. Lower operating costs will at least partially offset the negative impact of weak commodity prices on the company’s Q3 earnings. Despite the weakness in gold prices, Newmont’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, driven by the reduction in the company’s operating costs. [2] In this article, we will take a look at what to expect from Newmont’s third quarter results.

Gold Prices

Gold prices have fallen over the course of the last year or so, primarily over fears of an interest rate hike by the Fed. From an investment point of view, gold is generally considered a safe haven asset and investments are primarily made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions and rising interest rates generally weaken the investment demand for gold. An increase in interest rates pushes investors towards interest-bearing assets, which give higher yields as compared to gold, which does not offer any returns besides capital gains. The strengthening of the U.S. economy and fears over a potential interest rate hike by the Fed reduced the investment demand for gold and led to a fall in the prices of the metal. London PM Fix gold spot prices, which averaged roughly $1,280 per ounce in Q3 2014, averaged around $1,120 per ounce in Q3 2015. [3] Since gold mining accounts for most of Newmont’s revenues, the decline in gold prices is expected to negatively impact the company’s revenues and profitability in Q3. The following chart illustrates the trajectory of gold prices so far this year. Gold prices have averaged roughly $1,176 per ounce this year, as compared to $1,266 per ounce in 2014. [3]

Gold Prices in 2015, Source: Kitco

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Gold prices have recovered somewhat post the Fed’s decision to hold interest rates steady in its September meeting. An interest rate hike in the near future is contingent upon the rates of employment growth, inflation, and economic growth.

Copper Prices

Copper prices have declined sharply over the course of the past twelve months, mainly due to concerns over copper demand from China. China accounts for nearly 40% of the world’s demand for copper and is the largest consumer of the metal. [4] Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors, and the demand for copper is strongly correlated with economic growth. 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. [5]

London Metal Exchange (LME) copper prices averaged roughly $5,300 per ton in Q3 2015, as compared to approximately $7,000 per ton in Q3 2014. [6] The decline in copper prices will certainly negatively impact Newmont’s quarterly results.

Portfolio Optimization

In response to the decline in gold prices over the past couple of years, Newmont has made efforts to reduce the average costs of its operations through the sale of non-core assets. The company has raised nearly $1.6 billion through non-core asset sales since 2013. [7] Newmont intends to redeploy capital into projects that offer better returns. A combination of asset sales and operational improvements have helped lower the company’s all in sustaining costs (AISC) metric, which stood at $879 per ounce in the first half of 2015, as compared to $1,048 per ounce in the corresponding period of 2014. ((Newmont’s Q2 2015 Earnings Release, SEC)) The AISC metric captures all of the costs required to sustain a company’s ongoing mining operations. 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. However, with the Fed holding interest rates steady, we would like to hear the company management’s take on the likely direction of gold prices going forward, and how that will impact the company’s strategy. More information on this front will shed some light on the road ahead for Newmont Mining.

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Notes:
  1. Newmont Announces Third Quarter 2015 Earnings Call, Newmont Mining Website []
  2. Newmont’s Q2 2015 Earnings Release, SEC []
  3. Gold Price Charts, Kitco [] []
  4. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  5. World Economic Outlook, IMF []
  6. LME Copper Prices, LME []
  7. Newmont Sells Stake in Valcambi Gold Refinery in Switzerland, Newmont News Release []