Newmont Mining Q3 Earnings Review: Focus On Cost Reduction Partially Offsets Impact Of Decline In Gold Prices
Newmont Mining (NYSE:NEM) announced its third quarter results on October 28 and conducted a conference call with analysts the next day. [1] As expected, the decline in gold prices over the course of the last twelve months negatively impacted the company’s bottom line, with lower operating costs partially offsetting some of the negative impact of weaker gold prices on the company’s results. Newmont’s adjusted net income, which excludes the impact of non-recurring items on earnings, stood at $126 million in Q3 2015, as compared to $249 million in the corresponding period of last year. [2] The most important takeaway from the earnings conference call was the management’s focus on maintaining low cost mining operations and strengthening its balance sheet, in order to be in a position to operate profitably in a variety of gold pricing environments. ((Newmont’s Q3 2015 Earnings Call Transcript, Seeking Alpha))
Weaker Gold Prices
Newmont’s average realized price for gold sales stood at $1,104 per ounce in Q3 2015, around 13% lower as compared to the average realized price in the corresponding period of last year. [2] Gold prices have fallen over the course of the last twelve months mainly due to concerns over an interest rate hike by the Fed. From an investment point of view, gold is generally considered a safe haven asset and investments in gold are primarily made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions generally weaken the investment demand for gold. Moreover, an increase in interest rates tends to shift investors towards interest-bearing assets since investments in gold do not offer any returns besides capital gains. Fears over an interest rate hike reduced the investment demand for gold and led to a fall in the prices of the metal over the past year, negatively impacting Newmont’s realized prices in Q3.
Gold Prices in 2015, Source: Kitco
However, with the Fed keeping interest rates steady at its September meeting, gold prices have recovered somewhat, as illustrated by the chart shown above. Going forward, any changes in the Fed’s stance are likely to cause short term fluctuations in gold prices.
Cost Reduction
Cost reduction and productivity improvement initiatives, in addition to the mining of low-cost high grade ores, helped lower the company’s All-in Sustaining Costs (AISC) metric for gold production to $835 per ounce in Q3 2015, around 16% lower than the AISC for the corresponding period of 2014. [3] The AISC metric captures all of the expenses required to sustain a company’s ongoing mining operations.
In response to the decline in gold prices over the last two years, Newmont has divested a number of high-cost mining operations. Including the sale of the Waihi mine in October, the company has realized $1.7 billion over the course of the last two years through the sale of non-core assets. [4] Newmont has used the proceeds of these non-core asset sales to reduce its debt as well as to invest in low-cost gold mines. For example, the company acquired the Cripple Creek & Victor gold mine in August, which is expected to increase Newmont’s gold production while at the same time lowering the company’s average AISC. In addition to Newmont’s cost reduction initiatives, the mining of high grade ore sections at the Batu Hijau mine in Indonesia has helped lower the overall AISC for Newmont. As a result of Newmont’s success in cost reduction, the company management revised downward AISC guidance for 2015 by 4% to $880-940 per ounce. [2]
As a cumulative result of steps taken by Newmont in response to the decline in gold prices, the company is now poised to operate competitively in a variety of gold pricing environments. These measures should help Newmont weather short term fluctuations in gold prices caused by changing expectations of the trajectory of interest rates and economic growth.
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Notes:
- Newmont’s Q3 2015 Earnings Call Transcript, Seeking Alpha [↩]
- Newmont’s Q3 2015 Earnings Release, SEC [↩] [↩] [↩]
- Newmont’s Q3 2015 Earnings Presentation, Newmont Mining Website [↩]
- Newmont Completes Sale of Waihi Operations in New Zealand, Newmont Mining News Release [↩]