Newmont Mining Well Placed To Face The Challenges Of 2016
Newmont Mining (NYSE:NEM) enters 2016 well placed to face the challenges that it faces. Gold prices have fallen considerably over the past couple of years, putting downward pressure on the profitability of gold miners. This has forced gold miners globally to focus increasingly on cost reduction in order to prop up their bottom lines. While gold mining companies have had varied levels of success with their respective cost reduction efforts, Newmont Mining has been fairly successful with its measures to reduce it average operating costs. In this article, we will take a look at why Newmont is well placed to face the challenge of weak gold prices in 2016.
Gold Prices in 2016
Gold prices weakened considerably over the course of 2015, averaging nearly 8% lower than in 2014.
Gold Prices in 2015, Source: Kitco
Gold prices were under pressure over the course of 2015 due to fears of the Federal Reserve raising interest rates. Gold as an investment is considered as a safe haven asset and investments in gold are made with the intention of hedging against the impact of economic uncertainty. Moreover, since gold does not offer any returns besides capital gains, rising interest rates increase the relative attractiveness of interest-bearing assets vis-a-vis gold from an investment standpoint, weakening the investment demand for gold. The Fed finally raised interest rates towards the end of 2015, and indicated that further interest rate hikes would be contingent upon the pace of economic and jobs growth in the U.S. A strengthening U.S. economy is likely to stoke concerns of further rate hikes in 2016, putting downward pressure on gold prices.
Besides the investment demand for gold, a slowing Chinese economy will retard the growth in jewelry demand for gold, which has a positive correlation with macroeconomic growth. China is the world’s largest consumer of gold, and weakening Chinese economic growth will certainly negatively impact the jewelry demand for gold. Since the jewelry and the investment demands for gold taken together account for nearly three-fourths of the overall demand for the yellow metal, weakness in these areas will limit the upside for gold prices in 2016. Hence, the challenges this year are similar to those of last year and Newmont already has a head start in terms of preparedness for tackling them. [1]
Newmont Well Poised for 2016
Through a combination of cost reduction initiatives and the sale of high-cost mines, Newmont Mining has managed to lower its average costs of producing gold. Newmont’s all-in sustaining costs (AISC) for its gold mining operations stood at $864 per ounce in the first nine months of 2015, which represents a 16% year-over-year decline from the figure of $1,031 per ounce reported in the corresponding period of last year. [2] Comparisons with the year 2013 are even more favorable, with Newmont’s AISC in the first nine months of 2015 standing 22% lower than the figure of $1,104 per ounce reported for the full year 2013. [3] The AISC metric is a comprehensive measure of costs required to sustain a company’s ongoing mining operations. The sale of non-core assets has played a major role in lowering Newmont’s AISC, with the company raising nearly $1.7 billion through the sales of its high-cost mines over the last couple of years. [4] Using the proceeds of its non-core asset sales, the company has also managed to keep its debt in check. Newmont’s total debt stood at $6.3 billion at the end of Q3 2015, as compared to $6.7 billion at the end of 2013. [2]
Having managed to lower both its average operating costs and its outstanding debt, Newmont is well placed to weather a period of sluggish growth in gold prices. With a slowing China and the possibility of rising interest rates in the U.S. spooking the markets for gold, a leaner, lower-cost Newmont is in good shape to combat the sluggishness in prices expected in 2016.
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Notes:
- Gold Demand Trends Q3 2015, World Gold Council [↩]
- Newmont Mining’s Q3 2015 10-Q, SEC [↩] [↩]
- Newmont Mining’s 2013 10-K, SEC [↩]
- Newmont Completes Sale of Waihi Operations in New Zealand, Newmont Mining News Release [↩]