Newmont Mining Q4 2015 Earnings Preview: Decline In Gold Prices To Adversely Impact Results
Newmont Mining (NYSE:NEM) will announce its fourth quarter results on February 17 and conduct a conference call with analysts the next day. [1] We expect the decline in gold and copper prices over the course of 2015 to negatively impact the company’s results. In response to declining gold prices, the company has divested a number of high-cost, non-core mines since the middle of 2013. The divestment of these non-core assets and the company’s cost reduction initiatives has helped Newmont lower operating costs and will partially offset the impact of weaker commodity 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 the previous year. [2] In this article, we will take a look at what to expect from Newmont’s fourth quarter results.
Decline in Gold Prices
Gold Prices in 2015, Source: Kitco
The graph shown above illustrates the decline in gold prices over the course of the last year. Gold prices fell over the course of 2015, mainly due to concerns over an interest rate hike by the Fed, which finally materialized in December. From an investment point of view, gold is considered a safe haven asset, with investments in the commodity usually made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions and rising interest rates generally adversely affect the investment demand for gold. As interest rates rise, investors tend to shift towards interest-bearing assets, which give higher returns as compared to gold, which does not offer any returns besides capital gains. Thus, the strengthening of the U.S. economy and concerns over an interest rate hike drove down gold prices in Q4 2015. Gold prices stood at levels of $1,100 per ounce in Q4 2015, as compared to levels close to $1,200 per ounce in the corresponding period of 2014. [3] The decline in gold prices will adversely affect the company’s Q4 results.
Decline in Copper Prices
Copper prices declined sharply over the last twelve months, mainly due to concerns over weakening copper demand from China. China is the largest consumer of copper in the world, accounting for nearly 40% of the world’s demand for the metal. [4] Since copper has diverse industrial applications, the demand for the metal is strongly correlated with economic growth. Slowing economic growth in China has negatively impacted copper prices, with London Metal Exchange (LME) copper prices averaging roughly $4,900 per ton in Q4 2015, as compared to approximately $6,600 per ton in Q4 2014. [5] The fall in copper prices will certainly negatively impact Newmont’s quarterly results.
Cost Reduction
In response to the fall in gold prices over the past few years, Newmont Mining has tried to reduce the average costs of its operations through non-core asset sales and improving the productivity of its operations. The company has raised nearly $1.7 billion through non-core asset sales since 2013. [6] A combination of asset sales and operational improvements have helped lower the company’s all in sustaining costs (AISC) metric, which stood at $835 per ounce in Q3 2015, as compared to $995 per ounce in the corresponding period of 2014. [2] The AISC metric is a comprehensive measure of all of the costs required to sustain a company’s ongoing mining operations.
Going forward, in the earnings conference call, we would like to hear the management’s take on the trajectory of gold prices , and if more cost reduction initiatives are in the pipeline. More information on this front will shed some light on the road ahead for Newmont Mining.
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Notes:
- Newmont Announces Fourth Quarter and Full Year 2015 Earnings Call, Newmont Mining Website [↩]
- Newmont’s Q3 2015 Earnings Release, SEC [↩] [↩]
- LME Gold Prices, Kitco [↩]
- Copper Ends at 5-Month Low on China Worries, Wall Street Journal [↩]
- LME Copper Prices, LME [↩]
- Newmont Completes Sale of Waihi Operations in New Zealand, Newmont Mining News Release [↩]