Why Newmont’s South American Gold Mining Division Is Getting A New Lease On Life

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The Yanacocha mine, located in Peru, is the only operating mine in Newmont Mining’s South American Gold Mines division. However, the Yanacocha mine is a maturing mine characterized by declining ore grades and production. As a result, the division’s shipments (and consequently its share in the company’s overall revenue), as well as profitability, have gone down over the years as illustrated by the graphs shown below.

 

Though lower gold prices have contributed to a shrinking of the division’s margins, an increase in unit production costs as a result of the mining of lower grade ore and a decline in production have also had a significantly negative impact on the division’s profitability. However, the commencement of mining from the Merian mine in Suriname in the fourth quarter of this year will lead to a revival in fortunes of the division.

The Merian mine is expected to produce an average of 400,000-500,000 ounces of gold annually in the first five years of production at an all-in sustaining cost (AISC) of around $675 per ounce, which is much lower than the Yanacocha mine’s expected AISC of $1135 per ounce (considering mid-points of guidance). [1] [2] With the ramp up of production from the low-cost Merian mine, the South American Gold Mines division’s margins and contribution to Newmont’s total revenue will increase significantly, as summarized by the table shown below.

 

South American Gold Mines Revival

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Newmont Mining

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Notes:
  1. Newmont Mining Q2 2016 Earnings Presentation, Newmont Mining Website []
  2. Newmont Welcomes Suriname’s Decision to Participate in the Merian Gold Project, Newmont Mining News Release []