The Year 2016 In Review: Focus On Cost And Debt Reduction As Newmont Braces For Lower Gold Prices Next Year

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The year 2016 was characterized by wide fluctuations in gold prices. Prices rose from levels below $1100 per ounce in January to levels in excess of $1350 per ounce in the weeks post the UK’s June 23 EU referendum, before declining again towards year end. [1]

Gold Prices 2016

(Gold Prices In 2016, Source: Kitco)

Gold prices averaged close to $1250 per ounce for the full year 2016, which represented the first full year of an increase in average gold prices after three straight years of decline over the course of 2013-2015. [1] Though prices increased on average in 2016, Newmont Mining continued to focus on reducing its average operating costs, measures that the company had initiated in response to the decline in gold prices over previous years. With gold prices declining towards the end of the year, the company’s actions have positioned it well to contend with an environment of relatively subdued prices going forward.

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Fluctuations in Gold Prices

Gold is considered a safe-haven asset from an investment point of view, with macroeconomic uncertainty primarily driving investors towards the yellow metal. Moreover, since gold as an investment only offers capital gains as returns, an increase in interest rates tends to lower the investment demand for gold vis-a-vis interest linked securities. Gold prices declined towards the end of 2015 in anticipation of an interest rate hike by the Fed, which occurred in December of last year. However, concerns over sluggish global economic growth drove gold prices higher in the first half of 2016. Moreover, the unexpected outcome of the UK’s EU referendum in June heightened global macroeconomic concerns, driving up gold prices. The increase in prices was driven by heightened safe-haven investment demand for gold, particularly from gold ETFs and similar products, as illustrated by the table shown below.

Gold Demand ETFs

Despite exceeding levels of $1350 per ounce in the weeks following the UK’s EU referendum, prices declined once again in anticipation of an interest rate hike by the Fed, which materialized  in December. A strengthening U.S. economy and expectations of higher inflation in 2017 have increased chances of more rate hikes next year. [2]

Focus On Cost Reduction

Despite higher gold prices this year, Newmont Mining has continued to focus on cost reduction. Through a range of operational improvements, the company has managed to lower its all-in sustaining cost metric (AISC), which is a comprehensive measure of all costs required to sustain ongoing mining operations.

NEM AISC

(Source: Newmont Mining’s Q3 2016 Earnings Presentation)

A part of the reason for the reduction in Newmont’s AISC over the past few years has been the sale of high-cost mines by the company. Though the company completed the divestment of its Batu Hijau mine last month, this particular asset sale does not fall into the category of high-cost mines. However, the company’s mining operations at Batu Hijau were adversely impacted by unfavorable regulatory changes impacting the operations and taxation of the mining industry in Indonesia, where the mine is located. Thus, though the sale of the Batu Hijau mine does not necessarily result in a reduction in the company-wide AISC, it allows the company to exit a regulatory jurisdiction characterized by uncertainty.

Debt Reduction

Another area where the company maintained its thrust of previous years was debt reduction. The company has deployed the proceeds of the sale of non-core assets from previous years as well as operating cash flows to lower its outstanding debt.

NEM Change in Net DebtWith a stronger balance sheet, the company is well placed to weather a period of lower gold prices.

The Road Ahead

With the strengthening of the U.S. economy accompanied by a rally in the stock markets, the investment demand for gold is expected to decline next year. Moreover, expectations of further rate hikes by the Fed are likely to act as dampeners for gold prices in 2017. However, Newmont Mining, with its focus on low-cost mining operations and debt management, is well placed to take on the challenges of 2017.

Have more questions about Newmont Mining? See the links below.

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. Historical Gold Prices, Kitco [] []
  2. Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017, Wall Street Journal []