How Newmont Mining’s Strong Cash Flow Position Is an Advantage for the Company

by Trefis Team
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NEM
Newmont Mining
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Newmont Mining (NYSE: NEM) has seen a declining trend in its revenue since 2012 due to various interdependent factors such as political issues in Indonesia, an unpredictable environment for gold prices, and a subdued environment for copper prices. Owing to the fall in revenue, the company’s management had planned a systematic cash flow improvement program in order to cope with a future environment of instability. The positive result of this schedule is visible as per the latest quarter results released by the company which represented an improved cash flow position of 107% Y-O-Y.                                                       (Note: Fall in Revenue in 2016 attributable to the sale of Batu Hijau mine in Indonesia)

The trend of improvement in the cash flow position of the company is depicted in the chart below. You can view our base case for Newmont Mining here and create different scenarios using our interactive platform.

The improvement is mainly driven via the company’s strategy of reducing its all-in sustaining cost (AISC) by investing in existing mines to increase its operational efficiencies. AISC is a comprehensive metric used to measure all costs pertaining to production and sustaining capital expenditure (capex) required to sustain the ongoing mining operations.

(Note: Increase in AISC in Q3 ’17 attributable to the increased investment in exploration and development projects)

The strengthening of Newmont’s cash flow position would remain beneficial as gold prices are expected to remain subdued in the upcoming year. The Fed is expected to hike interest rate in its December Federal Open Market Committee (FOMC) meeting by 25 basis points, followed by four more hikes in 2018. [1] This would lead to further strengthening of the U.S. dollar and make the yellow metal comparatively expensive. A fall in gold prices would impact the company’s top line significantly as gold contributes to more than 90% of Newmont’s revenue. As per our estimates, the company has net debt outstanding of $7521 million with a few tranches due to 2019 and next in 2022. [2] A strong cash flow position would enable the company to successfully retire its debt and sustain its operation in an environment of falling revenue.

The company has projected an AISC outlook of $900-$950 for 2017 and aims to reduce it further in the upcoming year through its strong project pipelines. This would enable the company to maintain its margins even as gold prices fall.

We have a $36 price estimate for Newmont, which is currently in line with the market price.

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 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. Goldman Sachs Sees Four 2018 Fed Rate Hikes as U.S. Growth Gains, Bloomberg []
  2. Newmont Mining (NEM) Q3 2017 Results – Earnings Call Transcript, Seeking Alpha []
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