Does It Make Sense For Newmont To Increase Its Gold Output In An Unfavorable Environment For Gold?

Newmont Mining (NYSE:NEM) in its latest long term outlook increased their production forecast for 2018 by .2 million ounces of gold. ^[1] With the latest update on interest rate hikes announced this week, three more rate hikes are almost certain in 2018, which would reduce the potential of enhanced revenue for gold mining companies in the upcoming year.

Newmont’s increase in its gold production volume is mainly attributable to the strong project pipeline and mine improvement initiatives driven by the company. Along with the increase in production outlook, the company has also reduced its outlook for its  all-in sustaining costs (AISC) by $25 per ounce to a range of $965 and $1,025 per ounce in 2018. The AISC is a comprehensive metric which captures all costs (production costs as well as sustaining capital expenses) required to sustain ongoing mining operations. The reduced AISC would, in turn, enable the company to produce gold in an efficient manner. However, the AISC for 2018 is higher than the expected AISC for 2017 of $900-$950. ^[2] This is mainly due to the increase in advanced exploration and sustaining capital costs for next year, the benefits of which is expected to be reaped over the next 5 years. AISC is expected to be between $870 and $970 towards 2019, which depicts the company’s trajectory towards cost efficiency. ((Newmont Provides Updated 2018 and Longer-term Outlook, Newmont Mining News Release))

However, we expect that Newmont would not be able to take complete advantage of its increased output given the bearish forecast for gold prices in the upcoming year coupled with its increase in expected cost. Gold is largely considered a safe haven asset from an investment point of view, with macroeconomic or geopolitical uncertainty driving the investment demand for the yellow metal. Demand for gold as an investment is inversely related to the U.S. interest rate. Rising interest rates would most likely drive investors towards other asset classes such as fixed income investments as they become more attractive. Below is our projection for gold prices over our forecast period. You can view our base case for the gold price forecast here and create different scenarios using our interactive platform.

Despite the pessimistic outlook on gold, the metal might see a spike in its price in case of any sudden geopolitical outbreak like the recent uncertainty regarding North Korea’s nuclear agenda. In such a scenario, Newmont would be able to significantly benefit from its increased production volume. Apart from that, we expect Newmont’s earnings to be stagnant in 2018 even with the increase in its production volume.

1. Newmont Provides Updated 2018 and Longer-term Outlook, Newmont Mining News Release [↩]
2. Newmont Announces Third Quarter 2017 Results, Newmont Mining News Release [↩]