Newmont Mining’s 2018 Results Likely To Be Marred By Lower Production And Declining Prices Of Gold And Copper; Outlook Remains Bright

by Trefis Team
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Newmont Goldcorp Corporation
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Newmont Mining Corp. (NYSE: NEM), one of the largest gold companies in the world, is set to announce its fourth quarter results on February 21, 2019, followed by a conference call with analysts. The market expects the company to report revenue of $1.88 billion in Q4 2018, 3.1% lower than in Q4 2017. Adjusted earnings for the quarter are expected to be $0.24 per share compared to $0.40 per share in the year-ago period. The lower revenue and EPS is likely to be the result of a decrease in gold and copper production, coupled with a decline in the realized price of both the commodities, slightly offset by a decrease in cost of sales on the back of lower volume. Full year revenues are expected to decline by 6.8% to $6.85 billion in 2018 from $7.35 billion in 2017.

We have summarized our key expectations from Newmont Mining’s earnings in our interactive dashboard – Production Cuts To Affect Newmont’s Financial Performance In 2018. In addition, here is more Materials data.

 

Key Factors Affecting Earnings

Lower volume: Gold production declined by 7% in the first 9 months of 2018 compared to the corresponding period of 2017. This was mainly driven by a 7% reduction in volume from Carlin (USA) due to lower mill throughput at Mill 6 from unscheduled downtime and ore chemistry, as well as lower leach tons placed and recovered; and 41% lower production at CC&V (USA) primarily due to lower ore grade mined, a build-up of concentrate inventory to be shipped and processed in Nevada, and lower leach tons placed at Valley Leach Fill 2. We believe that these production cuts will have an adverse effect on gold ounces sold, which is expected to be 6.8% lower at 5.2 million ounces in 2018, compared to 5.6 million ounces in 2017. Additionally, we expect copper volume sold to marginally decrease to 110 million pounds in 2018 from 111 million pounds in 2017, mainly driven by a decrease in copper production due to lower ore grade milled at Phoenix in North America.

Declining prices: Gold prices have seen a decline since June-2018, mainly driven by rising interest rates in the US and a stronger dollar which made the greenback a more lucrative investment option compared to the yellow metal. Price ranged from a high of over $1,350 per ounce to about $1,180 per ounce in the second half of the year. Thus, for the full year, we expect the average realized gold price to be marginally lower at $1,252/oz in 2018 compared to $1,255/oz in 2017. Elevated copper price levels due to strong EV sales received a major jolt in the form of US-China trade tensions, which saw copper prices tumbling from over $3.15/pound to about $2.50/pound in the latter half of 2018. Though global copper prices saw some recovery in Q4, they remained much lower than the year’s high. Thus, for the full year, we expect realized copper price per pound to decline to $2.81 in 2018 from $2.84 in 2017.

Profitability: After two years of remaining in the red, we expect net income margin to enter the positive territory in 2018, driven by lower cost of sales and a decrease in tax outgo. Due to lower production and volume sold during the year, we expect cost of sales to be slightly lower compared to the previous year. Additionally, the implementation of the Tax Cuts and Jobs Act, which has reduced the federal tax rate from 35% to 21%, is expected to boost Newmont’s profitability for the year. We expect net margins to increase to approximately 2% in 2018, compared to -1.3% in 2017.

Future Looks Bright

As per a recent announcement, Newmont Mining Corp has decided to acquire Goldcorp Inc. in a $10 billion deal that is likely to conclude in Q2 2019. The new company – Newmont Goldcorp – is expected to be the largest gold miner in the world. We believe that this acquisition, which is likely to provide Newmont with geographic diversification, larger scale, and operational efficiencies, would push the company’s margins higher. With its closest rival, Barrick Gold also concluding a major deal recently (Barrick Gold acquired Randgold Resources), the acquisition of Goldcorp will help Newmont compete effectively in the market and maintain its position as the market leader in the gold segment.

After witnessing a declining trend over the last few months, gold prices have seen an upswing since January 2019, driven by an increasing amount of gold being bought by central banks world-over in the face of an uncertain economic climate. Additionally, the outlook on copper prices is also positive with rising demand and sales of electric vehicles. Thus, rising metal prices and synergies from the acquisition of Goldcorp are expected to be the primary drivers of growth in Newmont’s profitability and its stock price.

We have a price estimate of $39 per share for Newmont Mining Corp.

 

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