Newmont Mining’s 2018 Performance: Declining Volume Hits Revenue Growth While Bottom Line Grows Due To Lower Tax Outgo

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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, announced its Q4 2018 results on February 21, 2019, followed by a conference call with analysts. The company beat market expectations by posting revenue of $2.05 billion in Q4 2018, 5.8% higher compared to $1.94 billion in Q4 2017, mainly driven by higher gold production in the fourth quarter of 2018. Adjusted earnings were $0.40 per share in Q4 2018 compared to $0.38 in the year-ago period. Higher earnings were mainly as a result of lower tax expense following the implementation of the TCJ Act. For the full year, though Newmont surpassed consensus expectations by posting revenue of $7.25 billion in 2018, it was 1.7% lower compared to $7.38 billion in 2017. Lower revenues were primarily driven by a decrease in gold shipments for the full year on the back of lower production at various sites and decline in copper prices due to US-China trade tensions, partially offset by a marginal increase in gold price.

We have summarized the key takeaways from the announcement in our interactive dashboard – How Did Newmont Mining Fare In 2018 Amidst Lower Production And What Is The Outlook For 2019? In addition, here is more Materials data.

 

Key Factors Affecting Earnings

Lower shipments: Gold shipments declined by 2.1% (y-o-y) to 5.52 million ounces in 2018 on the back of lower production at various sites. Gold production declined by 7% in North America due to lower-grade ore mined at CC&V, Long Canyon, and Twin Creeks, as well as lower leach tons placed at Carlin, Phoenix and CC&V, partially offset by higher-grade ore milled at Phoenix. Production decreased by 3.2% in Asia-Pacific due to lower-grade ore milled at Boddington and Kalgoorlie, partially offset by higher-grade ore milled and recovery at Tanami. The lower-grade ore milled at Kalgoorlie was a result of reduced ore tons mined from the pit due to a failure in the East wall of the pit, leading to the processing of lower-grade stockpiles. However, we expect gold shipments to increase by 1.5% to 5.6 million ounces in 2019. Higher volume would most likely be driven by a full year of higher-grade production from the recently completed Subika Underground project in Africa, and increased production from the Ahafo mill expansion project which is expected to complete in Q2 2019. Additionally, copper volume saw a marginal decrease from 111 million pounds in 2017 to 110 million pounds in 2018, primarily driven by lower grades at Phoenix and Boddington due to lower copper leach placement and lower mill grade and throughput. We expect copper shipments to increase to about 112 million pounds in 2019 as Phoenix reaches higher-grade copper ore from the Bonanza pit which is offset by lower production at Boddington.

Price volatility: Gold prices have seen a lot of volatility in 2018. Price realized per ounce of gold sold increased marginally to $1,260 in 2018, compared to $1,254 in 2017. After being at elevated levels in the first half of the year, prices have declined 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. 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, the upside in price realization was limited during the year. However, the global gold price has surged since January 2019 as central banks across the world have invested more in the yellow metal in the face of rising economic uncertainty. As of Feb 21, 2019, the gold price was just shy of its one-year high and we expect prices to remain robust through 2019. After a strong 2017, copper prices witnessed a declining trend in 2018 due to the threat of a US-China trade war. Realized price per pound of copper declined by 2.9% to $2.75 in 2018, from $2.84 in 2017. However, prices have risen since January 2019 on the back of easing trade tensions and rising sales of electric vehicles. We expect prices to remain elevated through 2019.

Rising cost per unit: Costs of sales per gold ounce increased 2% in 2018 primarily due to lower volume sold, higher stockpile and leach pad inventory adjustments, and higher oil prices, partially offset by a lower co-product allocation of costs to gold. However, cost of sales per copper pound saw a significant rise of 15% in 2018 primarily due to a higher co-product allocation of costs to copper and lower production. Higher cost of sales in turn led to an increase of 2% in the AISC (all-in sustaining costs) per gold ounce and of 12% in AISC per copper pound. This affected the upside to margins.

Profitability: After being in the red for the last couple of years, net income turned positive in 2018 as net income margin increased to 4.7% in 2018 from -1.5% in 2017, mainly driven by a significant drop in tax expense for the year, after the implementation of the Tax Cuts and Jobs Act. Even though cost of sales per unit increased during the year, on an absolute basis, costs applicable to sales remained fairly consistent in 2018 compared to 2017, as higher direct operating costs and higher stockpile and leach pad inventory adjustments were mostly offset by lower production at various sites. Higher margins led to a sharp rise in EPS to $0.64 in 2018 from -$0.21 in 2017.

 

Outlook Remains Bright

We expect revenue to increase by 3.2% to $7.48 billion in 2019 from $7.25 billion in 2018, mainly driven by rising shipments and strengthening of global gold and copper prices. The company is expected to achieve cost efficiencies which would reflect in lower cost of sales attributable to gold for 2019 following higher production at Ahafo, lower mining costs at Yanacocha, and lower operational costs at Tanami with the completion of the Tanami Power Project. This would be partially offset by higher costs in the copper segment due to higher stripping expected at Boddington. Overall, cost-reduction efforts and lower tax expenses are likely to lead to an increase in net income margin and EPS in 2019.

As per the 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 leadership position in the gold segment. Thus, rising volume and prices of gold and copper, coupled with synergies from the acquisition of Goldcorp, are expected to be the primary drivers of growth in Newmont’s profitability and its stock price going forward.

We have a price estimate of $39 per share for Newmont Mining Corp, which is higher than its current market price.

 

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