What Forms The Bulk Of Newmont-Goldcorp’s Expenses?

Newmont-Goldcorp (NYSE: NEM) expenses are largely driven by costs applicable to sales, which alone accounted for about 56.4% of the company’s total revenues in 2018, which was marginally higher than 56% in 2016. Higher cost of sales made a dent of $34 million, or $0.06/share in the company’s profits. However, cost of sales as % of revenue is projected to decline from 56.4% in 2018 to 53.7% in 2020, which could translate into additional profit of $296 million or $0.55/share.  Over the recent years, Newmont-Goldcorp has seen steady revenue and expenses growth, while its total expenses as a percentage of revenue has been on a decline. Higher gold and copper production, along with merger synergies with Goldcorp, are set to lead to a further drop in expenses as % of revenues. To understand the trend in each expense component, view the Trefis interactive dashboard analysis – How Does Newmont-Goldcorp Spend Its Money?

Total Expenses

• Newmont-Goldcorp’s total expenses as percentage of revenue has been on a decline over the last few years.
• It stood at 95.3% in 2018, and it is expected to be 94% by 2020. This compares with the 109.4% figure seen in 2016.
• This can be attributed to an increase in expenses at a slower pace, when compared to the company’s revenues.
• Newmont’s total revenues are expected to increase sharply due to the merger with Goldcorp, whereas expenses are expected to increase at a slower rate going forward due to merger synergies.
• Thus net income margin is likely to increase from 4.7% in 2018 to 5.5% in 2020.

Break Down Of Newmont’s Expenses

Cost Applicable to Sales

• Though cost applicable to sales remained stable in 2018, as a % of revenue it increased due to a decline in total revenues.
• We expect the metric to decrease from 56.4% in 2018 to 53.7% in 2020, led by higher gold and copper production, synergies from the merger with Goldcorp, and cost reduction at Nevada due to a joint venture with Barrick Gold.

Depreciation and Amortization

• Depreciation and Amortization as % of revenue decreased over recent years due to lower production at various sites.
• However, with a rise in assets and production due to a major merger and JV in 2019, we expect the metric to increase sharply in 2019, followed by a marginal drop in 2020.

Exploration, Reclamation and Remediation

• Exploration, Reclamation & Remediation expense as % of revenue has hovered around 5% in recent years.
• Though exploration expense is likely to go up as the company continues to spend more on developing future reserves, as a % of revenue it is likely to remain around 5% with a sharp rise in revenue expected over the next two years.

General & Administrative (G&A) and Research & Development (R&D)

• General & Administrative and Research & Development expense as a % of revenue increased in 2018 due to feasibility study costs associated with the Yanacocha Sulfides and Chaquicocha Oxides projects in South America and the Long Canyon Phase 2 project in North America, and higher IT project and services costs as well as higher labor costs.
• The metric is expected to decrease from 5.5% in 2018 to about 5% by 2020, led by a sharp rise in revenue, though cost in absolute terms is likely to go up due to expenses related to the merger.

Impairment

• Impairment as a % of revenue increased sharply in 2018, driven by significant decrease in mine life at the Emigrant operation in North America.
• To see how Newmont’s impairment charges are expected to trend going forward, view our interactive dashboard

Net Interest Expense

• Net interest expense as % of revenue decreased sharply to 0.7% in 2018 led by debt repayment.
• We expect the metric to remain around the current level over the near term.

Other Expense/(Income)

• Other expenses declined in 2018 due to lower severance cost and higher royalty received.
• The metric is likely to remain around the current level in 2019 and 2020.

Effective Tax Rate

• Effective tax rate has been very high historically due to operations in various geographies, though it has been declining over recent years.
• We expect the rate to go down further, but to remain around 40%-45% over the next two years.

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