A Look At Newmont’s Response To Low Gold Prices
Newmont Mining (NYSE:NEM) has announced that it has made a $100 million prepayment towards a five-year term loan which matures in 2019. [1] The prepayment on the term loan was made largely through the proceeds from the Government of Suriname’s decision to exercise its option to participate through an equity stake in the Merian gold mine. [2] This is the latest in a series of steps taken by the company to enhance its flexibility to operate in an environment of subdued gold prices.
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Gold Prices
Newmont’s average realized gold price for the third quarter stood at $1,270 per ounce, down from $1,322 per ounce in the corresponding period last year. ((Newmont’s Q3 2014 Earnings Presentation, Newmont Mining Website)) The fall in realized prices for Newmont mirrors the decline in spot prices of gold over the same period. Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. The tapering of QE implied strengthening U.S. economic growth. Gold is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and led to a fall in prices of the metal. As per the World Gold Council, investment demand for gold fell from 1,623 tons in 2012 to 893 tons in 2013. [3]
Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. [4] However, the exact timing of an interest rate hike is contingent upon the pace of economic recovery and jobs growth in the U.S. [5] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.
Newmont’s Response to Low Gold Prices
In response to the fall in gold prices, Newmont has made efforts to optimize its portfolio of mines through the sale of high-cost and non-core assets over the past year or so. These assets include the Jundee mine in Australia, the Midas underground mine in Nevada, stakes in Paladin Energy Limited, Canadian Oil Sands, and the Penmont joint venture. [6] [7] [8] Newmont has generated $1.4 billion through the sale of non-core assets since 2013. [1]
In addition to the sale of non-core assets, the company has tried to reduce costs and improve the efficiency of its operations. The company has saved around $1.7 billion through cost savings and productivity improvements since 2013. [1] These savings were reflected in the company’s all-in sustaining costs (AISC) metric in Q3. The AISC metric provides a comprehensive view of costs required to sustain a company’s current mining operations. The AISC for Newmont’s gold production fell to $995 per ounce in Q3 2014 from $1,018 per ounce in the corresponding period last year. [9]. AISC includes costs applicable to sales, remediation costs, general and administrative costs, advanced projects and exploration expenses, treatment and refining costs, sustaining capital expenditure, and other miscellaneous expenses.
All of these steps taken by Newmont over the course of the last year or so have been tailored towards increasing the flexibility of the company to operate in an environment of low gold prices. The company’s latest effort to lower its debt has a similar objective. With the U.S. economy strengthening, the upside for gold prices is limited in the near term. Newmont has placed itself in a good position to deal effectively with such a scenario.
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- Newmont Prepays $100 Million of $575 Million Term Loan Maturing in 2019, Newmont News Release [↩] [↩] [↩]
- Newmont Welcomes Suriname’s Decision to Participate in the Merian Gold Project, Newmont Press Release [↩]
- Gold Demand Trends, World Gold Council [↩]
- Powell says Fed could hike rates mid-2015; cites low inflation, Reuters [↩]
- Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal [↩]
- Newmont’s 2013 10-K, SEC [↩]
- Newmont Signs Agreement To Sell Jundee Underground Gold Mine In Australia, Newmont Mining News Release [↩]
- Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico, Newmont News Release [↩]
- Newmont’s Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]