Newmont Mining Earnings Preview: Lower Gold And Copper Prices To Weigh On Q1 Results
Newmont Mining (NYSE:NEM) will announce its first quarter results on April 23 and conduct a conference call with analysts the next day. We expect lower gold prices in Q1 2015, as compared to the corresponding period last year, to negatively impact Newmont’s results. The company has divested a number of high-cost, non-core assets since the middle of 2013. It continued with its strategy of divestment of non-core assets with the announcement of the sale of its interest in the Penmont joint venture in Q4 2014. [1] The sale of non-core assets will help lower the company’s cost structure and put it in a better position to operate in a subdued gold pricing environment. However, these asset sales are expected to lower the company’s year-over-year gold shipments for the first quarter. In this article, we will take a look at what to expect from Newmont’s Q1 results.
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Gold Prices
Gold prices have fallen over the course of the last year, reacting to cues regarding the tapering of the Federal Reserve’s Quantitative Easing (QE) program. The tapering of QE implied strengthening U.S. economic growth. Gold as an investment 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. London PM Fix gold spot prices, which averaged close to $1,300 per ounce in Q1 2014, have averaged close to levels of $1,200 per ounce in Q1 2015. [2] Revenues from gold sales accounted for around 90% of Newmont’s total revenues in 2014. [3] Thus, lower gold prices are expected to negatively impact the company’s revenues and profitability in Q1 2015, as compared to the corresponding period a year ago.
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 sometime in 2015. [4] However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [5] An interest rate hike is likely to lead to a decline in gold prices, as investors shift towards higher yielding assets.
Copper Prices
Copper prices have declined sharply from their levels in the middle of 2014, mainly due to concerns over copper demand from China. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for the metal. [6] Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors. A slowdown in Chinese economic growth, particularly in the manufacturing sector, has negatively impacted Chinese demand for copper. Chinese GDP growth is expected to slow to 6.8% in 2015, from 7.4% in 2014. [7] Weakness in Chinese manufacturing activity is captured by the country’s Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing PMI measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 50.1 in March and below 50 in the remaining months of Q1, indicating weakness in manufacturing activity. [8]
London Metal Exchange (LME) copper prices averaged roughly $5,800 per ton in Q1 2015, as compared to approximately $7,100 per ton in Q1 2014. [9] The weakness in copper prices will adversely affect Newmont’s year-over-year quarterly results.
Portfolio Optimization
Newmont has made efforts to optimize its portfolio of mines through the sale of non-core assets. The company has raised nearly $1.3 billion through non-core asset sales since 2013. [10] Newmont intends to redeploy capital into projects that offer better returns. Asset sales and operational improvements have helped lower the company’s all in sustaining costs (AISC) metric, which stood at $927 per ton in Q4 2014, as compared to $1,043 per ton in the corresponding period of 2013. [11] The AISC metric captures all of the expenditures incurred to discover, develop, and sustain production. 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. This metric helps investors better gauge the company’s performance. Focusing on its low-cost, core gold mines will lower the company’s average costs of production, as well as give it the flexibility to operate in a possible scenario of lower gold prices. Thus, just like in Q4 2104, the company is likely to report lower year-over-year AISC figures in Q1. The sale of high-cost mining operations will boost the company’s flexibility to operate in an environment of subdued gold prices. Given that gold prices are unlikely to increase significantly in the near term, these steps will stand the company in good stead in 2015.
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Notes:
- Newmont Completes Sale of Stake in Penmont Joint Venture in Mexico, Newmont News Release [↩]
- Gold Price Charts, Kitco [↩]
- Newmont’s 2014 10-K, SEC [↩]
- 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 [↩]
- Copper Ends at 5-Month Low on China Worries, Wall Street Journal [↩]
- World Economic Outlook, IMF [↩]
- China Manufacturing PMI, Trading Economics [↩]
- LME Copper Prices, LME [↩]
- Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico, Newmont News Release [↩]
- Newmont’s Q4 2014 Earnings Release, SEC [↩]