Why Lower Cost Outlook Is a Positive for Newmont



Cost savings

Newmont Mining (NEM) took several disciplined cost control measures, which led to a decline in the all-in sustaining costs (or AISC) for gold, from $1,063 per ounce in 2Q14 to $909 per ounce in 2Q15. AISC for copper fell from $3.69 per pound in 2Q14 to $1.61 per pound in 2Q15.

The ongoing cost reduction is mainly due to an increase in productivity and efficiency improvements. Newmont management mentioned during the earnings call that costs also benefited from favorable movements in the exchange rate and energy prices during the quarter. Finally, as last quarter, this quarter benefited from delayed timing on the company’s capital expenditure.

Cost reduction has also led Newmont to report positive free cash flow (or FCF) for the fifth consecutive quarter. The company’s FCF was $119 million in 2Q15 compared to $124 million in 2Q14. This is despite a fall in average prices of gold and copper in the same period.

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Lower cost outlook

Management commented that Newmont’s costs for the second half of 2015 would be higher than the first half. Lower volumes at Ahafo and Yanacocha are cited as the main reasons for the cost increase in the second half of the year. However, despite the increase in the second half, Newmont is focusing on a lower cost outlook. Its overall cost guidance for full year 2015 has been lowered by 4%, from $960–$1,020 per ounce to $920–$980 per ounce.

This is particularly important in the current weak commodity price environment. Newmont’s drive to reduce its cost base is one of the major reasons for its relative outperformance in the gold sector. We’ll talk about this in detail in a later part of this series.

Goldcorp (GG), Barrick Gold (ABX), and Agnico Eagle Mines (AEM) have also embarked on portfolio optimization and operational improvements to control costs.

Newmont and Kinross Gold together form 9.2% of the VanEck Vectors Gold Miners ETF (GDX). The SPDR Gold Shares (GLD) provides exposure to spot gold prices.


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