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What Could Drive Newmont’s Unit Cost Reduction?

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Weak cost performance in 4Q15

Newmont Mining’s (NEM) AISC (all-in sustaining costs) for 4Q15 was higher 20% month-over-month and 8% higher year-over-year (or YoY) at $999 per ounce. The increase was mainly due to lower volumes at Yanacocha and Ahafo and the timing of sustaining capital expenditure. However, the company hit below the mid-point guidance of $910 per ounce for 2015 by achieving AISC of $898 per ounce. This is also an improvement of 10% YoY.

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Cost savings

During Newmont’s 4Q15 earnings call, management attributed about 60% of its 2015 AISC improvements to lower oil prices and favorable exchange rates. The rest of the improvement was due to sustainable cost and efficiency improvements across the portfolio as well as higher productivity in sales at low-cost operations.

Cost reduction after 2016

Newmont has maintained its cost reduction outlook for AISC for 2016 and beyond. For 2016, AISC is expected to be higher at $930 per ounce (mid-point guidance) compared to $898 for 2015. The increase is because management expects costs to be higher at Yanacocha and Ahafo.

After 2016, the company expects costs to go down so AISC will average $900 per ounce for 2017. According to management, costs are expected to improve by the second half of 2016 as the company ramps up production at CC&V (Cripple Creek and Victor) mine and Merian reaches commercial production.

While Newmont has reduced its AISC costs by an impressive 24% over the last three years, its costs are still higher than its close peer Barrick Gold (ABX), which delivered AISC of $831 per ounce for 2015. Agnico Eagle Mines’ (AEM) AISC was also lower than Newmont’s at $810 per ounce, while Kinross Gold (KGC) had a higher AISC of $975 per ounce for 2015.

Investors can gain exposure to the gold industry through gold-backed ETFs such as the SPDR Gold Trust (GLD). Agnico Eagle Mines accounts for 2.8% of the total holdings of the VanEck Vectors Gold Miners ETF (GDX), which provides exposure to senior and intermediate gold miners.

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