Understanding Newmont’s Scope for Cost Improvement

Cost performance in 1Q17

For 1Q17, Newmont Mining (NEM) reported AISC (all-in sustaining costs) of $900 per ounce, which is 8.7% higher YoY (year-over-year) and 2% lower quarter-over-quarter. This cost performance during the first quarter is better than the company’s midpoint guidance for 2017, at $970 per ounce.

Understanding Newmont’s Scope for Cost Improvement

Costs trending higher for the next two years

During its 4Q16 results, Newmont Mining (NEM) had guided for AISC between $940–$1,000 per ounce for 2017 and $950–$1,050 per ounce for 2018. The midpoints of $970 and $1,000 per ounce are significantly higher than the AISC of $912 that the company posted for 2016. During its 1Q17 results, the company maintained this outlook, excluding further cost and efficiency improvements.

Newmont improved its longer-term guidance, however, to be between $870 and $970 per ounce, as compared to its previous $880–$990 per ounce, for 2019–2021. This improvement over the longer-term is expected as increased production from Ahafo, ongoing productivity, cost, and capital improvements help to offset inflation and the impact of lower grades.

Upside in the long term?

As Newmont’s new low-cost mines come online and replace its maturing, high-cost mines, its cost structure should see a favorable shift. Its Merian project came online in October 2016, and its all-in sustaining costs lie between $650–$750 per ounce. Long Canyon came online in 4Q16, and its all-in sustaining costs lie between $500–$600 per ounce. Both mines have lower costs than the company’s current average costs.

To be sure, Newmont Mining is not unique in bringing down its costs. Peers (GDX) (RING) Barrick Gold (ABX), Goldcorp (GG), Agnico Eagle Mines (AEM), and Yamana Gold (AUY) have also brought down their costs considerably over the past year.