Newmont Mining ( NEM ) has announced the commencement of commercial production from the expanded Tanami mine, located in Australia. The expansion project is its latest step towards systematic rationalization of its mining costs, which should allow the company to operate profitably in an environment of subdued gold prices . Besides expanding mine life by three years, the Tanami Expansion Project is expected to lower the mine's overall operating costs. Post the completion of the expansion project, the Tanami mine's overall all-in sustaining costs (AISC) are expected to range between $700 and $750 per ounce, which compares favorably with the expected company-wide AISC of $900-950 per ounce in 2017. The AISC is a comprehensive metric which captures all costs (production costs as well as sustaining capital expenses) required to sustain ongoing mining operations.
Despite the Recent Boost, the Upside for Gold Prices is Limited in the Long Run
Gold prices recently hit an eleven-month high, having risen nearly 18% since the beginning of the year. The sharp increase in gold prices in recent months has been due to an increase in the investment demand for gold. Gold is largely considered a safe haven asset from an investment point of view, with macroeconomic or geopolitical uncertainty driving the investment demand for the yellow metal. Recent events such as the geopolitical turmoil in North Korea, the disruption caused by hurricane Irma and the uncertainty caused by a fractured political landscape in Washington, including a potential government shutdown, have boosted the safe-haven investment demand for gold, driving up prices. Other factors such as a weakening dollar and the likelihood of the Fed keeping interest rates unchanged over the rest of the year have also propped up gold prices.
However, once the uncertainty caused by geopolitical factors dissipates, the upside for gold prices remains limited over the next few years, as illustrated by the chart shown below.
There have been significant signs of a steady recovery in the US economy. The unemployment rate in the U.S. has been reduced considerably over the past year, as evidenced by the latest U.S Department of Labor data, which shows the current unemployment rate standing at 4.4% (Aug '17) vis-à-vis 4.9% (Aug '16). In addition, if President Trump's legislative agenda, including tax reform and the infrastructure plan, is implemented, it would provide a considerable boost to the U.S. economy. The strengthening of the US economy and rising inflation could trigger Fed rate hikes over the next couple of years. Gold is a non-yielding asset offering only capital appreciation as a return on investment. Rising interest rates would likely drive investors towards other asset classes such as equities once the geopolitical situation normalizes.
Therefore, It Makes Sense for Newmont to Focus on Operational Efficiencies
Thus, as per the foregoing discussion, there is a considerable downside risk for gold prices going forward. In such an environment, Newmont's ongoing strategy of lowering its mining costs through either operational improvements or the divestment of high cost mines will stand the company in good stead. Newmont lowered its AISC by nearly 22% between 2012 and 2016, a period generally characterized by declining gold prices. The expansion of the Tanami mine is a suitable course of action for the company in this context, largely in line with its long term strategy to reduce its AISC. As a result, the company is well placed to tackle a period of declining gold prices.
Have more questions about Newmont Mining? See the links below.
1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email firstname.lastname@example.org
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Newmont Mining
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology