In the past year, Newmont Mining (NYSE:NEM) has been selling non-core assets as part of its divestment strategy. In its latest news release, the company announced the sale of its Jundee underground gold mine in Australia for a total of $91 million.
This type of divestment plan is something that other gold companies have been doing, including Barrick Gold (NYSE:ABX). This company sold non-core assets, such as the Kanowna and Plutonic mines in Australia and a third of its share in its Marigold mine in Nevada, for $1 billion in the past year. Is this strategy the right course of action for Newmont Mining, though?
The Jundee underground gold mine has low output and reserve. This mine produced only 279,000 ounces of gold in 2013 -- roughly 5.5% of Newmont Mining's total gold production of 5.065 million ounces. In 2014, the company expected this mine to produce 220,000 ounces, which is 21% lower than a year back. Its total production before the sale is projected to reach 5.175 million ounces of gold. Therefore, the divestment of this mine will cut down Newmont Mining's production by 4.2% to slightly below 5 million ounces -- lower than in 2013.
Moreover, the mine only has 410,000 ounces in proven and probable reserves, which is less than 0.5% of Newmont Mining's 88.35 million ounces in proven and probable reserves. Therefore, the sale of this mine isn't likely to dramatically cut down Newmont Mining's gold production in 2014. This sale could also improve the company's profit margin looking forward.
Potential rise in profitability?
The Jundee mine's costs applicable to sales are expected to be $800 per ounce in 2014. This is roughly 4% higher than the company's average CAS of $765 per ounce for this year. This means that the divestment of the Jundee underground gold mine will decrease Newmont Mining's CAS by roughly 0.25% in the coming quarters, which could result in a modestly higher profit margin.
It's worth noting, however, that the Australia and New Zealand region has one of the lowest all-in sustaining costs at $1,090 per ounce, which is 3% lower than the company's average all-in sustaining costs. This implies that other assets in Australia and New Zealand have relatively low all-in sustaining costs. Looking forward, if the company keeps selling additional assets from this region, this could eventually backfire and adversely affect its profit margin.
Newmont Mining is in the process of cutting down costs and divesting less profitable assets. As long as the company is set in this direction, this could eventually improve its bottom line. If the company doesn't start to sell higher-producing and less profitable mines in the coming months, though, these steps will only have a modest impact on its profitability and cash flow.
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.