Newmont Mining Corp (NYSE:NEM) traces its history back to the early 1900s. It's changed a lot since those days, and now counts itself as one of the world's largest gold miners. That means, at the end of the day, gold is the determinant of Newmont's profitability.
A different beast today
Newmont started life as a way for the company's founder to bring his mining assets under one roof, and as a vehicle for continuing to collect more businesses, and parts of businesses. Back then, Newmont was actually more like a mutual fund than a mining company, owning interests in dozens of different businesses. In the 1980s, however, that changed.
A series of takeover attempts led the company to pay out a big dividend funded largely with debt. Newmont managed to fend off the "barbarians," but to pay down that debt, it sold assets. In fact, at one point, it trimmed down to just gold mining. It has since reentered the copper sector, though copper isn't the company's main focus. However, when it comes to the top line, the notable thing about Newmont today is that it is a miner -- it makes its money by digging gold and copper out of the ground and selling it.
And that has big implications for the company's top line. Gold sales make up roughly 90% of the company's revenues, with copper responsible for most of the rest. Since gold and copper are both commodities, Newmont can't differentiate its products. Thus, the market price for these two metals is a key factor for determining revenues. That said, it's only half of the picture.
The volume of gold and copper sold is the other half. And while Newmont can't control the price of the metals it sells, it can, for the most part, control the amount of the metal it mines. So, when looking at revenues, you need to consider both the volume of product being sold and the price the company is fetching.
It's worth noting here that Newmont does not hedge its exposure to gold and copper, so it is more exposed to the market's pricing shifts than some competitors. That's good and bad. When prices are falling, Newmont will feel the sting pretty quickly. But when gold and copper prices are rising, Newmont will participate more fully in the upswing.
What Newmont can control
So, if the top line is all about gold prices and the amount of gold sold, and Newmont controls the amount of gold sold, then the next big number to look at and understand on the income statement is costs applicable to sales. Essentially, this is what it takes to get gold and copper out of the ground and into the market.
There's a lot to consider, here, but one key metric to watch is all in sustaining costs (AISC). This metric is, essentially, the per ounce cost of mining gold. In 2014, Newmont's AISC was roughly $1,002 an ounce. That compares to Barrick Gold Corporation, the largest public gold miner, which had an AISC of $864. Clearly Newmont isn't leading the pack on costs, but it was able to reduce that figure by 10% year over year in 2014. So, this is an area that the company is working on. That said, the expectation for the next couple of years is for AISC to stay around the current level.
The reason for this is that while Newmont controls the amount of gold and copper it mines, there's more to it than that. For example, not every mine costs the same amount to run, because different processes are need to get at the ores. As mines age, they tend to get more expensive. And as gold is pulled from the ground, Newmont has to look for new sources of gold to replace it.
For example, Newmont has six projects at or near existing mines either near completion or expected to come online in the next two years. These projects will help keep its production numbers roughly flat despite production declines at aging mines. Absent these expenses, Newmont's production would likely fall. Thus, paying for these projects is vital to supporting the top line, and those costs will show up in AISC.
One for the road
Another line item to keep an eye on is interest expense. Newmont's debt has been going up in recent years, and as debt increases so, too, does interest expense. It isn't surprising that debt is being used to fund growth. Mines cost a lot of money to get up and running, and gold sales happen only after the investment is made. However, the higher Newmont's interest expense, the harder it is for the miner to turn a profit. And since interest expenses don't change when gold prices go up and down, too much debt in an environment where gold prices are falling could quickly be an issue. This is one to keep in the back of your mind.
At the end of the day, gold is the biggest determinant of Newmont Mining's revenues. That includes the price of gold, the amount of gold Newmont sells, and the costs for getting it out of the ground. There's clearly more going on at the company, but those are the big factors you need to look at when considering an investment in this miner.