Newmont Mining Corp. (NEM 3.11%) is one of the world's largest gold miners. That's been a tough place to be in recent years, with the price of the yellow metal in a downturn. And when your core business is struggling, what you need is enough cash to see yourself through to the upturn -- which is why investors should be asking if Newmont's wallet is fat enough.
Cash burn
On one hand, cash is pretty simple to understand: How many dollars do you have in the bank? In Newmont's case, it had around $3.3 billion at the end of the second quarter. That's not a bad sum, but it's vastly different from what was lying around just a few years ago. Indeed, cash can be a moving target.
Gold Price in US Dollars data by YCharts
The story begins in 2011, when the company started the year with roughly $4 billion in cash. That also happens to be the year in which most commodities started to trend lower, gold included. Over the next couple of years, Newmont spent heavily on capital projects and burned through that hoard, ending 2013 with a cash balance of around $1.6 billion. The problem was that it wasn't bringing in enough money from its mining operations to offset all the spending. That can only go on for so long before there's trouble since the difference has to be made up somewhere.
That's one of the big reasons Newmont has been hitting the brakes on spending, taking its capital outlays from $3.2 billion in 2012 to just $1.1 billion last year. To be fair, there's always going to be spending, since mines require a certain amount of upkeep and depletion means you need to invest at least a little to keep production up over time.
Through the first six months of this year, the miner has spent around $600 million, so it's at a similar run rate so far in 2015. But, as you can see, it's shifted gears in the face of a weak market, going from spending big to trying to pinch pennies. It's also been selling assets and trimming operating costs to get the cash flowing again. To the company's credit, it has done that.
And the proof of success is in the cash balance, which has gone from a $1.6 billion to around $3.3 in a very short period. Not too shabby since commodity prices continue to languish at relatively low levels. And these cost saving moves have also allowed Newmont to start trimming its debt, which peaked at the end of 2014 at $6.5 billion or so. (Guess where a lot of the cash to keep spending more than Newmont generated came from.) At the end of the second quarter, debt was around $6.1 billion. More debt means more cash going out the door in interest payments, so keeping that number in check is another smart move.
How much is enough?
So, having started to rebuild the cash account, does Newmont have enough? That, of course, depends on a lot of other factors. But at this point, the company looks fairly well positioned. In fact, it was confident enough in the security of its cash account and cash-generating ability to buy a new mine in Colorado for roughly $820 million. That said, most of the money for that deal came from a stock sale, with only around $150 million coming from the company's own bank account.
Shiny gold bars. Source: Newmont Mining.
So despite getting to the point where Newmont is generating positive cash flow from its operations, the cash balance will probably drop slightly this year. But that's actually a sign of strength, since Newmont was able to pick up what looks like a solid asset in a weak market. It couldn't have done that without a solid cash position. In fact, the move would have looked a lot more risky a year or so ago, when the bank account was half its current size and $150 million would have eaten up nearly 10% of its bank balance.
Safe and secure?
At this point, it certainly looks as if Newmont has plenty of cash to keep its business running through the downturn. This is backed by an aggressive effort to shift the business from burning cash to making it. Back in 2013, when the company was still spending more cash than it generated and its bank account continued to shrink, cash was a much bigger question mark. In fact, the recent mine acquisition even highlights its solid position, since it's again in a strong enough state to grow opportunistically during a downturn that's clearly forcing competitors to continue retrenching. So, for now anyway, Newmont certainly looks like it has the greenbacks it needs to get to the other side of this downturn.
