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NEM | Pick a Price | Adding Short NEM as a Best Idea

Newmont reported disappointing results that were in line with our December Black Book.  We provide a summary of the results below and highlight three noteworthy items.  While it is buried in a greatly expanded 10-K, NEM continues to capitalize stockpile & ore on leach pad costs using a $1,300 gold price, even though it lowered its reserve price assumption to $1,200. A long-term copper price assumption of $3.00/lb. to capitalize stockpile & ore on leach pads and $2.75 for valuing reserves is even more optimistic in our view. We expect NEM to continue to struggle with production costs, and forecast higher than expected gold mine output growth.  For background, please ping us for our Gold & NEM Black Book and EQM model & datasets.    

 

NEM | Pick a Price | Adding Short NEM as a Best Idea - Capitalized expenses vs. price

 

NEM | Pick a Price | Adding Short NEM as a Best Idea - What is a capitalized expense

 

1. Wrong Way, Higher Costs & Cash Burn Threaten Bull Thesis:  We see NEM’s gold production cost reductions as unsustainable and partly non-economic.  In the fourth quarter release, AISC moved up to $999/oz, amazingly just $1 below the sub-$1000 guidance.  That compares with $927/oz in 4Q 2014 and an average of $898/oz for all of 2015.  For longs, this is a meaningful piece of disconfirming evidence on NEM’s ability to adapt to a lower gold price environment. Only about $26/oz of the year-over-year increase was from higher ‘sustaining capital’, a dubious concept at best. The bulk of the year-on-year cost increase in the AISC framework was from Costs Applicable to Sales (a bit under $50/oz), which is harder for management to explain away.  While only a single quarter, it is worth noting that free cash flow was -$185 million in 4Q 2015; the bull story of NEM being a “most improved”, “adapting to low price environment”, and “cash generating” miner seems at risk.

 

NEM | Pick a Price | Adding Short NEM as a Best Idea - NEM AISC Adj. vs. Reported

 

2. Pick-A-Gold Price Assumption, Capitalizing Expenses:  The most surprising aspect of the 10-K for us was the continued use of a long-term $1,300 gold price assumption for stockpiles & ore on leach pads.  NEM dropped its 2015 long-term gold price assumption for Reserves to $1,200/oz from $1,300 last year.  How does it make sense to use two different gold prices for similar assets?  It doesn’t, as we see it.  An above market gold price does allow for capitalizing of costs related to stockpiles that would be expensed at lower gold price assumptions.  We believe that NEM is capitalizing an expense by using inconsistent long-term gold price assumptions, presenting an unsustainable cost profile at current gold prices. 

 

NEM | Pick a Price | Adding Short NEM as a Best Idea - Note 1

 

NEM | Pick a Price | Adding Short NEM as a Best Idea - note 2

 

NEM | Pick a Price | Adding Short NEM as a Best Idea - Ore on Leach Pads vs. Write downs

 

3. 2016 Costs Expectations Likely To Increase:  While 2016 guidance did not change except for a small drop in capital expenditures, higher fourth quarter costs may shift expectations to higher in the AISC range.  As it stands, the midpoint of guidance puts AISC costs up about 3.5% from 2015, which would seem the wrong direction.  The cost guidance is also likely back-end loaded, with the Merian mine launch and cost improvements at Carlin offering year-on-year improvement.  We would be quite interested to hear what 2016 AISC would look like with a $1,200 gold price assumption, and hope the question gets asked on the earnings call this morning.

Key Data and Notes on Earnings Report (Q4 2015 vs. Q4 2014)

  • Missed top-line, EBITDA, bottom line and FCF estimates
  • Reported Copper AISC and CAS each declined 37% (seems absurd). Gold AISC and CAS both increased +8% Y/Y
  • For the full year, stockpiles and ore on leach pads increased +$230MM to $896MM as of 12/31
  • Big jump in reclamation and remediation expense ($192MM in Q4 15’ vs. $93MM in Q4 14’)
  • Impairments long-lived assets sizable: $50MM vs. $8MM Q4 14’
  • For the full-year, impairments of investments, impairments of long-lived assets, and deferred income taxes added up to a $488MM in non-cash reconciliations for FCF bump over 2014 ($744MM vs. $328MM in 2015)
  • Large jump in production from Batu Hijau in Indonesia in Q4 (especially in copper). Considering their copper price assumptions for carrying value of inventories (NRV), need to watch this closely. Copper sold in Q4 was 40K tonnes and copper produced at Batu Hijau alone was 51K tonnes. Spot copper prices are 31% below NEM’s long-term copper price assumption.

 

Q4 2015 vs. Q4 2014 in $MM (All reported numbers vs. BBG consensus estimates):

  • Sales ($MM): $1,816 vs. $1,817 est. ($2,017 2014)
  • Gold Costs Applicable to Sales (CAS): $680/Oz. (+8% Y/Y)
  • Gold Reported AISC: $999/Oz. (+8% Y/Y)
  • EBITDA (Adj.): $466 vs. $546 est. ($)
  • Free Cash Flow: -$188 vs. -$54 est. ($)
  • Net Income (Adj.): $20 vs. $61.9 est. ($86MM 2014)

 

OPERATING

 

Gold:

 

  • Attributable Gold Sales (thousand Oz.): 1,237 oz. vs. 1,243 oz. Q4 14’
  • Attributable Gold Production: 1,247 oz. vs. 1,261 oz. Q4 14’
  • Consolidated Production: 1,406 oz. vs. 1,389 oz. Q4 14’         
  • AISC: $999 (+8% Y/Y)
  • CAS: $680 (+% Y/Y)

Copper:

 

  • Attributable Copper Sales (thousand tonnes): 40 vs. 34 in Q4 14’   
  • Attributable Copper Production: 39 vs. 29 in Q4 2014
  • Consolidated Production:   
  • AISC: $1.51 (-37% Y/Y)
  • CAS: $1.18 (-37% Y/Y)

 

2016 FULL-YEAR GUIDANCE

 

Gold

 

  • Attributable Gold Production: 4,825-5,295
  • Consolidated Gold Production: 5,
  • AISC: $900-960
  • CAS: $650-700

Copper

 

  • Attributable Copper Production: 120-160
  • Consolidated Copper Production: 210-250
  • AISC: $1.50-1.70
  • CAS: $1.20-1.40

 

Please feel free to reach out with any comments or questions. For access to our December blackbook or previous work in the sector, ping us directly at  


From Washington To Wall Street: What To Watch With JT Taylor

 

In this HedgeyeTV video, Potomac Research Group Chief Political Strategist JT Taylor speaks with Hedgeye Director of Research Daryl Jones about who’s hot and who’s not in the race for the White House, the anti-establishment surge implications of Donald Trump and Bernie Sanders, and the brewing brouhaha over Justice Scalia’s empty seat on the Supreme Court. 


CHART OF THE DAY | Hedge Funds: A Recession In Contrarian Thinking

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... If it wasn’t positioned too bullish in January 2016, we wouldn’t have A) seen the worst JAN ever and/or B) seen the crowd sell last week’s lows. And if they didn’t sell last week’s oversold lows (new weekly closing lows), we wouldn’t have had that kind of a bounce!

 

This is the point.

 

  1. The oversupply of fund managers who are selling low and chasing high (chasing momentum) is unprecedented
  2. Hedge Fund return correlation to US Equity Beta is at an all-time high (see Chart of The Day)
  3. And the amount of leverage hedge funds are using vs. daily market liquidity is also unprecedented"

 

CHART OF THE DAY | Hedge Funds: A Recession In Contrarian Thinking - 02.18.16 Chart


Attention Students...

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Will Markets Crash (again)?

“Wall Street exists to sell securities to people.”

-Jim Chanos

 

In a solid interview Lasse Heje Pedersen had with Jim Chanos in Efficiently Inefficient, Chanos went on to add that since people on the Old Wall are in the business of selling you securities, “most of the stuff you are going to hear all the time is bullish.” (pg 130)

 

Unless this is your first day on the job (if it is, it’s a great day to start short selling US Equities btw), I think you get that being bearish, skeptical, and cynical about Wall Street’s consensus (some of the time) can save (and make) you and your family a lot of money.

 

As Bernard Baruch taught Congress in 1917, “a market without bears would be like a nation without a free press… There would be no one to criticize and restrain the false optimism that always leads to disaster.” (Efficiently Inefficient, pg 123)

 

Will Markets Crash (again)? - Bear crossing cartoon 09.29.2015

 

Back to the Global Macro Grind

 

To be crystal clear on my view, I think the tail end of this 3-day short squeeze in everything “reflation” (commodities, stocks, junk bonds, etc.) is going to lead to another market disaster.

 

Not to be confused with the macro market disaster you should have already avoided in the past 6-18 months, I think this next leg down from classic slow-volume-lower-highs (total US equity volume -11% vs. 1mth avg in last 3 days) in Global Equities could be epic.

 

Yes, on the US Equities part, I get that more “people are bearish” than when we first started making this call (#Deflation call was 18 months ago; US Equities SELL call was July 2015). But ignorance never led to the end of a bear market – it perpetuates the epic part of a crash.

 

No matter how “bearish” you think “sentiment” is right now, I can assure you that consensus isn’t positioned bearish. If it wasn’t way too bullish in July, we wouldn’t have had the first -14% and -26% draw-downs (from July) in the SP500 and Russell.

 

If it wasn’t positioned too bullish in January 2016, we wouldn’t have A) seen the worst JAN ever and/or B) seen the crowd sell last week’s lows. And if they didn’t sell last week’s oversold lows (new weekly closing lows), we wouldn’t have had that kind of a bounce!

 

This is the point.

 

  1. The oversupply of fund managers who are selling low and chasing high (chasing momentum) is unprecedented
  2. Hedge Fund return correlation to US Equity Beta is at an all-time high (see Chart of The Day)
  3. And the amount of leverage hedge funds are using vs. daily market liquidity is also unprecedented

 

At both the lower-lows and lower-highs, that’s why I’d characterize my inbox as follows:

 

  1. Emotional
  2. Manic
  3. Frustrated

 

You see, I’m just a guy with a keyboard. I’m that new guy on a Wall St that isn’t trying to sell people securities. I’m the guy with 0% conflicts of interest (no prop desk front-running people, no positions, no banking/brokerage, etc.) who has been more right than wrong lately.

 

So, people vent to me. People talk to me. People trust me. I get a ton of feedback.

 

When I say “I”, it’s really the wrong thing to say. As you know, there is no I in Hedgeye. The collective feedback I receive has a huge multiplier since we’re not only the fastest growing Independent Research provider on the 2.0 Wall, but we also have one of the biggest research teams.

 

In rate of change terms, a day doesn’t go by where I don’t see #GrowthAccelerating direct messages about what people think (read: sometimes hope) is going on vs. what is actually going on. To summarize all of it:

 

  1. Most people missed calling the causal factors behind what I’ll call Phase 1 of asset #bubbles popping
  2. Many are constantly over-weighting what they need (the upside risk) instead of what is (the downside risk)
  3. The ever-changing “bullish” thesis drift away from our core bear case is as far from reality as it’s been

 

That’s why I think markets are entering what I’ll call Phase 2 of our Bear Case – the crash. Since many things are already crashing, it’s really not that hard of a word to use. You can forward this to your friends who are still debating our “recession” call, and just fast forward to #crash.

 

As we’ve documented, you don’t have to have a recession to have a US stock market crash. You simply have to have profits slowing to negative (year-over-year) for 2 consecutive quarters and/or credit spreads sustaining a breakout above their historical mean.

 

Markets also crash when the “fundamentals” (growth and profits slowing) are being perpetuated by this thing called market volatility. That’s why the “biggest 3-day bounce since November of 2008” should remind you of a very important lesson: what happened after that.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

 

UST 10yr Yield 1.61-1.84% (bearish)

SPX 1811-1938 (bearish)
RUT (bearish)

NASDAQ 4165-4564 (bearish)

Nikkei 147 (bearish)

DAX 8 (bearish)

VIX 20.99-28.97 (bullish)
USD 95.35-97.87 (bullish)
EUR/USD 1.09-1.14 (neutral)
YEN 111.65-116.68 (bullish)
Oil (WTI) 26.13-32.65 (bearish)

Nat Gas 1.89-2.09 (bearish)

Gold 1151-1252 (bullish)
Copper 1.98-2.10 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Will Markets Crash (again)? - 02.18.16 Chart


Growth & Profits Still Slowing

Client Talking Points

REFLATION

This is what, the 4th or 5th or 6th time (July, Oct, Feb = were the biggest “bottom is in” commodity led rallies) we’ve had to quintuple down on #Deflation being non-transitory. Australia and Russia (Equities) +2.3% this morning vs. Copper down -1%. Who has the intermediate-term call from here right? Copper.

RUSSELL 2000

After “covering” (Real-Time Alerts signaling product) SPY last week, the signal said to re-short the Russell (IWM) into the close yesterday. Fully loaded with the 3-day squeeze, don’t forget that the Russell 2000 is still in crash mode (-21.9% since July) and being long illiquidity (junk and small caps) is killing returns – short lower-highs; cover lower.

OIL

One of the major fade signals for the “reflation” trade (or was it “PMIs bottoming”?) has been using the top-end of our risk range – that’s currently $32.65 for WTI and don’t forget that the most important component of my signal is volatility. With OVX’s implying 63-80 volatility in the immediate-term, we would sell the Energy “bounce” here.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

 

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 26% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities worked against us for a -2% loss on the week, but remain an outperforming sector YTD. New scares in the form of increased risk from the financial sector emerged last week. Deutsche Bank made headlines over liquidity concerns that tied into CEO Keith McCullough's favorite S&P Sector short, the Financials. Financials are the most over-owned group relative to its rate risk – XLF is now -14% vs. Utilities (XLU) +5.3% YTD.

GIS

Walmart is still having an effect on General Mills, but it isn’t any more or less severe than previously guided by management. They will begin to lap some of the effects caused by the retailer at the beginning of their 4Q16 (starting in March). Five years ago they dealt with a similar clean store policy implemented by Walmart. Coming out of that they seemed to have gotten more than their fair share of upside, specifically in cereal and fruit snacks, now they are seeing a little more than their fair share on the downside.

TLT

Investors continue to be confronted with our signal of #GrowthSlowing in the U.S. and globally. Even the White House came out to reduce 2016 U.S. inflation assumption to 1.5% from prior expectations of 1.9%!  We’ve called for yield compression alongside our signal of growth slowing and our expectation that global investors will continue to pile into US Treasuries as a “safe haven” liquid play. Last week, the US 10 year fell 13bps to 1.736%.Continue with our go-to macro market calls of long TLT and short JNK, and things don’t have to be so doom and gloom.

Three for the Road

TWEET OF THE DAY

Strong net buys from $WWAV insiders filed yesterday. #LONG

@HedgeyeFood

QUOTE OF THE DAY

Life isn’t about getting and having, it’s about giving and being.

Kevin Kruse

STAT OF THE DAY

42% of wine consumed in the U.S. last year that was consumed by millennials, according to an industry group. 


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns

Takeaway: With the taxable bond category in a rare redemption cycle, investors are flocking to Treasuries in a flight to safety.

While the ICI taxable bond category is broad including investment grade corporates, high yield, government, and global bond issues, the across cycle pattern is clear. When rare redemptions in the category occur, a resulting decline in 10 year Treasury yields ensue as investors are likely rotating within the group, out of corporate and global bonds and into U.S. government securities. Only during the Taper Tatrum of 2013, did ICI taxable bonds redemptions (the white line below on a 5 week moving average), not result in lower 10 year Treasury yields (represented by the green line below). This week, taxable bond funds gave up another -$729 million, the 14th consecutive week of outflow.

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - Treasury Yields to Taxable flows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 10th, volatility picked up, equity markets tumbled, and investors backtracked on their contributions to domestic equities. U.S. stock funds lost -$3.6 billion in withdrawals, negating the prior week's inflows and bringing demand for total equity mutual funds and ETFs to a negative -$1.2 billion on the week. In fixed income, investors continued to favor municipal bonds and ETFs over taxable bonds. Munis brought in +$1.4 billion in contributions with fixed income ETFs gaining +$932 million, while taxable bonds lost another -$729 million. Finally, investors shored up +$3 billion of cash in money funds.

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI1

 

In the 5-day period ending February 10th, total equity mutual funds put up net outflows of -$1.4 billion, trailing the year-to-date weekly average outflow of -$993 million but outpacing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$2.3 billion and domestic stock fund withdrawals of -$3.6 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$690 million, outpacing the year-to-date weekly average outflow of -$1.2 billion and the 2015 average outflow of -$475 million. The inflow was composed of tax-free or municipal bond funds contributions of +$1.4 billion and taxable bond funds withdrawals of -$729 million.

 

Equity ETFs had net subscriptions of +$158 million, outpacing the year-to-date weekly average outflow of -$4.6 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$932 million, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI2

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI3

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI4

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI5

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI12

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI13

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI14

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI15

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI7 2

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors seeking safety poured +$588 million or +7% into the long duration Treasury TLT ETF. Year to date, the TLT has experienced a +37% inflow or +$2.6 billion. Of the flows in the table below, that is the largest percentage inflow by far.

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI17

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.8 billion spread for the week (-$1.2 billion of total equity outflow net of the +$1.6 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$641 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI10 2

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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