Of the major North American miners, Goldcorp finished off Q4 Earnings season last night with an awful print which included a net loss of -$4.3Bn when you include impairment charges of -$3.9Bn (-$128MM without charge).
In addition to the impairment charges, Goldcorp wrote-down the carrying value of heap leach inventory and stockpiles at two mines to the total of $104MM. The impairment and write-down charges assumed a long-term gold price of $1,100/Oz. While by no means apples-to-apples, the carrying value of Newmont’s stockpile and ore on leach pads is multiples of Goldcorp, and both companies previously assumed $1,300/oz.
These charges are a reality of a cyclical downturn, one that Newmont may be trying to push out as long as possible (or avoid). ABX and GG have taken impairment charges and downwardly revised for lower gold price expectations and Newmont has not. Rather, they’ve kept aggressive gold ($1,300/oz.) and copper ($3.00/lb.) price assumptions for capitalizing their much larger inventories and stockpiles.
We believe Newmont’s higher cost profile and aggressive capitalizations will matter in a lower gold price environment. However, we’ll be the first to say that these names are trading vehicles with leverage to gold prices, and being long of gold with leverage which has worked YTD.
With the release our monthly sector sentiment deck on Tuesday morning, we’ll outline some of the behavioral factors behind the move YTD as well as to outline what is becoming more of a consensus trade in gold ahead of policy catalysts in the coming weeks.
Behavioral factors along with Newmont’s failure to address aggressive accounting practices pushed us to add NEM to our Best Ideas on the short-side last week (link to the 02/18 note).
Below we use 4 charts to highlight what we view as two of Newmont’s biggest long-term headwinds:
- High Cost of Production (Adjusted AISC has trended higher since Q3 2014)
- Stockpiles and Inventories:
- Large quantity of stockpiles and inventories (relative to other producers)
- Aggressive long-term price assumptions for the capitalization of these inventories (meaning they have not yet realized the impairment and write-down charges normally taken by producers in a lower gold and copper price environment)