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Jul 25, 2019

Mega-merger hurdles at Newmont Goldcorp hit gold miner's profit

Higher costs wipe out stronger gold market for Newmont Goldcorp

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The world’s largest gold miner is experiencing some growing pains as it tries to integrate a slew of new assets from its recently completed mega-merger.

Newmont Goldcorp Corp.’s (NEM.N) shares fell after it posted an adjusted profit that was about half what analysts were expecting in a messy second quarter that included its merger with Goldcorp Inc. and the start of a new joint venture with rival Barrick Gold Corp. (ABX.TO) in Nevada.

Although there have been “no surprises” in the acquired Goldcorp assets, underinvestment has been an issue throughout the portfolio, Newmont President Tom Palmer told analysts Thursday on an earnings call. “There was not the work done on exploration, there wasn’t the work done on development, and that’s absolutely fundamental in either an open pit or an underground mine.”

Newmont is bringing technical rigor and discipline to the newly acquired mines, said Palmer, who is slated to take over as Newmont’s chief executive officer on Oct. 1. That said, “nothing’s changed in my mind in terms of what we saw during due diligence and what we’ve seen over the first 90 days of operating these operations.”

In its earnings statement, the Greenwood Village, Colorado-based company cited a number of cost pressures that eroded earnings, including:

-Integration costs associated with the Goldcorp merger and the Nevada JV
-Higher costs due to shutdowns at two mines acquired in the Goldcorp deal, Penasquito and Musselwhite
-Higher sustaining capital investments for the Goldcorp assets
-Higher spending for growth projects

In April, the miner warned that a serious fire at the Musselwhite mine in Canada at the end of the first quarter could affect guidance. The blaze affected the full 2.5-kilometer (1.6-mile) length of the conveyor system, Palmer said on the call. Meanwhile, a blockade at the Penasquito mine in Mexico in the second quarter lowered production and hiked costs, Newmont said in the statement.

‘Very Confident’

Newmont now expects consolidated production of 165,000 ounces of gold from Penasquito in 2019. Last year, the mine produced 272,000 ounces of gold for Goldcorp. Newmont is forecasting zero production at Musselwhite this year and doesn’t expect the mine to be fully operational until mid-2020. In 2018, it produced 205,000 ounces of gold.

The company said its full-year gold production will be 6.5 million ounces, which compares with a June forecast for 7 million ounces in 2019 and 7.4 million in 2020. The company is “very confident” it can achieve that guidance, Palmer said, noting that guidance for next year will be provided in December.

In a research note Thursday, Anita Soni, an analyst with CIBC World Markets Corp, said the lack of clarity about next year could worry investors. “No further 2020 outlook was provided, which will likely be an overhang on the stock given the uncertainty surrounding the production profile for the recently acquired Goldcorp assets,” she said.

Shares Drop

Newmont fell as much as 5.5 per cent Thursday, the most intraday since Jan. 14, and the shares were down 4.5 per cent as of 12:09 p.m. in New York.

Outgoing CEO Gary Goldberg has said the company will divest some assets as it optimizes its new portfolio, but told analysts there isn’t a timeline for that.

“We want to make sure we get in, get a good look at all the operations and projects that we brought in with the Goldcorp acquisition,” he said. The company needs “to make sure they’re delivering as strongly and as well as possible before we move forward with that process.”

The merger with Goldcorp took effect in April and is expected to comfortably extend the miner’s lead over rival Barrick as the largest gold producer. Meanwhile, a joint venture with Barrick in Nevada is expected to result in as much as US$500 million in annual synergies over its first five years, starting in 2020.

--With assistance from Aoyon Ashraf