Peñasquito Runs into a Blockade
Newmont Goldcorp recently announced that the company is planning to temporarily suspend operations at Mexico’s Peñasquito mine. The company has been forced to take this step as it is waiting for a resolution to the illegal blockade that has been in place for over a month now.
Members of the Cedros community and a trucking contractor began on March 27.
Newmont Goldcorp claims that it is working to resolve the issue with the blockade leaders as well as Mexican authorities through dialogue, and it needs to resolve the same as soon as possible.
The Peñasquito mine is an integral part of Newmont Goldcorp’s operations, supplying a nice chunk of its production. Last year it delivered 272,000 ounces of gold. Scotiabank says that the mine accounts for around 17% of Newmont Goldcorp’s net asset value. As such, it is important for the company to get this asset back online as soon as possible, or else Newmont Goldcorp’s production this year will take a hit and negatively impact results.
According to Stephen Walker, the head of global mining research at RBC Dominion Securities:
A Double Whammy for Newmont Goldcorp
Gold prices, which had gained strong momentum in recent months, are retreating now. The precious metal is no more trading at the $1,300 an ounce level that it was enjoying earlier this year.
In fact, after the latest slip, gold is trading close to $1,270 an ounce. This is bad news for Newmont Goldcorp, as a combination of lower production and weaker pricing will knock the wind out of the company’s top and bottom lines.
Newmont Goldcorp stock is already in bad shape this year, losing close to 13% of its value. Most of that decline has come in the past few weeks, and the challenges in Mexico will further dent investor confidence.
However, Newmont Goldcorp shareholders shouldn’t lose faith in the company’s prospects as it is working toward improving the long-term production profile. For example, by expanding the Ahafo Mill project in Africa, Newmont Goldcorp’s production will increase to the tune of 75,000-100,000 ounces a year starting next year.
As such, things should start getting better for the company once the synergies of the integration are complete. In my opinion, investors should not be discouraged by the short-term weaknesses faced by Newmont Goldcorp and instead focus on what the company is capable of delivering in the long run.
With the ongoing consolidation in the gold industry and the potential for higher gold prices in the long run, Newmont Goldcorp could be a solid bet for investors.
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