Shares of Newmont Mining Corporation (NYSE/NEM) plunged following a steep sell-off in gold prices.
This morning, gold prices dove below the $1,100 mark for the first time since March 2010 after sellers in China ditched more than $2.7 billion of the yellow metal. The plunging gold price dragged down Newmont’s shares about 11.45% at $18.72.
The plunging gold price poses more challenges for gold mining companies. One of the most important factors that contribute to the mining sector is debt. At any given time, when gold prices fluctuate, the cost of production remains relatively constant. Declining gold prices would reduce the profit margin for mining companies.
At Newmont, it costs the company $850.00 on average to pull one ounce of gold out of the ground. With gold trading at $1,300, as it was a few days ago, the miner was making $450.00 on each ounce produced. At today’s prices, however, Newmont is only earning $250.00 per ounce—a nearly 44% decrease in operating profits. (Source: Newmont First Quarter Earnings Presentation Slide 5, last accessed July 20, 2015.)
Investors have been finding less and less reason to hold gold as insurance against risk. Gold is believed to be used as a hedging tool against everything that can go wrong. Recently, a Greece deal with its creditors and positive economic data suggest that the economy is poised for stronger growth in the second half of 2015.
With the Federal Reserve’s first rate hike expected to be in September, and the prospect of a stronger dollar, the odds remain stacked against precious metals as investors rush into higher-yielding paper assets.