Newmont Mining Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold and copper producer with operations in North America, South America, Australia and Africa. The filing covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017. Results are highly dependent on gold and copper prices, operating performance, costs, currencies, permitting and environmental obligations.
Key financial and operating metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $1,817 million | $1,690 million | +8% |
| Gold sales | $1,739 million | $1,619 million | +7% |
| Copper sales | $78 million | $71 million | +10% |
| Net income from continuing operations | $169 million | $81 million | +$88 million |
| Net income attributable to Newmont stockholders | $192 million | $47 million | +$145 million |
| Continuing-operations diluted EPS attributable to stockholders | $0.32 | $0.13 | +$0.19 |
| Adjusted net income | $185 million | $136 million | +35% |
| Adjusted diluted EPS | $0.35 | $0.26 | +35% |
| Adjusted EBITDA | $644 million | $574 million | +12% |
| Operating cash flow from continuing operations | $266 million | $377 million | -29% |
| Free cash flow | $35 million | $197 million | -82% |
| Capital expenditures | $231 million | $180 million | +$51 million |
| Cash and cash equivalents at March 31 | $3,111 million | $2,919 million | Comparable prior-year balance |
| Total debt at March 31 | $4,095 million | Not clearly provided for the comparable date | Net debt was $984 million |
Continuing-operations net income represented approximately 9.3% of sales. Costs applicable to sales were $1,029 million, or approximately 56.6% of sales, excluding depreciation and reclamation costs. Gold production was 1.286 million consolidated ounces and 1.209 million attributable ounces; copper production was 26 million pounds. Average realized prices were $1,326 per gold ounce and $2.88 per copper pound.
Consolidated gold all-in sustaining cost was $973 per ounce, compared with $900 per ounce in Q1 2017. Copper all-in sustaining cost was $2.07 per pound, compared with $1.77 per pound. These are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.
Material changes versus the prior comparable period
- Higher realized gold and copper prices were the primary drivers of increased sales and continuing-operations earnings.
- Gold production declined 3% and attributable gold production declined 2%, mainly due to lower leach activity at Yanacocha, lower grades and maintenance at Boddington, and lower grade and recovery at CC&V.
- Copper production declined 10%, primarily because of lower grade and leach placement at Phoenix.
- Costs applicable to sales increased 8% to $1,029 million. Cost pressures included higher oil prices, Boddington mill maintenance, unfavorable Australian-dollar effects, royalties and larger stockpile and leach-pad adjustments.
- Operating cash flow fell by $111 million, primarily because of shipment timing and increased receivables, higher inventories and stockpiles, and payment timing for liabilities.
- Capital spending increased to $231 million, reflecting higher development spending on projects including Twin Creeks Underground, Quecher Main, Merian, Tanami Expansion, Subika Underground and the Ahafo Mill Expansion.
- Financing cash use increased to $179 million, including $76 million of dividends, $64 million of share repurchases and $39 million of employee-tax withholding payments.
- Interest expense declined by $14 million, primarily following repayment of the 2017 Convertible Senior Notes and increased capitalized interest.
- Q1 2018 included $22 million of income from discontinued operations, principally a $19 million gain from revaluation of the Holt royalty obligation. Q1 2017 included a $23 million loss from discontinued operations.
Guidance, outlook, commentary and risks
The filing does not provide a clear full-year production, cost or earnings guidance figure. Management states that liquidity, cash from operations and revolving-credit capacity are expected to fund working capital, approved projects, debt obligations, dividends and other foreseeable requirements. The revolving credit facility had $2,914 million of available capacity and no borrowings outstanding at March 31, 2018.
- Project pipeline: Subika Underground was expected to reach commercial production in the second half of 2018; Twin Underground in mid-2018; Ahafo Mill Expansion first production in the first half of 2019; and Quecher Main first production in early 2019. Tanami Power was expected to lower power costs and fuel-supply risk from 2019.
- Ahafo accident: An April 2018 construction accident at the Ahafo Mill Expansion caused six contractor fatalities. Civil construction was suspended pending investigations and safety assurances, creating potential timing and cost risks.
- Commodity exposure: Newmont does not hedge gold or copper sales. At quarter-end, 97,000 gold ounces and 20 million copper pounds remained subject to provisional pricing. A $25 change in the gold price would have had an estimated $2 million effect on stockholders’ net income; a $0.10 copper-price change would have had an estimated $1 million effect.
- Environmental liabilities: Reclamation and remediation liabilities totaled $2,358 million, including $2,163 million for reclamation and $300 million for remediation. Management notes that remediation liabilities could be as much as 42% above the accrued amount depending on ultimate resolution.
- Legal and tax contingencies: Notable matters include the Yanacocha tax dispute, with potential liability of up to $75 million, and the NWG Investments litigation, which seeks C$1.2 billion in damages. Management cannot predict the outcomes of these matters.
- Accounting changes: ASC 606 revenue recognition was adopted in 2018. The filing states that reported Q1 2018 sales and net income were $105 million and $21 million higher, respectively, than amounts that would have been reported without the adoption, principally because of timing and presentation of concentrate revenue. The company also revised prior-period amounts for accounting-standard adoption and immaterial errors, including reclamation accounting.
Most important facts for investors to verify
- Whether the Ahafo Mill Expansion construction suspension changes project cost, production timing or capital requirements.
- Whether gold and copper production recover from the Q1 2018 declines and whether elevated AISC persists.
- The conversion of $35 million of reported free cash flow into sustainable cash generation after development spending, debt service and other obligations.
- Gold and copper price assumptions underlying stockpile valuations, impairment testing and provisional pricing adjustments.
- The status and potential exposure of environmental, Yanacocha tax and NWG Investments legal matters.
- The impact of ASC 606 and the revised financial statements when comparing Q1 2018 with prior periods.
- Debt maturities, including scheduled principal repayments of $626 million in 2019, $992 million in 2022 and $2,474 million thereafter.