Newmont Mining Corporation — 2016 Second-Quarter Form 10-Q
Business context and reporting period
Newmont is a global gold producer with copper production and operations or assets in the United States, Australia, Peru, Indonesia, Ghana and Suriname. This unaudited filing covers the three and six months ended June 30, 2016, compared primarily with the corresponding 2015 periods. Newmont reported 530.6 million common shares outstanding as of July 13, 2016.
Financial and operating metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $2,038 million | $1,908 million | $4,070 million | $3,880 million |
| Income from continuing operations | $89 million | $139 million | $250 million | $360 million |
| Net income attributable to Newmont stockholders | $23 million | $72 million | $75 million | $255 million |
| EPS attributable to stockholders | $0.04 | $0.14 | $0.14 | $0.51 |
| Operating cash flow | Not separately provided | Not separately provided | $1,299 million | $1,063 million |
| Free cash flow | Not separately provided | Not separately provided | $713 million | $463 million |
| Adjusted net income | $231 million | $131 million | $413 million | $361 million |
| Adjusted EBITDA | $804 million | $692 million | $1,607 million | $1,508 million |
Q2 sales increased approximately 7%; six-month sales increased approximately 5%. Reported net income attributable to stockholders declined substantially, while adjusted net income increased. Approximate sales-based margins were 4.4% for Q2 continuing-operations income and 2.5% for Q2 stockholder income; six-month margins were approximately 6.1% and 1.8%, respectively.
- Gold sales were $1,803 million in Q2 and $3,497 million year to date, versus $1,574 million and $3,219 million in the comparable 2015 periods.
- Copper sales were $235 million in Q2 and $573 million year to date, versus $334 million and $661 million in 2015.
- Gold production was 1.457 million ounces in Q2 and 2.873 million ounces year to date; attributable production was 1.285 million and 2.514 million ounces, respectively.
- Copper production was 144 million pounds in Q2 and 285 million pounds year to date; attributable production was 85 million and 168 million pounds, respectively.
- Average realized gold price increased to $1,260 per ounce in Q2 and $1,226 year to date, while copper declined to $1.94 and $1.98 per pound.
- Gold all-in sustaining cost was $876 per ounce in Q2 and $852 year to date, compared with $909 and $879 in 2015. Copper all-in sustaining cost was $1.53 per pound in Q2 and $1.42 year to date, compared with $1.61 and $1.67.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2,902 million at June 30, 2016, up from $2,782 million at December 31, 2015. Approximately $715 million was attributable to noncontrolling interests.
- Total reported debt was $5,571 million, consisting of $196 million current debt and $5,375 million non-current debt, compared with $6,190 million at year-end 2015. Approximate reported net debt was $2,669 million.
- Newmont repaid $641 million of debt during the first six months, including $498 million of senior notes and $140 million under the PTNNT revolving credit facility.
- Scheduled minimum debt repayments are $765 million in 2017, $901 million in 2019 and $3,974 million thereafter. Management stated that it expects to fund maturities through operating cash flow, cash, investments and available credit facilities.
- Capital expenditures were $591 million in the first six months, compared with $606 million in 2015. Newmont had $2,164 million of outstanding letters of credit, surety bonds and bank guarantees.
- The quarterly common dividend remained $0.025 per share, or $0.050 for the first six months.
Material changes versus the prior comparable period
- Higher gold prices, gold volumes and the addition of CC&V increased gold revenue. Lower copper prices and, in Q2, lower copper volumes reduced copper revenue.
- Reported earnings were pressured by higher income and mining tax expense: $310 million in Q2 and $634 million year to date, producing effective tax rates of approximately 76% and 71%, versus 51% and 48% in 2015. The increase primarily reflected changes in deferred-tax valuation allowances and tax-planning actions.
- Gold production rose 4% in both the quarter and year to date, while copper production declined 8% in Q2 and 4% year to date.
- Stockpile and leach-pad write-downs totaled $83 million in Q2 and $157 million year to date, primarily related to Carlin, Twin Creeks and Yanacocha.
- Newmont sold its Regis Resources investment for $184 million and recorded a $103 million pretax gain, contributing to higher other income.
- Newmont completed debt tender activity involving its 2019 and 2039 notes and recorded a $4 million pretax loss on the tender offer.
- Results included a $27 million Q2 loss and $53 million year-to-date loss from discontinued operations, driven by remeasurement of the retained Holt property royalty obligation.
Guidance, outlook, commentary and risks
- Newmont expects Merian in Suriname to reach commercial production in the fourth quarter of 2016, with estimated initial annual production of 400,000 to 500,000 gold ounces and attributable capital spending of $575 million to $625 million.
- Long Canyon is expected to reach commercial production in the first quarter of 2017; Tanami Expansion is expected to reach production by mid-2017.
- Newmont approved the NW Exodus underground project, with first gold expected in the third quarter of 2016 and estimated capital costs of $50 million to $75 million.
- The company entered agreements to sell its effective 48.5% economic interest in Batu Hijau for $920 million of cash plus contingent payments of up to $403 million. Closing was anticipated in the third quarter of 2016 but remained subject to governmental, export-license, shareholder and other conditions. Management expected to record an approximate $500 million loss at closing, excluding uncertain contingent consideration.
- Batu Hijau represented approximately 15% of total assets at June 30, 2016. Its export permit was expected to expire in November 2016, creating operational risk if the sale did not close or the permit was not renewed.
- Yanacocha faces revised Peruvian water-quality standards and an updated reclamation plan. The company expects higher treatment costs and stated that the revised plan could materially increase reclamation liabilities, all-in sustaining costs and potentially impairment risk.
- Commodity prices, foreign exchange, operating performance, ore grades and recoveries, permitting, political conditions, environmental rules, taxes and mine-closure costs remain key risks. Newmont does not hedge gold or copper sales but hedges portions of currency and diesel exposure.
- A Canadian subsidiary received a $54 million tax and interest assessment related to a pre-acquisition Fronteer transaction and is required to pay at least half by September 30, 2016 while defending the matter.
- The company continued a foreign-corrupt-practices investigation involving the SEC and Department of Justice; no provision was recorded because the outcome could not be predicted.
Most important facts for investors to verify
- Whether the Batu Hijau transaction closed, the amount of cash received, contingent consideration value and the final loss recognized.
- Actual 2016 production, realized-price and all-in sustaining-cost performance against the filing’s project and operating expectations.
- The sustainability of the large gap between GAAP earnings and adjusted net income, particularly the impact of valuation allowances, inventory write-downs and discontinued-operation items.
- Cash availability for the $765 million 2017 debt maturities and longer-term scheduled repayments.
- Progress and cost estimates for Merian, Long Canyon, Tanami Expansion, CC&V and NW Exodus.
- Updated Yanacocha water-treatment and reclamation estimates, including any resulting liability increases or impairment charges.
- Developments in the Canadian tax assessment, FCPA investigation and other legal or environmental contingencies.