Business Context and Reporting Period
Newmont Mining Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. Newmont is a global gold producer with copper production and operations in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. Results include consolidated operations and noncontrolling interests.
Financial and Operating Highlights
| Metric | Three months ended June 30, 2010 | Six months ended June 30, 2010 | Comparable 2009 period |
|---|---|---|---|
| Sales | $2,153 million | $4,395 million | $1,602 million; $3,138 million |
| Income from continuing operations | $537 million | $1,280 million | $320 million; $597 million |
| Net income attributable to Newmont stockholders | $382 million | $928 million | $162 million; $351 million |
| Diluted earnings per share | $0.77 | $1.87 | $0.35; $0.73 |
| Net cash from operations | Not separately provided | $1,468 million | $894 million |
| Cash capital expenditures | Not separately provided | $628 million | $910 million |
- Consolidated income from continuing operations represented approximately 25% of sales in the quarter and 29% for the first half. Net income attributable to Newmont stockholders represented approximately 18% and 21%, respectively.
- Gold production was 1.557 million ounces in the quarter and 3.173 million ounces year to date, compared with 1.481 million and 3.018 million ounces in 2009.
- Copper production was 148 million pounds in the quarter and 307 million pounds year to date, compared with 114 million and 195 million pounds in 2009.
- Average realized gold prices were $1,200 per ounce in the quarter and $1,152 per ounce year to date, versus $915 and $911 in 2009. Average realized copper prices were $2.33 and $2.87 per pound, versus $2.17 and $1.94.
- Costs applicable to sales increased to $492 per gold ounce and $0.77 per copper pound in the quarter, and $486 per gold ounce and $0.78 per copper pound year to date. The filing identifies foreign exchange, royalties, higher mining and maintenance costs, and Boddington's higher-cost production as contributors.
- Cash and cash equivalents were $3,602 million at June 30, 2010, compared with $3,215 million at December 31, 2009. Current assets were $6,071 million versus current liabilities of $2,195 million.
- Total debt was $4,575 million, including $295 million current debt and $4,280 million non-current debt, compared with $4,809 million at year-end 2009. Scheduled debt repayments are $27 million for the remainder of 2010, $287 million in 2011 and $576 million in 2012.
- Newmont repaid $263 million of debt during the first half, including the $220 million PTNNT project financing balance. Management stated that the company was in compliance with debt covenants and expects to fund maturities from operating cash flow, cash, short-term investments and available credit facilities.
- Dividends declared were $0.10 per common share per quarter, or $0.20 for the first half.
Material Changes Versus the Prior Comparable Period
- Sales increased 34% in the second quarter and 40% in the first half, driven by higher gold and copper prices, increased sales volumes and the start-up of Boddington.
- Net income attributable to Newmont stockholders increased 136% in the quarter and 165% in the first half. The first-half comparison benefited from a $127 million tax benefit related to converting certain non-U.S. entities to U.S. taxpayers and from the absence of $67 million of Boddington acquisition costs recorded in 2009.
- Net cash from continuing operations increased 67% year over year to $1,481 million; total operating cash flow increased to $1,468 million from $894 million.
- Investing cash outflows declined to $605 million from $1,672 million because the prior-year period included the Boddington acquisition and substantially higher construction spending.
- Interest expense increased to $69 million in the quarter and $144 million year to date, versus $23 million and $55 million, primarily due to senior notes issued in 2009 and lower capitalized interest following completion of Boddington construction.
- Boddington generated production but experienced lower-than-expected gold grades during ramp-up. Yanacocha production declined because of mine sequencing, lower leach tons and lower mill grades, while Batu Hijau production increased materially.
- Newmont's direct ownership in PTNNT, which operates Batu Hijau, declined to 31.5% following the 2010 divestiture, while Newmont continued to consolidate PTNNT and reported a 48.5% effective economic interest.
Guidance, Outlook, Risks and Unusual Items
- 2010 consolidated gold production guidance remained approximately 6.3 to 6.8 million ounces, with costs applicable to sales revised to approximately $460 to $480 per ounce from $450 to $480.
- 2010 consolidated copper production guidance was approximately 610 to 670 million pounds at costs applicable to sales of $0.85 to $0.95 per pound.
- 2010 capital expenditure guidance was approximately $1.4 billion to $1.6 billion; exploration guidance increased to approximately $220 million to $245 million; amortization guidance was approximately $970 million to $1.0 billion; and interest expense guidance was approximately $270 million to $290 million.
- Boddington 2010 gold guidance was reduced to 750,000 to 825,000 ounces at $475 to $550 per ounce, versus the original 800,000 to 875,000 ounces at $375 to $395. Copper guidance was 65 to 75 million pounds at $1.55 to $1.75 per pound. Management cited lower modeled gold content, higher mining costs and a stronger Australian dollar.
- Ahafo production guidance increased to 500,000 to 530,000 ounces at $475 to $515 per ounce. Asia Pacific cost guidance increased to $440 to $480 per ounce.
- Management expects the 2010 tax rate to be approximately 24% to 28%, assuming an average gold price of $1,100 per ounce.
- Newmont sells gold and copper at spot-market prices and does not hedge metal sales. It hedges portions of foreign currency, diesel and interest-rate exposure. At June 30, 2010, 137 million pounds of copper and 180,000 ounces of gold remained subject to provisional pricing; a copper price decline generated a $79 million second-quarter mark-to-market loss, partly offset by a $20 million gold gain.
- Reclamation and remediation liabilities totaled $863 million, including $714 million for producing properties and $149 million for former mining activities. The company states that liabilities for certain former-site matters could be as much as 158% greater than accrued amounts.
- Outstanding letters of credit, surety bonds and bank guarantees totaled $982 million. Environmental, legal, tax, Indonesian Contract of Work and PTNNT divestiture matters remain contingencies. The company disclosed approximately $133 million of unrecognized tax benefits and an anticipated Indonesian tax assessment, while stating that it does not expect a material financial-position impact.
- The company reported no material changes to the risk factors in its 2009 Form 10-K. Principal ongoing risks include metal-price volatility, foreign exchange, energy costs, operating performance, environmental obligations, permitting, political and regulatory developments, and disputes involving Indonesian operations.
Facts Investors Should Verify
- Whether Boddington achieves revised production and cost guidance and whether lower ore grades affect reserves, mine life or future production.
- Actual gold and copper prices, provisional settlement adjustments and the sensitivity of cash flow to metal prices, oil prices and the Australian dollar.
- Progress toward 2010 production, cost, exploration, capital expenditure, amortization and tax-rate guidance.
- Debt maturities, liquidity availability, covenant compliance and the use of the revolving credit facility to secure letters of credit.
- Resolution of PTNNT divestiture, ownership, tax and operating-agreement matters, including the impact on Newmont's economic interest and control.
- Potential changes to reclamation, remediation, environmental, legal and tax liabilities, particularly the disclosed uncertainty around former mine sites and Indonesian tax matters.
- The effect of non-GAAP adjustments, including the $127 million tax benefit, asset-sale gains, community contributions and other unusual items, when assessing recurring earnings.