Newmont Mining Corporation — Q1 2017 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. This unaudited quarterly report covers the three months ended March 31, 2017. Batu Hijau, sold in November 2016, is presented as a discontinued operation for all periods.
Financial and operating metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Sales | $1,659 million | $1,462 million | 13% increase |
| Net income from continuing operations attributable to Newmont | $69 million | $(12) million | $81 million improvement |
| Diluted continuing-operations EPS | $0.13 | $(0.02) | $0.15 improvement |
| Net income attributable to Newmont | $46 million | $52 million | 12% decrease |
| Adjusted net income | $133 million | $129 million | 4% increase |
| Adjusted EBITDA | $566 million | $470 million | 20% increase |
| Operating cash flow from continuing operations | $379 million | $157 million | $222 million increase |
| Free cash flow | $199 million | $(123) million | $322 million improvement |
| Cash and cash equivalents | $2,919 million | $2,756 million at Dec. 31, 2016 | $163 million increase |
Gold sales were $1,588 million and copper sales were $71 million. Consolidated gold production increased 8% to 1.327 million ounces, while attributable gold production increased 9% to 1.234 million ounces. Copper production increased to 29 million pounds from 28 million pounds.
Average realized prices were $1,221 per gold ounce versus $1,192 and $2.68 per copper pound versus $2.03. Consolidated gold costs applicable to sales increased to $687 per ounce from $680, while copper costs declined to $1.50 per pound from $1.80. Gold all-in sustaining cost increased to $900 per ounce from $889; copper all-in sustaining cost declined to $1.77 per pound from $2.12. These are non-GAAP measures.
Costs applicable to sales were $933 million, or approximately 56% of sales. Income before income and mining taxes and other items was $193 million, or approximately 12% of sales. Continuing-operations net income attributable to Newmont was approximately 4% of sales. Income and mining tax expense declined to $110 million from $227 million, with the effective rate falling to 57% from 109%.
Total debt on the balance sheet was $4,621 million, comprising $572 million current debt and $4,049 million non-current debt. Debt fair value was $5,023 million. Current assets were $4,838 million versus current liabilities of $1,565 million. The company reported $3.0 billion of available capacity under its corporate revolving credit facility, of which $80 million was used to support letters of credit.
Material changes versus the prior comparable period
- Sales increased primarily from higher gold and copper prices, higher gold volumes, and new production from Merian and Long Canyon.
- Continuing-operations earnings improved despite higher gold production costs, adverse weather in Australia and South America, and geotechnical issues at Carlin.
- Adjusted EBITDA and free cash flow improved substantially, supported by higher prices, new production and better working capital.
- Capital expenditures declined to $180 million from $280 million. Approximately $54 million was development capital and $126 million was sustaining capital.
- Interest expense declined by $7 million because of debt repayments and the 2016 extinguishment of the 2019 term loan.
- Reported net income attributable to Newmont declined because Q1 2016 included $159 million of discontinued-operation income from Batu Hijau, whereas Q1 2017 included a $23 million loss related to the Holt royalty obligation.
- The quarterly common dividend increased to $0.050 per share from $0.025.
Guidance, outlook, commentary and risks
Management stated that Tanami Expansion remained on track for commercial production in mid-2017, with annual production expected at 425,000 to 475,000 ounces for its first five years. Subika Underground was approved for full funding, with first production expected in the second half of 2017 and commercial production in the second half of 2018. The project is expected to add 150,000 to 200,000 ounces annually beginning in 2019. The Ahafo Mill Expansion was also approved and is expected to add 75,000 to 100,000 ounces annually beginning in 2020.
Other pipeline opportunities included Quecher Main, with an investment decision expected in the second half of 2017, and Twin Underground, also subject to an expected second-half 2017 investment decision. Timing and costs remain subject to permitting, community and government support, engineering, procurement, technical execution and cost escalation risks.
- Gold and copper prices materially affect revenue, cash flow, asset carrying values and potential inventory or long-lived-asset impairments. Newmont does not hedge gold or copper sales.
- Operations were affected by extreme weather, supply shortages, mill downtime, lower grades and recovery, and geotechnical conditions.
- Yanacocha submitted an environmental impact assessment modification in February 2017. Its revised closure plan, expected in the second half of 2017, could require additional reclamation bonding.
- Reclamation liabilities were $1,812 million and remediation liabilities were $293 million at March 31, 2017. The company noted that environmental obligations could ultimately be as much as 43% higher than the accrued amount.
- Outstanding letters of credit, surety bonds and bank guarantees totaled $2,234 million.
- A Canadian tax assessment of $54 million relating to a pre-acquisition Fronteer transaction remains disputed; the company paid half of the assessment and intends to defend its position.
- Other disclosed contingencies include the Yanacocha tax dispute, environmental and regulatory matters in Peru and the Midnite/Dawn remediation obligations, and litigation related to Fronteer. The company states that certain outcomes cannot reasonably be predicted.
- The SEC notified Newmont in February 2017 that it did not intend to recommend an enforcement action concerning a foreign-corrupt-practices investigation; the company stated that the ultimate outcome of related matters could not yet be predicted and recorded no provision.
Investor verification checklist
- Verify the reconciliation and exclusions underlying adjusted net income, adjusted EBITDA, free cash flow and all-in sustaining costs.
- Monitor gold and copper prices, provisional pricing adjustments and the 101,000 ounces of gold and 28 million pounds of copper subject to final pricing.
- Track Tanami, Subika Underground and Ahafo Mill Expansion milestones, capital spending and production ramp-up.
- Review debt maturities, including $575 million scheduled for the remainder of 2017 and $626 million in 2019, and confirm covenant compliance.
- Assess Yanacocha permitting, closure-plan revisions, reclamation bonding and potential environmental liabilities.
- Separate continuing-operations performance from Batu Hijau and Holt discontinued-operation effects when comparing periods.