Newmont Mining Corporation — Q1 2016 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold and copper producer with operations and assets in North America, South America, Asia Pacific and Africa. The unaudited filing covers the three months ended March 31, 2016, with comparisons to the same period in 2015. Results are substantially exposed to gold and copper prices, operating costs, foreign exchange, permitting, environmental obligations and geopolitical conditions.
Financial and operating metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $2,032 million | $1,972 million | +3% |
| Income from continuing operations | $161 million | $221 million | -27% |
| Net income attributable to Newmont stockholders | $52 million | $183 million | -72% |
| Basic earnings per share | $0.10 | $0.37 | Declined |
| Adjusted net income | $182 million | $229 million | -21% |
| EBITDA | $891 million | $797 million | +12% |
| Adjusted EBITDA | $803 million | $815 million | -1% |
| Operating cash flow | $522 million | $625 million | -16% |
| Free cash flow | $227 million | $344 million | -34% |
| Gold produced | 1.416 million ounces | 1.362 million ounces | +4% |
| Copper produced | 141 million pounds | 139 million pounds | +1% |
| Average realized gold price | $1,194/ounce | $1,203/ounce | -1% |
| Average realized copper price | $2.02/pound | $2.34/pound | -14% |
| Gold all-in sustaining cost | $828/ounce | $849/ounce | -2% |
| Copper all-in sustaining cost | $1.33/pound | $1.73/pound | -23% |
Approximate net margin attributable to Newmont stockholders was 2.6% in Q1 2016 versus 9.3% in Q1 2015. Gold operating margin declined to $556 per ounce from $589, while copper operating margin was $0.97 per pound versus $0.99.
- Cash and cash equivalents were $2,461 million at March 31, 2016, down from $2,782 million at December 31, 2015.
- Total debt was $5,704 million, consisting of $335 million current and $5,369 million non-current debt, versus $6,190 million at year-end 2015. Approximate net debt was $3,243 million at quarter-end.
- Capital expenditures were $297 million, compared with $284 million in Q1 2015.
- Reclamation and remediation liabilities totaled $1,821 million, including $1,575 million of reclamation obligations and $316 million of environmental remediation obligations.
- The company declared a quarterly dividend of $0.025 per common share.
Material changes versus the prior comparable period
- Revenue increased primarily from higher gold and copper sales volumes, including the acquired Cripple Creek & Victor operation and improved Batu Hijau production. These gains were partly offset by lower realized metal prices and the 2015 sale of the Waihi mine.
- Gold production increased 4%, led by Asia Pacific operations and CC&V, while production declined at Yanacocha and in Africa. Copper production increased modestly.
- Costs applicable to sales rose for gold to $638 per ounce from $614, but fell for copper to $1.05 per pound from $1.35, reflecting higher copper production, lower fuel prices and favorable foreign exchange.
- Net income attributable to Newmont fell sharply because of higher income and mining taxes, higher operating costs, lower realized prices and a $26 million loss from discontinued operations. The prior-year period included a $57 million investment impairment, while Q1 2016 included a $103 million gain on the sale of the Regis Resources investment.
- The effective tax rate increased to 66% from 46%, primarily due to a $194 million increase in the valuation allowance for deferred tax assets, including foreign tax credits, and higher mining taxes.
- Operating cash flow declined by $103 million, while financing cash use increased to $738 million from $196 million. Q1 2016 financing included $499 million of debt repayments, $146 million of dividends to noncontrolling interests and a $91 million increase in restricted cash.
- On March 29, 2016, Newmont accepted approximately $274 million of 2019 Notes and $226 million of 2039 Notes in a debt tender offer, recording a $4 million pretax loss.
Guidance, outlook, commentary and risks
- Management emphasized the Full Potential program and continued efforts to improve productivity, costs and operating cash flow. No clear consolidated full-year production or earnings guidance is provided in the filing text.
- Merian, Suriname, is expected to reach commercial production in Q4 2016. Expected average production is 400,000 to 500,000 ounces annually for the first five years, with attributable total capital spending estimated at $575 million to $625 million; $490 million had been spent through March 31, 2016.
- Long Canyon is under construction and expected to reach commercial production in the first half of 2017. CC&V expansion commissioning and ramp-up are expected to continue through 2016. Tanami expansion is intended to increase production and reduce costs.
- Batu Hijau remained subject to Indonesian Contract of Work renegotiations and a six-month export permit expiring in May 2016. Failure to obtain timely renewal could negatively affect operations and financial results; the company continued evaluating potential impairments and other charges.
- The Conga project in Peru remains suspended, and management does not anticipate full development for the foreseeable future without social acceptance, favorable economics and potentially another partner. Future impairment or capital reallocation remains possible.
- Newmont does not hedge gold and copper sales, retaining exposure to spot prices. It hedges portions of foreign currency and diesel costs. Provisionally priced sales at March 31, 2016 included 227,000 gold ounces and 194 million copper pounds subject to future pricing adjustments.
- Stockpiles and ore on leach pads were written down by $74 million in Q1 2016, reflecting higher future processing costs, lower grades and lower recoveries.
- The company had $2,153 million of outstanding letters of credit, surety bonds and bank guarantees, and $98 million of its $3 billion revolving credit facility was used to support letters of credit.
- Newmont and its affiliates are subject to environmental, legal and tax contingencies. A Foreign Corrupt Practices Act and related investigation involving the SEC and Department of Justice remains unresolved; no provision was recorded.
- The company reported no material changes to the risk factors in its 2015 Form 10-K. Management concluded disclosure controls were effective, although CC&V was excluded from the internal-control assessment as permitted for a newly acquired business.
Most important facts for investors to verify
- Whether Batu Hijau received a timely export-permit renewal and the status of Contract of Work negotiations.
- Actual Merian construction progress, remaining capital requirements and Q4 2016 production start-up.
- The sustainability of the higher tax rate and the recoverability of deferred tax assets and foreign tax credits.
- Gold and copper price assumptions used in inventory, impairment and royalty valuations, including the $74 million Q1 stockpile write-down.
- Production, cost and recovery trends at Yanacocha, Carlin, Ahafo and other higher-cost operations.
- Debt maturities, refinancing plans and liquidity after scheduled repayments of $143 million for the remainder of 2016, $765 million in 2017 and $901 million in 2019.
- Potential cash exposure from environmental remediation, the Holt royalty, Indonesian and Peruvian disputes, and the unresolved government investigations.