Business Context and Reporting Period
Newmont Mining Corporation, a global gold producer with copper operations, filed an unaudited Form 10-Q for the three months ended March 31, 2011. Operations spanned the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico.
Key Financial and Operating Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales | $2,465 million | $2,242 million | Up 10% |
| Net income | $670 million | $743 million | Down 10% |
| Net income attributable to Newmont stockholders | $514 million | $546 million | Down 6% |
| Diluted earnings per share | $1.03 | $1.11 | Down 7% |
| Net cash from operations | $989 million | $715 million | Up $274 million |
| Capital expenditures, cash basis | $402 million | $309 million | Up $93 million |
| Cash and equivalents at March 31 | $4,533 million | $3,364 million | Up $1,169 million |
| Total debt | $4,430 million | $4,441 million at December 31, 2010 | Broadly stable |
| Cash dividends declared per common share | $0.15 | $0.10 | Up 50% |
- Calculated pre-tax margin was approximately 39.5% of sales; net income attributable to Newmont stockholders was approximately 20.9% of sales.
- Current assets were $7,884 million versus current liabilities of $3,501 million. Cash exceeded total debt by approximately $103 million at March 31, 2011, before the subsequent Fronteer acquisition.
- Consolidated gold production was 1.516 million ounces and copper production was 102 million pounds. Attributable production was 1.342 million gold ounces and 57 million copper pounds.
- Net realized gold price was $1,382 per ounce versus $1,106; net realized copper price was $4.00 per pound versus $3.33.
- Consolidated costs applicable to sales increased to $557 per gold ounce from $476 and to $1.11 per copper pound from $0.78.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily because higher gold and copper prices more than offset lower sales volumes.
- Gold ounces sold declined 7% to 1.478 million, while copper pounds sold declined 29% to 105 million. Lower production at Yanacocha and Batu Hijau was significant.
- Gold revenue increased 17%, but copper revenue declined 14% because the volume reduction and a $12 million provisional-pricing loss outweighed higher copper prices.
- Operating cash flow reached a record $989 million, helped by higher realized metal prices and a $194 million favorable working-capital movement.
- Income and mining tax expense rose to $305 million from $141 million, and the effective tax rate increased to 31% from 16%. The 2010 rate benefited from a $127 million tax benefit related to an internal restructuring.
- Amortization increased to $256 million from $224 million, exploration increased to $62 million from $43 million, and advanced projects, research and development increased to $68 million from $46 million.
- Net income attributable to noncontrolling interests declined to $156 million from $197 million, primarily reflecting lower earnings at Yanacocha and Batu Hijau.
Guidance, Outlook, Commentary and Risks
- Management maintained 2011 guidance for attributable gold production of approximately 5.1 to 5.3 million ounces at consolidated costs applicable to sales of approximately $560 to $590 per ounce.
- Attributable copper production guidance remained approximately 190 to 220 million pounds at consolidated costs of approximately $1.25 to $1.50 per pound.
- 2011 capital expenditures were expected to be approximately $2,700 million to $3,000 million; exploration expense was expected at $335 million to $345 million; advanced projects and research and development at $405 million to $415 million; and amortization at $1,025 million to $1,035 million.
- Management expected a 2011 effective tax rate of approximately 28% to 32%, assuming an average gold price of $1,300 per ounce.
- Newmont announced a potential development plan targeting approximately 7 million ounces of annual attributable gold production and 400 million pounds of attributable copper production by 2017. The plan was subject to project execution, permitting, funding and other risks.
- The company announced a non-binding gold price-linked dividend policy. The first dividend under the policy was expected to be $0.20 per share, payable June 29, 2011, based on the first-quarter realized gold price.
- On April 6, 2011, after the reporting date, Newmont acquired Fronteer Gold for approximately $2,259 million. The acquisition included the Long Canyon project and was funded using cash; the preliminary purchase-price allocation was not final.
- Significant risks included gold and copper price volatility, lower grades and production, cost inflation, foreign exchange exposure, permitting and development risk, environmental obligations, mine safety, and political and legal disputes in Indonesia, Peru, Canada and the United States.
- Newmont did not hedge gold or copper sales, preserving exposure to spot prices. It used derivatives for foreign currency, diesel and interest-rate risk management.
- Reclamation and remediation liabilities totaled approximately $1,055 million. Outstanding letters of credit, surety bonds and bank guarantees totaled $1,339 million.
- Debt maturities included $232 million during the remainder of 2011, $565 million in 2012 and $538 million in 2014. Management expected to fund maturities from operating cash flow, cash balances, investments and credit facilities.
- At March 31, 2011, unrecognized tax benefits totaled $128 million. Management expected a possible decrease of approximately $5 million to $10 million over the following 12 months.
- The filing reported no material changes to the risk factors in the 2010 Form 10-K and stated that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether lower production and higher unit costs at Yanacocha and Batu Hijau persist through the remainder of 2011.
- The final purchase-price allocation, financing impact and operating contribution of the Fronteer acquisition.
- Progress, permitting, capital requirements and expected returns for Long Canyon, Hope Bay, Conga and Akyem.
- Exposure to final pricing on 146,000 ounces of gold and 111 million pounds of copper sold provisionally at March 31, 2011.
- The outcome and potential financial impact of Indonesian PTNNT divestiture, tax and regulatory disputes and PT Pukuafu litigation.
- Potential changes in reclamation, environmental and historic mine liabilities, including the Midnite Mine matter.
- The sustainability of the proposed gold price-linked dividend relative to metal prices, operating cash flow, acquisition spending and debt maturities.