Business Context and Reporting Period
Newmont Mining Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2009. The company operates primarily as a gold producer, with copper production concentrated at Batu Hijau in Indonesia. Comparative 2008 amounts reflect retrospective adoption of convertible-debt accounting guidance and revised segment presentation.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Change |
|---|---|---|---|
| Revenue | $1,552 million | $1,943 million | Down 20% |
| Income from continuing operations | $277 million | $551 million | Down 50% |
| Net income attributable to Newmont stockholders | $189 million | $365 million | Down 48% |
| Diluted earnings per share | $0.40 | $0.80 | Down $0.40 |
| Operating cash flow | $387 million | $494 million | Down 22% |
| Capital expenditures | $330 million | $450 million | Down 27% |
| Cash and cash equivalents at period end | $1,451 million | $1,014 million | Prior-year comparative |
Revenue consisted of $1,391 million from gold and $161 million from copper. Gold revenue declined 8%, while copper revenue declined 63%. Consolidated gold ounces sold decreased 5% to 1.534 million ounces, and copper pounds sold decreased 10% to 95 million pounds.
Net income attributable to Newmont stockholders represented approximately 12.2% of revenue, compared with approximately 18.8% in the prior-year quarter. Income from continuing operations represented approximately 17.8% of revenue, compared with approximately 28.4% in Q1 2008. Costs applicable to sales were $753 million, including $668 million for gold and $85 million for copper; amortization was $192 million.
Average realized prices were $906 per gold ounce versus $933 and $1.69 per copper pound versus $4.10. Gold costs applicable to sales increased to $435 per ounce from $396, while copper costs decreased to $0.89 per pound from $1.43.
At March 31, 2009, total assets were $17.025 billion, total liabilities were $6.796 billion, and total stockholders’ equity was $10.229 billion. Debt comprised $223 million of current debt and $2.749 billion of long-term debt, or approximately $2.972 billion in total. Net debt was approximately $1.521 billion based on cash balances alone.
Net cash provided by financing activities was $982 million. Newmont raised $1.239 billion from common-stock issuance and received net proceeds of approximately $504 million from $518 million of convertible senior notes due 2012, while repaying $1.590 billion of debt. The company had repaid all borrowings under its $2.0 billion revolving credit facility at quarter end and stated that it remained in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings fell primarily because of substantially lower copper prices, lower realized gold prices, and lower metal sales volumes.
- Gold production and sales were affected by lower North American and Asia Pacific output and higher finished-goods inventory in South America. Ahafo production increased significantly and partially offset declines elsewhere.
- Gold unit costs increased because of lower production, lower by-product credits, higher contracted services, and higher costs allocated from copper at Batu Hijau. Currency weakness and lower fuel prices provided offsets.
- Other expense increased to $77 million from $63 million, including $14 million of workforce-reduction costs, $8 million of Boddington acquisition costs, and $5 million related to the Batu Hijau divestiture.
- Interest expense increased to $32 million from $28 million, partly because of the new convertible notes and non-cash debt-discount amortization required by FSP APB 14-1.
- Noncontrolling-interest income declined to $88 million from $192 million, reflecting lower earnings at Batu Hijau and Yanacocha.
- Operating cash flow declined, but investing cash use also decreased because Q1 2008 included $318 million of Miramar acquisition-related payments.
- Cash increased by $1.016 billion during the quarter, principally from equity issuance and financing activity rather than operating cash generation.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management maintained 2009 consolidated gold sales guidance of 6.35 million to 6.85 million ounces at costs applicable to sales of $400 to $440 per ounce.
- 2009 copper sales guidance was approximately 460 million to 510 million pounds at costs applicable to sales of approximately $0.50 to $0.65 per pound.
- Expected 2009 capital expenditures were $1.4 billion to $1.6 billion. Expected amortization was $775 million to $825 million, assuming 100% ownership of Boddington.
- Boddington was approximately 95% complete at March 31, 2009, with initial mill start-up expected in mid-2009. The planned acquisition of AngloGold Ashanti’s remaining 33.33% interest required $750 million at closing, a further $240 million payable in cash or stock, and a contingent payment capped at $100 million. Additional Q2 acquisition costs of $55 million to $60 million were expected.
- The company expected 2009 interest expense of approximately $150 million to $160 million, exploration expense of $165 million to $175 million, and a tax rate of approximately 27% to 31%, assuming an average gold price of $875 per ounce.
- At Batu Hijau, an international arbitration award required transfers or offers of interests representing the 2006, 2007, and 2008 divestiture obligations within specified 180-day cure periods. Newmont and Sumitomo agreed to provide a joint and several guarantee for PTNNT project-financing principal and interest to facilitate release of share pledges. The award could ultimately reduce NTP’s ownership interest in PTNNT to 49%, although Newmont expected to continue consolidating Batu Hijau.
- The required extension of an Indonesian forest-use permit for Batu Hijau had not been received and could adversely affect future operations, mine development, and financial results.
- Environmental and reclamation liabilities totaled $717 million, including $620 million for reclamation obligations and $157 million for former-mine remediation matters. Management stated that the remediation liability could be as much as 131% higher or 7% lower than the accrued amount depending on ultimate resolution.
- Outstanding letters of credit, surety bonds, and bank guarantees totaled $807 million. The company also had a contingent support line of credit for PTNNT with a pro-rata share of $11 million.
- Unrecognized tax benefits totaled $173 million, of which $124 million could affect the effective tax rate. Management expected net unrecognized benefits to decrease by approximately $3 million to $5 million over the following 12 months.
- Commodity prices, foreign exchange rates, diesel prices, operating execution, permitting, environmental obligations, legal proceedings, political and ownership risks in Indonesia, and Boddington completion and cost overruns were identified as material risk areas. Hedge contracts generated unfavorable cost effects in several areas and approximately $31 million of net-of-tax derivative losses were expected to be reclassified into income over the following 12 months.
Facts Investors Should Verify
- Whether Boddington achieved the expected mid-2009 start-up and whether total project costs remained within the $2.6 billion to $2.9 billion range.
- The final outcome and implementation of the Batu Hijau divestiture requirements, including any impact on ownership, consolidation, guarantees, and project financing.
- Actual 2009 gold and copper production, realized prices, unit costs, and the effect of provisional pricing adjustments.
- Whether cash generation was sufficient to fund Boddington acquisition payments, capital expenditures, debt maturities, dividends, and reclamation obligations without renewed reliance on revolving debt or equity issuance.
- Changes in reclamation, environmental, tax, and legal exposures, particularly the Midnite Mine CERCLA matter and unresolved Peruvian claims.
- The effect of convertible-debt discount amortization and any future dilution if Newmont’s share price exceeds applicable conversion or warrant thresholds.