Newmont Mining Corporation — 2018 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are primarily with the same periods of 2017. The interim financial statements are unaudited. Newmont is a global gold and copper producer with operations in North America, South America, Australia and Africa.
Financial and Operating Highlights
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $1,726 million | $1,879 million | $5,205 million | $5,444 million |
| Net income attributable to Newmont stockholders | $(145) million | $206 million | $339 million | $428 million |
| Continuing-operations income attributable to stockholders | $(161) million | $213 million | $283 million | $473 million |
| Diluted continuing-operations EPS | $(0.31) | $0.39 | $0.53 | $0.88 |
| Adjusted net income | $175 million | $184 million | $504 million | $568 million |
| Adjusted EBITDA | $636 million | $656 million | $1,825 million | $1,929 million |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $1,095 million | $1,391 million |
| Free cash flow | Not separately provided | Not separately provided | $332 million | $834 million |
| Cash and cash equivalents | $3,068 million at September 30, 2018 | $3,259 million at December 31, 2017 | ||
| Debt | $4,043 million at September 30, 2018 | $4,040 million at December 31, 2017 | ||
| Net debt | $1,122 million | $806 million at December 31, 2017 |
- Gold sales were $1,656 million in Q3 and $4,976 million for the first nine months; copper sales were $70 million and $229 million, respectively.
- Consolidated gold production declined to 1.394 million ounces in Q3 and 3.922 million ounces for the nine months, compared with 1.441 million and 4.208 million ounces in the prior-year periods.
- Attributable gold production was 1.286 million ounces in Q3, down 4.0% year over year.
- Average realized gold price was $1,201 per ounce in Q3 and $1,271 per ounce for the nine months. Average realized copper price was $2.50 and $2.79 per pound, respectively.
- Gold all-in sustaining costs were $927 per ounce in Q3 and $973 per ounce for the nine months, compared with $941 and $908 in the prior-year periods. Copper all-in sustaining costs were $1.87 and $2.00 per pound, compared with $1.65 and $1.70.
- Capital expenditures were $763 million for the first nine months, versus $557 million in 2017. The company reported $752 million of capital expenditures on an accrual basis, including $311 million for development projects and $441 million of sustaining capital.
- Cash dividends declared were $0.14 per share in Q3 and $0.42 per share for the nine months, compared with $0.075 and $0.175, respectively.
- The revolving credit facility had $2,914 million of available capacity and no borrowings outstanding at September 30, 2018.
Material Changes Versus the Prior Comparable Period
- Q3 continuing-operations loss attributable to Newmont stockholders worsened by $374 million, primarily due to a $366 million impairment of North American long-lived assets and lower realized metal prices.
- The impairment comprised $331 million for North American exploration properties and $35 million for the Emigrant operation, following changes in exploration priorities and mine plans. Emigrant also recorded a $22 million leach-pad write-down.
- Nine-month sales declined 4%, mainly from lower gold production, partially offset by higher average realized gold prices. Q3 sales declined 8% because both gold and copper prices were lower.
- Nine-month gold production fell 7%, reflecting lower grades, recovery and throughput at CC&V, Carlin, Boddington and Akyem. Q3 production was affected by lower mill throughput at Carlin, lower leach production at CC&V and lower grades at Kalgoorlie.
- Gold costs applicable to sales increased to $729 per ounce for the nine months from $692, while gold AISC increased to $973 from $908. Higher costs reflected lower ounces sold, inventory adjustments and higher oil prices.
- Operating cash flow from continuing operations decreased 21%, while free cash flow fell 60%, primarily because of lower sales, unfavorable working-capital movements and increased capital spending.
- Net debt increased by $316 million from year-end, despite the company retaining substantial cash and available revolver capacity.
- Newmont adopted ASC 606 and other accounting standards in 2018. ASC 606 reduced reported nine-month sales by $18 million and net income by $4 million relative to the amounts that would have been reported without adoption.
Outlook, Projects, Risks and Unusual Items
- Project pipeline: Subika Underground was expected to reach commercial production in Q4 2018, with anticipated average annual production of 150,000 to 200,000 ounces during its first five years. The Ahafo Mill Expansion was delayed after an April construction accident that caused six fatalities; first gold shifted to the second half of 2019, while commercial production remained expected in the second half of 2019.
- Quecher Main was expected to produce first gold in late 2018 and reach commercial production in the second half of 2019. Tanami Power was expected to lower power costs, reduce fuel-supply risk and reduce carbon emissions beginning in 2019.
- Newmont completed the CC&V concentrates project, commissioned the primary crusher at Merian, advanced Tanami Expansion 2 to definitive feasibility study and acquired or expanded interests in several exploration projects.
- The company expects liquidity from cash, operating cash flow and the revolving facility to fund working capital, projects, debt obligations and dividends for the foreseeable future. Scheduled minimum debt repayments were $626 million in 2019, $992 million in 2022 and $2.474 billion thereafter.
- Key risks include volatility in gold and copper prices, foreign-exchange movements, higher fuel and operating costs, lower grades or recoveries, mine-plan changes, permitting and regulatory requirements, environmental liabilities, political and community matters, construction execution, safety incidents and project cost escalation.
- Reclamation and remediation liabilities totaled $2.385 billion at September 30, 2018. Management noted that certain environmental remediation liabilities could be as much as 44% higher or zero lower than the amount accrued, depending on ultimate resolution.
- Material legal and regulatory matters include Yanacocha environmental and tax proceedings, the Conga project litigation, the Midnite mine remediation and the NWG Investments litigation, which seeks damages of C$1.2 billion. Outcomes remain uncertain.
- Other unusual items included a $100 million pretax gain from exchanging royalty interests for cash, Maverix equity and warrants; $25 million of business-interruption insurance proceeds related to Kalgoorlie; and a $55 million nine-month gain from revaluation of the Holt royalty obligation in discontinued operations.
- Newmont does not hedge gold or copper sales, preserving exposure to spot prices. It uses derivatives primarily for diesel, foreign-currency and interest-rate risk management.
Investor Verification Checklist
- Reconcile reported GAAP earnings with adjusted net income and adjusted EBITDA, particularly the $366 million impairment, Emigrant write-downs, royalty gain and marketable-security valuation changes.
- Verify production, grades, recoveries, throughput and AISC trends at Carlin, CC&V, Boddington, Akyem, Kalgoorlie and Merian.
- Assess whether the lower nine-month free cash flow and higher net debt are temporary or indicate sustained pressure from capital spending and working capital.
- Confirm the timing, remaining capital requirements and expected production for Subika Underground, Ahafo Mill Expansion, Quecher Main and Tanami Power.
- Monitor gold and copper prices, provisionally priced sales, fuel costs and foreign-exchange rates; at September 30, 2018, 113,000 gold ounces and 18 million copper pounds remained subject to final pricing.
- Review the six-fatality Ahafo construction accident, related safety actions and any potential financial, regulatory or schedule consequences.
- Evaluate reclamation, remediation and litigation exposures, including the Yanacocha tax dispute, Midnite mine obligations and NWG Investments claim.
- Confirm the effect of ASC 606, lease accounting adoption expected January 1, 2019, and any further U.S. tax-reform adjustments expected in the fourth quarter of 2018.