Newmont Mining Corporation 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 filing covers the three and nine months ended September 30, 2017. Batu Hijau, Indonesia, was sold in November 2016 and is presented as a discontinued operation for all periods.
Key Financial and Operating Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales | $1,879 million | $1,791 million | $5,413 million | $4,922 million |
| Net income from continuing operations | $205 million | $135 million | $452 million | $109 million |
| Net income attributable to Newmont stockholders | $206 million | $(358) million | $429 million | $(283) million |
| Diluted EPS from continuing operations | $0.39 | $0.32 | $0.88 | $0.32 |
| Adjusted net income | $183 million | $202 million | $564 million | $486 million |
| Adjusted EBITDA | $653 million | $666 million | $1,917 million | $1,736 million |
| Operating cash flow from continuing operations | Not provided for quarter | Not provided for quarter | $1,596 million | $1,333 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $1,039 million | $501 million |
Q3 continuing-operations net margin was approximately 10.9%, based on $205 million of net income on $1,879 million of sales. Costs applicable to sales were $1,053 million, or approximately 56% of sales. Reported gold all-in sustaining cost was $943 per ounce, compared with $925 per ounce in the prior-year quarter; copper AISC was $1.65 per pound, compared with $2.57.
- Gold production was 1.441 million ounces, up 9% year over year; attributable production was 1.339 million ounces, up 7%.
- Copper production was 27 million pounds, down from 32 million pounds.
- Average realized gold price was $1,276 per ounce, down from $1,329; average realized copper price was $3.06 per pound, up from $2.04.
- Cash and cash equivalents were $2.969 billion at September 30, 2017, up from $2.756 billion at December 31, 2016.
- Debt was $4.050 billion, including $4.046 billion of non-current debt, versus $4.615 billion at December 31, 2016. No borrowings were outstanding under the $3.0 billion revolving credit facility.
- Cash dividends declared were $0.075 per share for Q3, up 50% from $0.025 in Q3 2016.
Material Changes Versus the Prior Comparable Period
- Sales increased 5% in Q3 and 10% for the first nine months, primarily from higher gold volumes and new production at Merian and Long Canyon.
- Continuing-operations earnings attributable to Newmont increased by $44 million in Q3 and $303 million for the nine months. The improvement reflected higher production and lower income and mining taxes, partly offset by lower realized gold prices.
- Adjusted net income declined 8% in Q3, and adjusted EBITDA declined 2%, despite higher reported GAAP earnings. The comparison was affected by higher costs, valuation-related tax items and other adjustments.
- Operating cash flow from continuing operations increased $263 million for the nine months, while free cash flow increased $538 million. Capital expenditures declined to $557 million from $832 million.
- Newmont repaid $579 million of debt during the first nine months, including the $575 million 2017 convertible senior notes at maturity in July.
- Gold AISC was broadly stable for the first nine months at $909 per ounce versus $910, but increased in Q3 due to higher direct operating costs and sustaining expenditures.
- Prior-year results included a $577 million loss on classification of Batu Hijau as held for sale and Batu Hijau operating earnings. These items materially distort year-over-year total net income comparisons.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear consolidated production or cost guidance range for full-year 2017. Management emphasizes self-funding projects, reducing debt and returning cash to shareholders.
- Tanami Expansion achieved commercial production at the end of August 2017. Tanami production is expected to remain 425,000 to 475,000 ounces annually for the first five years.
- Subika Underground achieved first production in June 2017; commercial production is expected in the second half of 2018 and is expected to add 150,000 to 200,000 ounces annually beginning in 2019.
- Ahafo Mill Expansion is expected to begin production in the first half of 2019 and commercial production in the second half of 2019, adding 75,000 to 100,000 ounces annually beginning in 2020.
- Twin Creeks Underground achieved first production in August 2017, with commercial production expected in mid-2018.
- The board approved Quecher Main in October 2017. First production is expected in early 2019, with commercial production in the fourth quarter of 2019. The project is expected to extend Yanacocha's mine life to 2027.
- Key risks include gold and copper price volatility, operating costs, grades and recoveries, weather, foreign exchange, permitting, political and community support, environmental compliance, mine development execution and reclamation obligations.
- Reclamation liabilities were $1.863 billion and remediation liabilities were $272 million at September 30, 2017. Management states that environmental obligations could be materially higher or lower than accrued amounts.
- The Australian Taxation Office indicated a potential capital gains tax assessment of approximately $65 million to $85 million, before interest and penalties, relating to a 2011 reorganization; Newmont disputes the position.
- Other contingencies include Yanacocha environmental and tax matters, the Fronteer-related litigation seeking C$1.2 billion, and $2.323 billion of outstanding letters of credit, surety bonds and bank guarantees.
- The SEC and Department of Justice closed a previously disclosed foreign-corrupt-practices investigation without enforcement action in 2017.
Important Facts for Investors to Verify
- Reconcile GAAP earnings with adjusted net income and adjusted EBITDA, particularly the effect of discontinued operations, tax valuation allowances, inventory write-downs and asset-sale gains.
- Assess whether higher gold production can offset rising gold AISC and lower realized gold prices.
- Verify the sustainability of the $1.039 billion nine-month free cash flow after debt service, dividends, noncontrolling-interest distributions and project spending.
- Review debt maturities, including $626 million due in 2019 and $3.466 billion thereafter, against expected operating cash flow and available liquidity.
- Monitor Yanacocha closure-plan approval, water-treatment requirements and associated reclamation liability revisions.
- Track construction, permitting, community and funding risks for Subika Underground, Ahafo Mill Expansion and Quecher Main.
- Confirm the eventual resolution and financial exposure from the Australian tax review, Yanacocha disputes and other legal contingencies.
- Consider the sensitivity to commodity prices: provisionally priced sales included 75,000 ounces of gold and 20 million pounds of copper at September 30, 2017.