Newmont Mining Corporation: Q2 2012 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold producer with copper and gold operations in the United States, Australia, Peru, Indonesia, Ghana, Mexico and New Zealand. The unaudited filing covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. Results include consolidated operations with significant noncontrolling interests, particularly at Yanacocha and Batu Hijau.
Financial and operating metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $2,229 million | $2,384 million | $4,912 million | $4,849 million |
| Income from continuing operations | $371 million | $660 million | $1,045 million | $1,330 million |
| Net income attributable to Newmont stockholders | $279 million | $387 million | $769 million | $901 million |
| Basic EPS attributable to Newmont | $0.56 | $0.78 | $1.55 | $1.82 |
| Adjusted net income | $294 million | $445 million | $872 million | $958 million |
| Cash flow from continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $964 million | $1,403 million |
| Capital expenditures, cash basis | Not separately provided for the quarter | Not separately provided for the quarter | $1,578 million | $1,020 million |
Gold production was 1.362 million ounces in the quarter and 2.841 million ounces for the first half, compared with 1.393 million and 2.904 million, respectively, in 2011. Copper production was 60 million pounds in the quarter and 117 million pounds year to date, compared with 71 million and 169 million pounds.
- Average realized gold price increased to $1,598 per ounce in Q2 and $1,643 for the first half, from $1,501 and $1,440.
- Average realized copper price decreased to $2.85 per pound in Q2 and $3.49 for the first half, from $3.78 and $3.91.
- Consolidated gold costs applicable to sales increased to $681 per ounce in Q2 and $649 year to date, from $583 and $570.
- Consolidated copper costs applicable to sales increased to $2.35 per pound in Q2 and $2.14 year to date, from $1.34 and $1.21.
- Non-GAAP gold operating margin was $917 per ounce in Q2 and $994 year to date; copper operating margin was $0.50 and $1.35, respectively.
At June 30, 2012, cash and cash equivalents were $1,897 million, current assets were $5,272 million and current liabilities were $2,367 million. Total debt was $6,128 million, consisting of $40 million current debt and $6,088 million noncurrent debt. The company reported total equity of $15,989 million and total assets of $28,660 million.
Material changes versus the prior comparable period
- Q2 sales declined 7% despite higher gold prices, primarily because copper sales fell sharply and gold sales volumes declined. First-half sales increased 1%.
- Net income attributable to Newmont stockholders fell 28% in Q2 and 15% for the first half. Lower production, lower copper prices, higher production costs and timing of metal sales were partly offset by higher gold prices and stronger Nevada, La Herradura and Yanacocha performance.
- Gold production declined modestly, while copper production fell substantially because Batu Hijau processed lower-grade stockpiles. Batu Hijau gold and copper production declined 68% and 25% in Q2 and 73% and 40% for the first half.
- Cash flow from continuing operations fell $439 million year to date, primarily because of lower cash flow from Batu Hijau and increased working capital invested in inventories and stockpiles.
- Capital expenditures increased to $1,578 million from $1,020 million, with significant spending on Conga, Akyem, Nevada projects and other mine development.
- The company issued $2.5 billion of senior notes in March 2012, consisting of $1.5 billion of 3.5% notes due 2022 and $1.0 billion of 4.875% notes due 2042. It also repaid the $517 million 2012 convertible notes and paid a $172 million cash conversion premium.
- The corporate revolving credit facility was increased from $2.5 billion to $3.0 billion and extended to 2017. The company stated that it was in compliance with debt covenants.
- The effective tax rate increased to 32% in Q2 and 33% year to date, versus 22% and 27%, respectively, due to Canadian deferred-tax valuation allowances, higher mining taxes and the absence of a $65 million nonrecurring 2011 tax benefit.
Guidance, outlook, commentary and risks
- 2012 attributable gold production guidance was narrowed to 5.0–5.1 million ounces. Consolidated gold costs applicable to sales guidance remained $625–$675 per ounce.
- Attributable copper production guidance was reduced to 145–165 million pounds, with consolidated copper costs guidance of $1.80–$2.20 per pound.
- 2012 capital expenditure guidance was reduced to $3.3–$3.6 billion, including approximately 50% directed toward projects and pipeline development. Exploration expense guidance was $360–$390 million, advanced projects and research and development expense guidance was $425–$475 million, and general and administrative expense guidance was $200–$220 million.
- Conga development was largely suspended because of local political and community protests. Newmont adopted a “go slow, water first” approach, reducing planned 2012 and 2013 spending from $2.9 billion to $850 million. Failure to resume the current development plan could lead to capital reallocation and a potential Conga impairment.
- Akyem construction was progressing toward first production in late 2013. Estimated capital costs were $850–$1.1 billion, with $496 million incurred at June 30, 2012.
- Hope Bay was on care and maintenance. Newmont expected an additional $50 million of spending during the remainder of 2012 and approximately $25 million annually thereafter.
- Reclamation and remediation liabilities totaled $1,336 million, including $1,145 million for producing or recently producing properties and $191 million for historical environmental obligations. The company stated that the latter liabilities could be as much as 108% higher or 7% lower than accrued.
- The first-half discontinued-operations charge of $71 million related to a higher expected Holt property royalty liability, driven by revised production estimates and higher gold prices.
- Newmont does not hedge gold or copper sales and therefore remains exposed to metal prices. It uses derivatives for foreign currency, diesel and interest-rate risk. Provisionally priced sales at June 30 included 40 million pounds of copper and 74,000 ounces of gold.
- Outstanding letters of credit, surety bonds and bank guarantees totaled $1,661 million. The filing also describes environmental, Indonesian Batu Hijau divestiture and permitting disputes, the Choropampa claims in Peru, and other legal matters for which outcomes cannot be reasonably predicted.
- Management expected a 2012 consolidated tax rate of approximately 30%–32%, assuming an average realized gold price of $1,650 per ounce in the remainder of the year.
Most important facts for investors to verify
- Whether Batu Hijau’s lower-grade stockpile period and related cost increases are temporary and when Phase 6 ore is expected to be reached.
- Progress, permitting, community support, spending and impairment risk at Conga, Akyem and other major development projects.
- Actual gold and copper production, realized prices and costs relative to the revised 2012 guidance.
- Cash generation after capital expenditures, dividends and debt service, including the availability and conditions of the revolving credit facility.
- Exposure to gold, copper, foreign exchange, diesel and interest-rate movements, including the effect of provisionally priced sales.
- Potential changes in reclamation liabilities, Hope Bay care-and-maintenance costs, the Holt royalty and other environmental or legal contingencies.
- The effect of noncontrolling interests on attributable production, earnings and cash available to Newmont stockholders.