Business Context and Reporting Period
Newmont Mining Corporation, a global gold producer with copper exposure, filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. Operations spanned North America, South America, Asia Pacific and Africa, with development focused on Conga, Akyem, Hope Bay and Nevada satellite deposits.
Financial and Operating Metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $2,597 million | $2,049 million | $6,992 million | $5,187 million |
| Income from continuing operations | $814 million | $645 million | $2,094 million | $1,242 million |
| Net income attributable to Newmont stockholders | $537 million | $388 million | $1,465 million | $739 million |
| Diluted earnings per share | $1.07 | $0.79 | $2.94 | $1.54 |
| Net cash provided by operations | Not separately provided | Not separately provided | $2,322 million | $1,949 million |
| Capital expenditures, cash basis | Not separately provided | Not separately provided | $972 million | $1,314 million |
- Approximate net margin attributable to Newmont stockholders was 20.7% in Q3 2010 versus 18.9% in Q3 2009, and 20.9% for the first nine months versus 14.2% in the prior-year period.
- Gold produced was 1.689 million ounces in Q3 and 4.862 million ounces year to date; copper produced was 156 million pounds in Q3 and 463 million pounds year to date.
- Average realized prices increased to $1,221 per gold ounce and $3.67 per copper pound in Q3, compared with $964 and $2.80, respectively, in Q3 2009.
- Costs applicable to sales increased to $477 per gold ounce and $0.73 per copper pound in Q3, compared with $404 and $0.50, respectively.
- Cash and cash equivalents were $3,951 million at September 30, 2010, compared with $3,215 million at December 31, 2009. Current assets were $7,056 million versus current liabilities of $2,798 million.
- Total debt was $4,578 million, consisting of $289 million current and $4,289 million non-current debt, compared with $4,809 million at December 31, 2009.
- Reclamation and remediation liabilities totaled $867 million, including $719 million related to producing mineral properties and $148 million related to former mining activities.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 27%, and nine-month sales increased 35%, primarily from higher gold and copper prices, increased copper volumes and the addition of Boddington production.
- Q3 net income attributable to Newmont stockholders rose 38%; nine-month earnings nearly doubled, increasing 98%.
- Operating cash flow increased 19% year to date, despite income tax payments of $893 million compared with $53 million in the prior-year period.
- Production costs increased because of higher waste mining, royalties, stronger foreign currencies and the addition of higher-cost Boddington production. Amortization also increased following Boddington’s commercial production start in November 2009.
- Interest expense increased to $210 million year to date from $65 million, primarily because of senior notes issued in September 2009 and lower capitalized interest.
- Newmont repaid $274 million of debt, including the $220 million remaining under the PTNNT project financing facility. Boddington acquisition and construction spending was substantially lower than in 2009.
- Newmont’s direct ownership in PTNNT was reduced to 31.5% following the sale of a 7% interest, while the company continued to consolidate PTNNT and reported a 48.5% effective economic interest.
Guidance, Outlook, Commentary and Risks
- 2010 consolidated gold production guidance was narrowed to approximately 6.3–6.5 million ounces from 6.3–6.8 million ounces, with costs applicable to sales increased to approximately $485–$500 per ounce.
- 2010 copper production guidance was reduced to approximately 565–605 million pounds from 610–670 million pounds; cost guidance remained approximately $0.85–$0.95 per pound.
- Capital expenditure guidance was reduced to approximately $1.3–$1.5 billion from $1.4–$1.6 billion. Amortization guidance was reduced to approximately $925–$950 million.
- Management expected 2010 exploration expense of approximately $220–$245 million, advanced projects and research and development expense of $230–$250 million, general and administrative expense of $180–$190 million, and net interest expense of $270–$290 million.
- Management expected a 2010 effective tax rate of approximately 26%–28%, assuming an average gold price of $1,100 per ounce.
- Production and cost guidance was affected by lower-than-expected output at Boddington and Batu Hijau, lower Yanacocha production, mine sequencing, weather-related delays and a stronger Australian dollar.
- Gold and copper production was not hedged; the company remained exposed to commodity-price changes. Foreign currency and diesel derivatives were used to manage input-cost volatility.
- At September 30, 2010, provisionally priced sales included 151 million pounds of copper at $3.65 per pound and 146,000 ounces of gold at $1,308 per ounce. Final pricing could affect earnings.
- PTNNT was required to pay a $132 million Indonesian tax assessment, including $119 million related to corporate income taxes and penalties, while pursuing available defenses. The company recorded a corresponding receivable.
- Material contingencies included environmental matters, the Midnite Mine CERCLA litigation, Indonesian PTPI and PTNNT disputes, Yanacocha-related claims, and potential future reclamation obligations. Outstanding letters of credit, surety bonds and bank guarantees totaled $1,171 million.
- On October 27, 2010, Yanacocha repaid its remaining $96 million of senior notes.
Important Facts for Investors to Verify
- Whether lower production guidance and higher unit-cost guidance were subsequently achieved, particularly at Boddington, Batu Hijau and Yanacocha.
- The final settlement and recoverability of the $132 million Indonesian tax assessment receivable.
- Exposure to gold, copper, foreign exchange and diesel prices, including the effect of final pricing on provisional concentrate sales.
- The timing and funding of scheduled debt repayments, including $285 million in 2011 and $582 million in 2012, and the availability of the revolving credit facility.
- The ultimate cost of reclamation, remediation and environmental contingencies, which management stated could be materially above recorded accruals for certain former mining sites.
- The outcome of PTPI litigation and related arbitration, future PTNNT divestiture requirements, and the company’s ability to retain operational control and standards at Batu Hijau.
- The sustainability of earnings growth after adjusting for the $127 million first-quarter tax benefit, the $42 million gain on non-core asset sales and the absence of 2009 Boddington acquisition costs.