Business Context and Reporting Period
Newmont Mining Corporation’s Form 10-K covers the fiscal year ended December 31, 2010. The filing is an annual report rather than a quarterly filing, although it provides unaudited fourth-quarter data. Newmont is primarily a global gold producer with significant copper operations, operating in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico.
Newmont reported 6.5 million ounces of consolidated gold production, including 5.4 million attributable ounces, and 600 million pounds of consolidated copper production, including 327 million attributable pounds. Gold represented 81% of sales and copper 19%.
Financial and Operating Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Sales | $9,540 million | $7,705 million | +24% |
| Income from continuing operations | $3,144 million | $2,109 million | +49% |
| Net income | $3,116 million | $2,093 million | +49% |
| Net income attributable to Newmont stockholders | $2,277 million | $1,297 million | +76% |
| Basic EPS | $4.63 | $2.66 | +74% |
| Adjusted net income | $1,893 million | $1,359 million | +39% |
| Cash flow from continuing operations | $3,180 million | $2,914 million | +9% |
| Capital expenditures | $1,402 million | $1,769 million | Down $367 million |
| Debt, including current portion | $4,441 million | $4,809 million | Down $368 million |
| Cash and cash equivalents | $4,056 million | $3,215 million | +26% |
Average realized gold price increased to $1,222 per ounce from $977, while average realized copper price increased to $3.43 per pound from $2.60. Consolidated gold ounces sold declined to 6.296 million from 6.534 million, while copper pounds sold increased to 539 million from 507 million.
- Gold costs applicable to sales were $485 per ounce, compared with $411 in 2009. Including amortization and reclamation, total production costs were $617 per ounce versus $520.
- Copper costs applicable to sales were $0.80 per pound, compared with $0.64. Including amortization and reclamation, total production costs were $1.02 per pound versus $0.81.
- Gold operating margin, defined by management as average realized gold price less consolidated costs applicable to sales, was $737 per ounce, up 30%.
- Reported income and mining tax expense was $856 million, with an effective tax rate of 21%, including approximately $440 million of tax benefits from internal restructuring and tax planning.
- Interest expense, net increased to $279 million from $120 million, partly because less interest was capitalized after Boddington entered commercial production.
- At year-end, total assets were $25,663 million and Newmont stockholders’ equity was $13,345 million. The company declared $0.50 per common share in dividends, versus $0.40 in 2009.
Material Changes Versus the Prior Comparable Period
- Sales and earnings benefited substantially from higher gold and copper prices and higher copper volumes.
- Copper production increased 19%, primarily because of higher grade and throughput at Batu Hijau and a full year of Boddington production.
- Gold production was broadly stable overall but shifted geographically: Asia Pacific production increased to 2.535 million ounces from 1.832 million, while North America and South America declined.
- Yanacocha gold production fell 29% because of mine sequencing, increased waste mining, lower leach placement, and lower mill grade and recovery. Its costs applicable to sales increased 39% per ounce.
- Nevada gold production declined 13%, partly because of the December 2009 Gold Quarry geotechnical event and completion of mining at Deep Post. Costs applicable to sales increased 11% per ounce.
- Boddington operated for a full year but produced below original expectations because of lower-than-expected grade and mill throughput; higher mining and mill maintenance costs also affected results.
- Gold reserves increased by 1.7 million ounces to 93.5 million ounces. Copper reserves increased by 300 million pounds to 9,420 million pounds. Reserve additions were partly affected by higher reserve-price assumptions than in 2009.
- Cash increased despite $1,402 million of capital spending, $1,185 million of income and mining taxes paid, $430 million of debt repayments, $246 million of common dividends and $462 million of dividends to noncontrolling interests.
Guidance, Outlook, Commentary, Risks and Unusual Items
For 2011, management expects attributable gold production of approximately 5.1 to 5.3 million ounces and attributable copper production of approximately 190 to 220 million pounds. Consolidated costs applicable to sales are expected at approximately $560 to $590 per gold ounce and $1.25 to $1.50 per copper pound.
- Planned 2011 capital expenditures are approximately $2,700 million to $3,000 million, with approximately 40% allocated to major projects and the balance to expansion, optimization, replacement and mine-life-extension projects.
- Exploration expense is expected to be approximately $335 million to $345 million, and advanced projects, research and development expense approximately $405 million to $415 million.
- Management expects lower Batu Hijau production in 2011 as the operation moves into Phase 6 stripping and processes primarily stockpiled ore until Phase 6 becomes the primary mill feed, expected in late 2013.
- Newmont agreed in February 2011 to acquire Fronteer Gold for approximately C$2,300 million, subject to shareholder and court approvals. Closing was expected in the second quarter of 2011. The transaction includes the Long Canyon project in Nevada and a potential C$85 million break fee under specified circumstances.
- Newmont does not hedge gold or copper sales, retaining exposure to spot prices. It hedges portions of Australian- and New Zealand-dollar operating costs, Nevada diesel costs and certain interest-rate exposure.
- Material risks include gold and copper price volatility, rising energy, labor and contractor costs, foreign-exchange movements, reserve estimation risk, permitting and environmental requirements, water and power availability, labor disruptions, political and regulatory risks, and mining hazards.
- Batu Hijau remains subject to Indonesian divestiture, permit, tax and litigation risks. Newmont’s direct ownership was reduced to 31.5%, while its effective economic interest was 48.5% at year-end. A final 7% divestiture was expected in the first half of 2011.
- PT Pukuafu Indah litigation in Indonesia included a non-final ruling requiring transfer of 31% of PTNNT shares and monetary damages of approximately $26 million to $27 million; Newmont and related entities appealed and disputed the claims.
- Environmental and reclamation liabilities totaled approximately $1,048 million, including $904 million for current or recently producing properties and $144 million for historic operations. Management stated that the historic-operation liability could be materially higher or lower than accrued.
- Newmont recognized a $28 million after-tax charge in discontinued operations for legal claims related to historic operations, and approximately $440 million of tax benefits from internal restructuring. These items make reported earnings less representative of recurring operating performance.
- At December 31, 2010, Newmont had $1,191 million of outstanding letters of credit, surety bonds and bank guarantees, primarily supporting reclamation, permitting and other obligations.
Most Important Facts an Investor Should Verify
- Reconcile reported net income of $2,277 million attributable to Newmont stockholders with adjusted net income of $1,893 million, particularly the $440 million tax benefit and other unusual items.
- Assess whether 2011 production and cost guidance appropriately reflects lower Batu Hijau production, higher energy and labor costs, and the expected return of Nevada production.
- Review the sustainability of cash flow after the planned $2,700 million to $3,000 million capital program, the proposed Fronteer acquisition, debt maturities and dividends.
- Evaluate the sensitivity of earnings, cash flow and reserves to gold and copper prices because Newmont does not hedge metal sales.
- Confirm the status and financial implications of the Batu Hijau final divestiture, operating control, permit renewals, regional tax disputes and PTPI litigation.
- Review reclamation, remediation, environmental and surety obligations, including the potential for historic-operation liabilities to exceed recorded accruals.
- Verify reserve assumptions, especially the 2010 gold price assumption of $950 per ounce and copper price assumption of $2.50 per pound, and test reserve sensitivity to lower prices and higher operating costs.
- Examine Boddington’s actual grade, throughput, maintenance costs and contingent consideration, as well as the development and permitting schedules for Akyem, Conga and Hope Bay.