Newmont Mining Corporation — Q2 2017 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 Form 10-Q covers the three and six months ended June 30, 2017. Results exclude Batu Hijau, which was sold in November 2016 and is presented as a discontinued operation for all periods.
Key financial and operating metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $1,875 million vs. $1,669 million | $3,534 million vs. $3,131 million |
| Net income attributable to Newmont stockholders | $177 million vs. $23 million | $223 million vs. $75 million |
| Continuing-operations income attributable to stockholders | $192 million vs. $14 million | $261 million vs. $2 million |
| Diluted EPS from continuing operations | $0.36 vs. $0.02 | $0.49 vs. nil |
| Adjusted net income | $248 million vs. $155 million | $381 million vs. $284 million |
| Adjusted EBITDA | $698 million vs. $600 million | $1,264 million vs. $1,070 million |
| Operating cash flow from continuing operations | Not separately provided for the quarter | $908 million vs. $825 million |
| Free cash flow | Not separately provided for the quarter | $545 million vs. $262 million |
| Cash and cash equivalents | $3,105 million at June 30, 2017 | $2,756 million at December 31, 2016 |
| Total debt | $4,623 million carrying value, including current debt | $4,615 million at December 31, 2016 |
Continuing-operations income attributable to stockholders represented approximately 10.2% of second-quarter sales and 7.4% of first-half sales. Costs applicable to sales were $999 million in the quarter and $1,932 million year to date, implying sales less costs applicable to sales of approximately 46.7% and 45.3%, respectively; these are not GAAP gross margins.
- Consolidated gold production increased 14% in the quarter to 1.440 million ounces and 11% for the first half to 2.767 million ounces.
- Attributable gold production increased 13% in the quarter to 1.352 million ounces and 11% for the first half to 2.586 million ounces.
- Consolidated copper production increased 7% in the quarter to 31 million pounds and 5% for the first half to 60 million pounds.
- Average realized gold prices were $1,250 per ounce in the quarter and $1,236 per ounce for the first half, compared with $1,257 and $1,226, respectively, in the prior-year periods.
- Average realized copper prices were $2.46 per pound in the quarter and $2.56 per pound for the first half, compared with $2.00 and $2.02, respectively.
- Consolidated gold all-in sustaining costs were $884 per ounce in the quarter and $892 per ounce for the first half, compared with $913 and $902, respectively.
- Consolidated copper all-in sustaining costs were $1.69 per pound in the quarter and $1.72 per pound for the first half, compared with $2.17 and $2.15, respectively.
Material changes versus the prior comparable periods
- Sales increased 12% in both the quarter and first half, primarily because of higher gold volumes from Merian and Long Canyon. Copper sales increased 33% in the quarter and 36% for the first half, primarily due to higher realized copper prices.
- Profitability improved substantially because of higher production, lower income and mining taxes, and lower interest expense. The effective tax rate declined to 50% in the quarter and 52% for the first half, versus 99% and 104% in the prior-year periods, largely because of lower valuation allowance charges and higher percentage-depletion benefits.
- Operating cash flow from continuing operations increased $83 million year to date, while capital expenditures declined to $363 million from $563 million. Free cash flow increased to $545 million from $262 million.
- Gold costs applicable to sales increased 13% in the quarter and 12% year to date, reflecting new production at Merian and Long Canyon and higher unit costs at Yanacocha. Copper costs applicable to sales declined 20% in the quarter and 17% year to date.
- Yanacocha production declined 23% in both comparable periods because of lower grades, leach tons and throughput. Tanami production declined 31% in the quarter and 30% year to date, partly because severe rainfall disrupted logistics and caused the mill to be placed in care and maintenance for much of February.
- The prior-year periods included Batu Hijau operating results and significant related cash flows, as well as a $103 million gain from the sale of Regis Resources. These items make total net income and cash-flow comparisons less directly comparable.
- Reclamation and remediation expense increased to $44 million in the quarter and $74 million year to date, mainly because of revised Yanacocha closure and water-treatment assumptions.
Guidance, outlook, commentary, risks and unusual items
- Management emphasized self-funding development projects, reducing debt and returning cash through dividends. The quarterly dividend payable in the third quarter was increased to $0.075 per share; dividends declared for the first half were $0.100 per share versus $0.050 in the prior year.
- Tanami Expansion was on track for commercial production in the third quarter of 2017 and is expected to support annual production of 425,000 to 475,000 ounces for the first five years.
- Subika Underground achieved first ore in June 2017, with commercial production expected in the second half of 2018 and projected incremental annual production of 150,000 to 200,000 ounces beginning in 2019.
- Ahafo Mill Expansion was expected to begin production in the first half of 2019 and commercial production in the second half of 2019, with projected incremental annual production of 75,000 to 100,000 ounces beginning in 2020.
- Twin Underground was approved in June 2017, with first production expected in the fourth quarter of 2017 and commercial production in mid-2018. It is expected to add 30,000 to 40,000 ounces annually beginning in 2018.
- Newmont acquired a 19.9% interest in Continental Gold for $109 million and a 19.9% interest in Shore Gold following an exchange of its Fort á la Corne joint-venture interest.
- The $3.0 billion revolving credit facility was extended to May 2022. No borrowings were outstanding at June 30, although $80 million supported letters of credit. The $575 million 2017 convertible-note maturity was paid in July 2017.
- Newmont had $2.270 billion of outstanding letters of credit, surety bonds and bank guarantees. Reclamation and remediation liabilities totaled $2.060 billion at June 30.
- The revised Yanacocha closure plan was expected to be submitted to Peruvian regulators in the second half of 2017 and could require additional reclamation bonding. Potential environmental and legal outcomes at Yanacocha and historic mine sites remain uncertain.
- Major risks include gold and copper price volatility, operating and geological performance, weather, currency movements, permitting, environmental requirements, political and regulatory conditions, taxes, labor and project execution. The company does not hedge gold or copper sales, retaining direct exposure to metal prices.
- The SEC and Department of Justice closed their investigations into certain foreign business activities in 2017 without recommending enforcement action, according to the filing.
Most important facts for investors to verify
- Whether production and cost performance at Yanacocha and Tanami recover as expected after grade, weather and logistics disruptions.
- Progress, capital spending and commissioning dates for Tanami Expansion, Subika Underground, Ahafo Mill Expansion and Twin Underground.
- The effect of the July 2017 $575 million debt repayment on liquidity, leverage and future interest expense.
- Updated Yanacocha closure-plan requirements, reclamation bonding and the adequacy of the $2.060 billion reclamation and remediation liability.
- Sensitivity of cash flow and inventory valuations to gold and copper prices, including provisionally priced sales of 92,000 ounces of gold and 24 million pounds of copper outstanding at June 30.
- The sustainability of the improved tax rate and the extent to which adjusted earnings depend on valuation-allowance and other tax adjustments.
- The comparability of reported results after the Batu Hijau disposal and the impact of non-GAAP adjustments used in adjusted net income, EBITDA and free cash flow.