Newmont Corporation: Q2 2020 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold producer with operations and assets across North America, South America, Australia, Africa and Nevada, plus exposure to copper, silver, lead and zinc. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared primarily with the corresponding 2019 periods.
Comparability is affected by the April 2019 Goldcorp acquisition, the July 2019 formation of Nevada Gold Mines with Barrick, and the 2020 sales of Kalgoorlie and Red Lake. Newmont owns 38.5% of Nevada Gold Mines and accounts for its interest using proportionate consolidation.
Key financial and operating metrics
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Sales | $2,365 million | $2,257 million | $4,946 million | $4,060 million |
| Net income attributable to Newmont stockholders | $344 million | $(25) million | $1,166 million | $62 million |
| Continuing-operations net income attributable to stockholders | $412 million | $1 million | $1,249 million | $114 million |
| Diluted EPS from continuing operations | $0.51 | Nominal | $1.55 | $0.18 |
| Adjusted net income | $261 million | $92 million | $587 million | $268 million |
| Adjusted diluted EPS | $0.32 | $0.12 | $0.73 | $0.41 |
| Adjusted EBITDA | $984 million | $679 million | $2,102 million | $1,366 million |
| Operating cash flow from continuing operations | Not separately stated | Not separately stated | $1,607 million | $875 million |
| Free cash flow | Not separately stated | Not separately stated | $999 million | $270 million |
| Gold production | 1.239 million oz. | 1.612 million oz. | 2.715 million oz. | 2.949 million oz. |
| Gold all-in sustaining cost | $1,097/oz. | $1,016/oz. | $1,061/oz. | $967/oz. |
Gold sales were $2,166 million in Q2 and $4,487 million in the first half. Average realized gold prices increased to $1,724 per ounce in Q2 and $1,652 per ounce in the first half, versus $1,317 and $1,310, respectively, in the comparable periods. Q2 costs applicable to sales were $1,058 million, down 23%, while first-half costs were $2,390 million, up 2% due largely to the expanded portfolio and increased non-gold-metal activity.
Gold production declined 23% in Q2 and 8% in the first half. Other-metal production increased, particularly at Peñasquito, with Q2 silver, lead and zinc production of 3.554 million ounces, 22 million pounds and 43 million pounds, respectively.
At June 30, 2020, cash and cash equivalents were $3,808 million, total liquidity was approximately $6,736 million, and unused revolving-credit capacity was $2,928 million. Debt was $6,030 million, lease and other financing obligations were $648 million, and net debt was $2,870 million. The company reported compliance with its debt covenants.
Capital expenditures were $608 million in the first half, including $392 million of sustaining capital and $172 million of development projects on an accrual basis. Regular dividends declared were $0.25 per share in Q2, compared with $0.14 in Q2 2019. Newmont repurchased approximately $321 million of stock during the first half.
Material changes versus the prior comparable periods
- Sales increased 5% in Q2 and 22% in the first half, primarily from higher gold prices, the full-period contribution of Goldcorp assets, increased Peñasquito output and the Nevada Gold Mines structure.
- Continuing-operations net income attributable to stockholders increased by $411 million in Q2 and $1,135 million in the first half. Drivers included higher gold prices, lower transaction and integration costs, investment fair-value gains and, in the first half, gains on asset and investment sales.
- First-half gains on asset and investment sales totaled $592 million, including $493 million from Kalgoorlie, $91 million from Continental Gold and $9 million from Red Lake.
- Adjusted EBITDA increased 45% in Q2 and 54% in the first half, while adjusted net income increased 184% in Q2 and 119% in the first half.
- Gold production and sales volumes fell because five sites were temporarily placed into care and maintenance during the pandemic and because Kalgoorlie and Red Lake were sold. Gold AISC increased 8% in Q2 and 10% in the first half.
- Operating cash flow from continuing operations increased 84% in the first half, and free cash flow increased to $999 million from $270 million. Investing cash flow benefited materially from asset-sale proceeds.
- Newmont issued $1,000 million of 2.25% senior notes due 2030 and used the proceeds and cash to tender for portions of senior notes due 2022 and 2023. Debt-extinguishment charges were $77 million in the first half.
Guidance, outlook, commentary and risks
The filing does not provide a clear consolidated 2020 production, cost or earnings guidance figure. Management stated that all five temporarily suspended sites resumed operations during the second quarter, but were at different stages of ramp-up as of June 30.
Management continues to emphasize financial flexibility, self-funded development, debt reduction, dividends and share repurchases. The Tanami Expansion 2 project is expected to add approximately 150,000 to 200,000 ounces of annual gold production during its first five years beginning in 2023 and reduce operating costs by approximately 10%. Development capital since approval was $49 million, including $23 million in Q2. Musselwhite Materials Handling was on track for completion by year-end 2020.
- COVID-19 remains the principal near-term operating uncertainty. Potential effects include additional closures, ramp-up delays, workforce interruptions, supply-chain or logistics disruptions, increased costs and impairment charges.
- Q2 included $125 million of cash care-and-maintenance costs, $70 million of non-cash care-and-maintenance costs in depreciation, and $33 million of incremental COVID-19-specific costs. The company also established a $20 million community support fund and had distributed approximately $6 million by June 30.
- Commodity prices, particularly gold, remain the primary earnings and cash-flow sensitivity. Lower prices could reduce reserves and trigger impairments of property, plant and mine development, inventories, stockpiles, investments, deferred tax assets or goodwill.
- Environmental and reclamation liabilities totaled approximately $3,550 million on the balance sheet. The filing states that certain environmental remediation matters could result in a liability up to 37% greater than the amount accrued.
- Material contingencies include Yanacocha environmental and regulatory matters, Peruvian tax litigation, Mexican tax disputes, Ghanaian mining-lease litigation, Goldcorp-related shareholder litigation and other legacy environmental matters. Outcomes generally cannot be predicted with certainty.
- Discontinued operations generated a $68 million loss in Q2 and an $83 million loss in the first half, primarily from revaluation of the Holt royalty obligation, which had a fair value of $351 million at June 30.
Most important facts for investors to verify
- Whether suspended operations fully return to planned production levels and whether COVID-19 causes further disruptions or incremental costs.
- The sustainability of high gold prices and the effect of gold prices, foreign exchange rates, grades, recoveries and input costs on AISC and free cash flow.
- The extent to which reported first-half earnings and cash flow benefited from non-recurring asset-sale gains and investment fair-value changes.
- Actual debt maturities, interest costs and future tender or refinancing activity, including the $550 million scheduled 2021 maturity and $492 million scheduled 2022 maturity.
- Progress, capital requirements and permitting or execution risks for Tanami Expansion 2, Musselwhite Materials Handling and other development projects.
- Potential changes to reclamation, remediation and tax liabilities, including the Yanacocha and Mexico matters.
- The company’s ongoing capital-allocation decisions regarding the $1 billion repurchase authorization, dividends and debt reduction.
- Reconciliations and definitions for non-GAAP measures, including adjusted net income, adjusted EBITDA, free cash flow and all-in sustaining costs.