Newmont Mining Corporation: Q2 2018 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold and copper producer with operations and assets in North America, South America, Australia and Africa. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to the same periods in 2017. The company reported 533.4 million common shares outstanding as of July 19, 2018.
Financial and operating metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $1,662 million | $1,875 million | $3,479 million | $3,565 million |
| Net income attributable to Newmont stockholders | $292 million | $175 million | $484 million | $222 million |
| Continuing-operations net income attributable to stockholders | $274 million | $190 million | $444 million | $260 million |
| Diluted EPS from continuing operations | $0.51 | $0.36 | $0.83 | $0.49 |
| Adjusted net income | $144 million | $248 million | $329 million | $384 million |
| Adjusted diluted EPS | $0.26 | $0.46 | $0.61 | $0.72 |
| Adjusted EBITDA | $545 million | $699 million | $1,189 million | $1,273 million |
| Operating cash flow from continuing operations | Not provided for the quarter | Not provided for the quarter | $667 million | $902 million |
| Free cash flow | Not provided for the quarter | Not provided for the quarter | $178 million | $539 million |
| Gold produced | 1.242 million oz. | 1.440 million oz. | 2.528 million oz. | 2.767 million oz. |
| Gold all-in sustaining cost | $1,024/oz. | $883/oz. | $998/oz. | $891/oz. |
| Copper produced | 31 million lb. | 31 million lb. | 57 million lb. | 60 million lb. |
| Copper all-in sustaining cost | $2.05/lb. | $1.69/lb. | $2.06/lb. | $1.72/lb. |
Q2 net income margin was approximately 18%, compared with approximately 9% in the prior-year quarter; however, the comparison benefited from significant tax and portfolio-related items. Costs applicable to sales were $965 million in Q2 and $1,994 million for the six-month period. Average realized prices increased to $1,292 per gold ounce and $2.99 per copper pound in Q2, from $1,250 and $2.46, respectively.
At June 30, 2018, cash and cash equivalents were $3.127 billion, debt was $4.042 billion, lease and other financing obligations were $79 million, and net debt was $994 million. The company reported $2.914 billion of available borrowing capacity under its revolving credit facility and no outstanding revolver borrowings. Total assets were $20.655 billion and total liabilities were $8.822 billion.
Material changes versus the prior comparable period
- Q2 sales declined 11%, primarily because gold ounces sold fell 15% to 1.224 million ounces; higher realized gold and copper prices partly offset lower volumes.
- Six-month sales declined 2%, while continuing-operations net income attributable to stockholders increased 71% to $444 million.
- Adjusted net income fell 43% in Q2 and 14% for the six-month period; adjusted EBITDA fell 22% in Q2 and 7% year to date.
- Attributable gold production decreased 14% in Q2 and 8% year to date, reflecting lower grades, lower throughput or recovery, and concentrate inventory buildup at CC&V. Production was also lower at Boddington, Akyem and Twin Creeks.
- Gold all-in sustaining cost increased 16% in Q2 and 12% year to date, while copper all-in sustaining cost increased 21% and 20%, respectively.
- Operating cash flow from continuing operations declined 26% year to date, while capital expenditures increased to $489 million from $363 million. Free cash flow declined to $178 million from $539 million.
- Cash financing uses increased because of $150 million of common dividends, $70 million of share repurchases, and $39 million of employee-tax withholding payments.
Guidance, outlook, commentary and unusual items
- The filing does not provide a clear consolidated full-year production, cost or earnings guidance figure.
- Management emphasized self-funding development projects, reducing debt, maintaining dividends and improving the portfolio of longer-life, lower-cost mines.
- Projects in execution included Subika Underground, the Ahafo Mill Expansion, Twin Underground, Quecher Main and Tanami Power. Subika commercial production was expected in Q4 2018; Quecher Main first production was expected in late 2018 with commercial production in the second half of 2019.
- The Ahafo Mill Expansion was delayed following an April 2018 construction accident that caused six contractor fatalities. Management expected a safe restart in August and first gold to shift into the second half of 2019.
- Newmont completed the exchange of royalty interests for cash, Maverix Metals equity and warrants, recognizing a pre-tax gain of $100 million. The transaction was a major contributor to the increase in reported earnings and other income.
- The company recorded a $45 million Australian deferred-tax benefit related to a fixed-asset study and a $15 million release of valuation allowance on capital losses. Management expected further updates related to U.S. tax reform during the second half of 2018.
- Stockpile and leach-pad write-downs totaled $101 million in Q2 and $209 million year to date, compared with $64 million and $117 million in the prior-year periods.
- Reclamation and remediation liabilities totaled $2.369 billion at June 30, 2018. Management stated that environmental liabilities could ultimately be as much as 43% greater than the $294 million accrued for certain remediation matters, depending on resolution.
- Key risks include volatile gold and copper prices, production and grade variability, higher fuel and operating costs, permitting and community issues, environmental obligations, political and regulatory risks, foreign exchange exposure, and project execution risks.
- In July 2018, after quarter-end, Newmont agreed to acquire a 50% interest in the Galore Creek Partnership for $100 million in cash, plus deferred and contingent payments.
Most important facts for investors to verify
- Whether lower grades and production interruptions, particularly at CC&V, Twin Creeks, Boddington and Akyem, continue into the second half of 2018.
- Whether higher all-in sustaining costs and increased capital spending reduce future free cash flow and delay debt reduction.
- The recurring earnings impact after excluding the $100 million royalty-portfolio gain and favorable tax adjustments.
- Progress, restart timing and revised costs for the Ahafo Mill Expansion following the fatal construction accident.
- Execution and funding requirements for Quecher Main, Subika Underground, Tanami Power and other development projects.
- The outcome and potential exposure from Yanacocha tax and environmental matters, the Fronteer litigation, and other reclamation obligations.
- The effect of future gold and copper prices on inventory valuations, cash flow and profitability; the company does not hedge its gold or copper sales.
- The terms, contingent payments and strategic rationale of the post-quarter-end Galore Creek transaction.