Newmont Mining Corporation — Q3 2014 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold and copper producer with operations and projects in North America, South America, Australia/New Zealand, Indonesia and Africa. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared primarily with the corresponding 2013 periods. Dollar amounts are in millions unless otherwise stated.
Key financial and operating metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Sales | $1,746 | $2,020 | $5,275 | $6,226 |
| Income from continuing operations | $72 | $415 | $284 | $(1,576) |
| Net income attributable to Newmont stockholders | $213 | $398 | $493 | $(1,347) |
| Basic EPS attributable to stockholders | $0.43 | $0.80 | $0.99 | $(2.71) |
| Adjusted net income | $249 | $217 | $459 | $480 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $879 | $1,161 |
| Capital expenditures, cash basis | Not separately provided for the quarter | Not separately provided for the quarter | $766 | $1,528 |
| Cash and cash equivalents | September 30, 2014: $1,778 | December 31, 2013: $1,555 | ||
| Total debt | September 30, 2014: $6,773 | December 31, 2013: $6,740 |
Q3 operating results included 1.251 million ounces of consolidated gold production and 34 million pounds of copper production. Nine-month production was 3.842 million ounces of gold and 173 million pounds of copper. Average realized prices were $1,270 per gold ounce and $2.71 per copper pound in Q3, and $1,282 and $2.75, respectively, for the first nine months.
Consolidated gold costs applicable to sales were $705 per ounce in Q3 and $733 per ounce for the first nine months. Copper costs were $5.73 per pound in Q3 and $3.75 per pound for the first nine months. Gold operating margin was $565 per ounce in Q3 and $549 per ounce year to date; copper operating margin was negative $3.02 per pound and negative $1.00 per pound, respectively. These per-unit and adjusted measures are non-GAAP measures.
Material changes versus the prior comparable periods
- Q3 sales declined 14%, while nine-month sales declined 15%, primarily from lower gold and copper volumes and lower realized metal prices.
- Gold ounces sold decreased 7% in Q3 and 3% year to date; copper pounds sold decreased 27% in Q3 and 22% year to date.
- Gold production declined 9% in Q3 and 3% year to date. Copper production declined 45% in Q3 and 9% year to date, principally because of Batu Hijau export restrictions.
- Q3 net income attributable to Newmont stockholders fell to $213 from $398, despite a $47 tax benefit. The decline reflected lower metal prices, lower production and Batu Hijau inventory adjustments and abnormal operating costs.
- Nine-month stockholder earnings improved substantially from the 2013 loss, primarily because 2013 included approximately $2.265 billion of write-downs; 2014 write-downs were $18.
- Adjusted net income was $249 in Q3, up from $217, but $459 for the first nine months, down from $480.
- Operating cash flow decreased $282, or approximately 24%, to $879, while cash capital expenditures fell by approximately 50% to $766.
- The Company sold the Jundee mine for $94 in cash during July 2014 and completed the sale of its 44% La Herradura interest for $450 on October 6, 2014, after the reporting date.
Guidance, outlook, management commentary and risks
Management emphasized the Full Potential program, intended to improve productivity, costs and operating cash flow over the next three years. The filing does not provide a consolidated quantitative production or earnings guidance range.
- Batu Hijau: PTNNT received a six-month export permit on September 19, 2014, and operations and concentrate shipments resumed. The Indonesia memorandum of understanding requires higher royalties, export duties and a $25 surety bond, while Contract of Work renegotiations remain unresolved. Future operations depend on successful renegotiation, future export permits, smelting availability, export quotas and labor-related matters.
- Projects: Merian received full funding approval, with construction mobilization beginning in August 2014 and expected production in late 2016. Management expects annual life-of-mine production of 300,000 to 400,000 ounces and total project capital of $900 to $1,000 on a 100% basis. Turf Vent Shaft is expected to begin commercial production in late 2015; Waihi Correnso is planned for 2015 production.
- Conga: Development remained largely suspended because of political and community opposition. The Company expects approximately $65 of 2014 spending focused on access, permitting and water infrastructure. Failure to continue the current plan could result in capital reallocation and a potential impairment.
- Commodity prices: The Company does not hedge gold or copper sales, leaving earnings and cash flow directly exposed to metal prices. The filing uses long-term assumptions of $1,300 per gold ounce and $3.00 per copper pound for certain valuation analyses.
- Liquidity and debt: The Company expects to fund debt maturities and capital expenditures through operating cash flow, cash and short-term investments and available credit facilities. Its $3.0 billion revolving credit facility had no borrowings outstanding, although $162 was used to support letters of credit. Scheduled minimum debt repayments total $5.680 billion after 2018.
- Contingencies: Reclamation and remediation liabilities totaled $1.579 billion. Outstanding letters of credit, surety bonds and bank guarantees totaled $1.737 billion. The Company also disclosed environmental, tax, legal and Indonesian divestiture matters with outcomes that cannot be reasonably predicted.
- Tax: The effective tax rate was unusually negative because of tax benefits, valuation allowance changes and percentage depletion. Unrecognized tax benefits totaled $460, with an estimated $65 to $70 possible reduction over the next 12 months.
Most important facts for investors to verify
- Whether Batu Hijau’s export permit and Contract of Work renegotiation support sustained production and concentrate shipments after the six-month permit expires.
- The durability of the production recovery at Batu Hijau and the effect of higher royalties, export duties and inventory carrying-cost adjustments.
- Actual gold and copper prices, production volumes and unit costs relative to the filing’s assumptions and non-GAAP AISC measures.
- Funding requirements, schedule and ownership economics for Merian, Turf Vent Shaft, Correnso and other development projects.
- Potential impairment exposure at Conga, Batu Hijau and other assets if commodity prices, operating costs or permitting conditions deteriorate.
- Debt maturities, restricted cash, foreign-subsidiary cash and the availability of the revolving credit facility.
- The ultimate cost of reclamation, environmental matters, legal claims, tax audits and Indonesian divestiture obligations.