Business Context and Reporting Period
Newmont Mining Corporation, a global gold and copper producer, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Operations were primarily in North America, South America, Australia, Ghana and Suriname. The financial statements present Batu Hijau in Indonesia as a discontinued operation and assets held for sale following the planned sale of Newmont’s 48.5% economic interest.
Key Financial and Operating Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Sales | $1,791 million | $1,560 million | $4,922 million | $4,633 million |
| Income from continuing operations | $135 million | $159 million | $109 million | $286 million |
| Net income attributable to Newmont stockholders | $(358) million | $219 million | $(283) million | $474 million |
| Continuing-operations EPS, basic | $0.32 | $0.30 | $0.32 | $0.54 |
| Operating cash flow from continuing operations | Not provided for the quarter | Not provided for the quarter | $1,327 million | $1,304 million |
| Free cash flow | Not provided for the quarter | Not provided for the quarter | $495 million | $415 million |
| Cash and cash equivalents | Not provided for the quarter | Not provided for the quarter | $2,099 million at September 30 | $2,430 million at December 31, 2015 |
- Continuing-operations sales increased 15% in Q3 and 6% for the nine-month period, mainly reflecting higher gold prices and the contribution from CC&V.
- Average realized gold prices were $1,329 per ounce in Q3 and $1,261 per ounce for nine months, versus $1,112 and $1,167, respectively, in the comparable periods.
- Average realized copper prices were $2.04 per pound in Q3 and $2.03 per pound for nine months, versus $1.97 and $2.25, respectively.
- Continuing-operations gold production was 1.318 million ounces in Q3 and 3.810 million ounces for nine months. Copper production was 32 million pounds and 89 million pounds, respectively.
- Gold all-in sustaining costs, a non-GAAP measure, were $925 per ounce in Q3 and $910 per ounce for nine months, compared with $879 and $898 in the prior-year periods. Copper all-in sustaining costs were $2.57 and $2.30 per pound, compared with $2.21 and $2.17.
- Q3 continuing-operations income attributable to Newmont stockholders was $169 million, up from $159 million. Nine-month continuing-operations income declined to $171 million from $275 million.
- Total debt was $5,116 million at September 30, 2016, consisting of $564 million current debt and $4,552 million non-current debt, compared with $5,863 million at December 31, 2015.
- The company repaid $777 million of debt during the first nine months, including $498 million of senior notes and $275 million of term-loan principal. Scheduled minimum debt repayments were $575 million in 2017 and $626 million in 2019, with $3,974 million thereafter.
- Capital expenditures were $832 million for the first nine months, compared with $889 million in 2015. The corporate revolving credit facility had a $3,000 million capacity, of which $80 million was used to support letters of credit.
- Quarterly and year-to-date dividends declared were $0.025 and $0.075 per common share. Management announced a dividend-policy increase effective in the fourth quarter.
Material Changes Versus the Prior Comparable Period
- Newmont recorded a $577 million loss on classifying Batu Hijau as held for sale. This drove discontinued-operations losses of $448 million in Q3 and $225 million for the nine months, compared with income of $126 million and $376 million in 2015.
- Because of the Batu Hijau charge, consolidated net loss attributable to Newmont stockholders was $358 million in Q3 and $283 million for nine months, despite profitable continuing operations.
- Gold sales rose 16% in Q3 and 7% for nine months, while copper sales declined 5% and 19%, respectively. Gold volume was broadly stable; copper volumes declined.
- Costs applicable to sales increased 6% in Q3 and 5% for nine months. Depreciation and amortization increased 15% and 13%, respectively.
- The company recorded $92 million of Q3 and $199 million of nine-month stockpile and leach-pad write-downs in costs applicable to sales, plus $45 million and $95 million, respectively, in depreciation and amortization. The charges primarily reflected higher future processing costs, lower grades and recoveries, and revised estimates at North American, Yanacocha and African operations.
- The effective tax rate was 40% in Q3 and 83% for nine months, versus 26% and 48% in the prior-year periods. The increase was primarily associated with changes in valuation allowances on deferred tax assets.
- Other income, net declined to an expense of $4 million in Q3 from income of $142 million, largely because 2015 included gains on the deconsolidation of TMAC and the sale of EGR. For the nine months, 2016 included a $103 million gain on the sale of Regis Resources.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
- Merian reached commercial production on October 1, 2016. Management expects 400,000 to 500,000 ounces of annual gold production on a 100% basis during the first five full years beginning in 2017.
- Long Canyon was expected to achieve commercial production by the end of 2016. Tanami Expansion was expected to reach commercial production by mid-2017.
- Management continued to emphasize the Full Potential program, operational efficiency, safety, environmental and social performance, debt reduction, project development and shareholder returns.
- The Batu Hijau sale was expected to close in the fourth quarter of 2016, but remaining conditions included valid Indonesian export licensing, closing of the local partner’s stake sale, absence of material adverse events and satisfaction of other transaction conditions. Failure to close could affect operations, export rights and financial results.
- The company’s current Batu Hijau export permit was expected to expire in November 2016. Contract-of-Work negotiations and permit renewal remained unresolved at the reporting date.
- Yanacocha was reassessing its water-treatment requirements and reclamation plan. Management expected a potentially material increase in the Yanacocha reclamation liability in the fourth quarter of 2016, with possible impairment effects on long-lived assets.
- Reclamation liabilities were $1,349 million and other environmental remediation liabilities were $300 million at September 30, 2016. The company stated that the environmental remediation liability could be as much as 46% greater or 1% lower than the accrued amount depending on ultimate resolution.
- The company had $2,168 million of outstanding letters of credit, surety bonds and bank guarantees.
- Newmont disclosed an ongoing investigation, with the SEC and Department of Justice, concerning potential violations of the Foreign Corrupt Practices Act and other laws. No provision was recorded because the outcome could not be predicted.
- Other disclosed contingencies included the Fronteer/NewWest litigation, potential Yanacocha tax and regulatory matters, Midnite Mine remediation, environmental claims and an unresolved Canadian tax assessment of $54 million.
- Newmont does not hedge gold or copper sales but hedges portions of foreign-currency and diesel exposure. At September 30, 2016, derivative liabilities included $25 million for Australian-dollar contracts and $8 million for diesel contracts.
Most Important Facts for Investors to Verify
- Whether the Batu Hijau transaction closed on the expected terms and whether the company received the anticipated $920 million cash consideration and any contingent payments.
- The final fourth-quarter impact of Yanacocha’s reclamation-plan review, including any increase in liabilities, impairment charges or changes in all-in sustaining costs.
- Whether Merian and Long Canyon achieved commercial-production milestones and whether actual production and capital costs align with disclosed expectations.
- The sustainability of higher gold prices and the effect of lower copper volumes, higher unit costs and inventory write-downs on future margins and cash flow.
- The company’s ability to fund scheduled debt maturities, reclamation obligations, project capital and dividends from operating cash flow and available liquidity.
- Developments in the SEC and Department of Justice investigation, tax disputes, environmental matters and other legal contingencies.
- Reconciliation of non-GAAP measures, including adjusted net income, adjusted EBITDA, free cash flow and all-in sustaining costs, to GAAP results.