Business Context and Reporting Period
Newmont Mining Corporation filed its Form 10-K for the fiscal year ended December 31, 2011. The company is primarily a global gold producer with copper operations and assets in the United States, Australia, Peru, Indonesia, Ghana, Mexico, New Zealand and Canada. The filing also provides fourth-quarter 2011 supplementary data.
At year-end, Newmont reported 98.8 million attributable proven and probable gold reserves, 9.72 billion pounds of attributable copper reserves and 195 million ounces of attributable silver reserves. The company acquired Fronteer Gold on April 6, 2011, including the Long Canyon exploration project in Nevada.
Key Financial and Operating Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $10,358 million | $9,540 million | +9% |
| Income from continuing operations | $1,108 million | $3,144 million | Down substantially |
| Net income attributable to Newmont stockholders | $366 million | $2,277 million | Down substantially |
| Basic EPS | $0.74 | $4.63 | Down substantially |
| Adjusted net income | $2,170 million | $1,893 million | +15% |
| Adjusted EPS | $4.39 | $3.85 | +14% |
| Cash flow from continuing operations | $3,591 million | $3,180 million | +13% |
| Capital expenditures | $2,787 million | $1,402 million | +99% |
| Cash and cash equivalents | $1,760 million | $4,056 million | Down $2,296 million |
| Total debt | $4,313 million | $4,441 million | Down $128 million |
Reported results were materially affected by a $2,084 million write-down of property, plant and mine development, primarily related to Hope Bay. The filing states that adjusted net income excludes the Hope Bay impairment and other unusual items; adjusted measures are non-GAAP.
- Consolidated gold production was 5.897 million ounces, including 5.185 million ounces attributable to Newmont; gold ounces sold were 5.820 million.
- Consolidated copper production was 352 million pounds, including 206 million pounds attributable to Newmont; copper pounds sold were 356 million.
- Average realized prices were $1,562 per gold ounce and $3.54 per copper pound.
- Consolidated costs applicable to sales were $591 per gold ounce and $1.26 per copper pound.
- Gold operating margin was $971 per ounce, compared with $737 in 2010. Copper operating margin declined to $2.28 per pound from $2.63.
- Gold represented approximately 88% of sales and copper approximately 12%.
- Year-end total assets were $27,474 million and Newmont stockholders’ equity was $12,896 million.
Material Changes Versus the Prior Comparable Period
- Sales increased because the average realized gold price rose 28% to $1,562 per ounce, more than offsetting lower gold and copper sales volumes.
- Gold production declined 9% on a consolidated basis, primarily from lower production at Batu Hijau and Yanacocha. Attributable gold production declined 4%.
- Copper production declined 41%, principally because Batu Hijau processed lower-grade stockpiled ore during Phase 6 waste stripping and experienced mill downtime.
- Costs applicable to sales increased 12% overall, reflecting higher waste mining, milling, royalty, diesel, labor and Australian-dollar costs.
- Exploration expense increased to $350 million from $218 million, and advanced projects, research and development expense increased to $373 million from $216 million.
- Capital expenditures increased to $2,787 million, including $739 million for Conga and $248 million for Akyem.
- Cash declined substantially because operating cash flow was more than offset by capital expenditures, the $2,257 million net Fronteer acquisition, taxes, dividends and other investing activities.
- Common dividends increased to $1.00 per share from $0.50 per share. The fourth-quarter dividend was $0.35 per share under the gold price-linked policy.
- Net income attributable to Newmont fell primarily because of the Hope Bay impairment, the $136 million after-tax loss from discontinued operations and other unusual items.
Guidance, Outlook, Commentary, Risks and Unusual Items
For 2012, management expected attributable gold production of approximately 5.0 to 5.2 million ounces at consolidated costs applicable to sales of $625 to $675 per ounce. Attributable copper production was expected to be approximately 150 to 170 million pounds at consolidated costs applicable to sales of $1.80 to $2.20 per pound. Planned 2012 capital expenditures were $4,000 to $4,300 million, exploration expense was expected at $400 to $430 million, and advanced projects, research and development expense at $475 to $525 million.
- Management’s longer-term plan targeted approximately 7 million attributable gold ounces by 2017, subject to project execution and permitting.
- Akyem was expected to begin production in late 2013 to early 2014, with estimated annual production of 350,000 to 450,000 ounces during its first five years.
- Conga construction was suspended on November 30, 2011 following protests in Peru and a government-requested independent review of its environmental impact assessment. If development cannot proceed, the project could be impaired and capital may be redirected.
- Hope Bay was placed on care and maintenance in January 2012 and was excluded from the 2017 growth plan. The project generated a $2,097 million impairment, including inventory and property-related write-downs.
- Batu Hijau’s final 7% divestiture transaction, valued at approximately $247 million, remained subject to Indonesian governmental approvals and disputes over parliamentary approval. Closing could reduce Newmont’s direct ownership and potentially affect control and consolidation.
- Newmont does not hedge gold or copper prices, retaining exposure to commodity-price declines. It does hedge portions of Australian-dollar operating and capital costs, diesel costs and interest-rate exposure.
- Forward-starting interest-rate swaps had a $399 million liability at year-end against an expected 2012 debt issuance. If the debt issuance did not proceed, Newmont could have been required to cash-settle the swaps, with the payment charged to earnings.
- The company paid approximately $640 million in February 2012 for the maturity of its 2012 convertible senior notes.
- Environmental and reclamation liabilities totaled approximately $1,240 million, including $1,070 million for current or recently producing properties and $170 million for former mining activities. Outstanding letters of credit, surety bonds and bank guarantees totaled $1,354 million.
- Major risks include gold and copper prices, rising operating and capital costs, foreign-exchange movements, reserve estimation, mine safety, environmental regulation, water and energy availability, labor disruptions, political and community opposition, permitting, litigation and funding requirements.
Important Facts for Investors to Verify
- Reconcile GAAP net income of $366 million with adjusted net income of $2,170 million, especially the Hope Bay impairment and other exclusions.
- Review the sustainability of cash generation after the sharp increase in capital expenditures and the planned 2012 project spending.
- Assess Batu Hijau’s production recovery, Phase 6 stripping schedule, ownership-divestiture status and continued consolidation treatment.
- Monitor the outcome of the Conga environmental review, permitting and community opposition, including potential impairment exposure.
- Evaluate whether 2012 production and cost guidance is achievable given lower Batu Hijau grades, higher input costs and currency exposure.
- Review debt maturities, the February 2012 convertible-note payment, anticipated debt issuance and the $399 million interest-rate-swap liability.
- Assess the adequacy of reclamation, remediation, litigation and tax provisions, including the Midnite Mine and unresolved Indonesian and Peruvian matters.
- Confirm reserve sensitivity to metal prices: 2011 gold reserves used a $1,200 per-ounce assumption and copper reserves used a $3.00-per-pound assumption.