NEWMONT Corp quarterly report, Q2 FY2011

Newmont Mining Corporation: Q2 2011 Form 10-Q Summary

Business context and reporting period

Newmont is a global gold producer with copper operations and exploration, development and acquisition activities in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods. Dollar amounts are in millions unless otherwise stated.

Financial and operating metrics

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Sales	$2,384	$2,153	$4,849	$4,395
Income from continuing operations	$660	$537	$1,330	$1,280
Net income attributable to Newmont stockholders	$387	$382	$901	$928
Diluted EPS	$0.77	$0.77	$1.80	$1.87
Adjusted net income	$445	$377	$958	$786
Cash flow from continuing operations	Not separately provided	Not separately provided	$1,403	$1,481
Capital expenditures, cash basis	Not separately provided	Not separately provided	$1,020	$628

Q2 gold production was 1.398 million ounces and attributable production was approximately 1.2 million ounces. Six-month consolidated production was 2.914 million ounces and attributable production was approximately 2.6 million ounces.
Q2 copper production was 74 million pounds and attributable production was 44 million pounds. Six-month consolidated production was 176 million pounds and attributable production was 101 million pounds.
Average realized gold prices increased to $1,501 per ounce in Q2 and $1,440 per ounce for the first half, from $1,200 and $1,152, respectively.
Average realized copper prices increased to $3.78 per pound in Q2 and $3.91 per pound for the first half, from $2.33 and $2.87, respectively.
Consolidated gold costs applicable to sales rose to $583 per ounce in Q2 and $570 per ounce for the first half, compared with $485 and $481, respectively. Copper costs rose to $1.34 and $1.21 per pound, compared with $0.77 and $0.78.
At June 30, 2011, cash and cash equivalents were $1,855, versus $4,056 at December 31, 2010. Total debt was $4,310, comprising $539 current and $3,771 non-current debt, versus $4,441 at year-end 2010.
Newmont had a new $2,500 revolving credit facility maturing in May 2016. At quarter-end, $90 was borrowed and $239 was committed to letters of credit; the facility had substantial remaining availability subject to covenants and other conditions.
Reclamation and remediation liabilities totaled $1,094 at June 30, 2011, including $922 for producing or recently producing properties and $172 for former mining activities.

Material changes versus the prior comparable period

Sales increased 11% in Q2 and 10% for the first half, driven principally by higher gold and copper prices. Higher prices were partly offset by lower sales volumes.
Q2 net income attributable to Newmont stockholders increased modestly to $387 from $382, while first-half income declined to $901 from $928. The first-half decline reflected lower production and sales volumes, higher costs, higher taxes, the Holt property charge and acquisition-related expenses.
Income from continuing operations increased, but Q2 and first-half results included a $136 after-tax loss from discontinued operations related to the Holt property royalty litigation. The Ontario Court of Appeal upheld the royalty ruling in May 2011.
Production declined materially because Batu Hijau processed lower-grade stockpiles rather than higher-grade Phase 5 ore. Q2 consolidated gold production fell 10% and copper production fell 50%; first-half declines were 8% and 43%, respectively.
Operating costs increased because of lower production, higher waste mining, milling, labor, royalty, diesel and power costs, and a stronger Australian dollar. Currency movements increased consolidated gold costs by approximately $21 per ounce in Q2 and $15 per ounce for the first half, net of hedging.
Newmont completed the Fronteer Gold acquisition on April 6, 2011 for preliminary purchase consideration of $2,259, including the Long Canyon project. The acquisition used $2,291 of investing cash flow, including transaction-related amounts, and generated $21 of transaction costs.
Net cash from continuing operations declined $78 to $1,403, while investing cash use increased to $3,280 from $605 because of the Fronteer acquisition and higher capital spending. Cash declined by $2,201 during the first half.
The company repaid $973 of debt, including the $223 balance of its 8 5/8% senior notes, and borrowed $803 under its revolving facility during the first half.

Guidance, outlook, commentary and risks

Management maintained its 2011 outlook for attributable gold production of 5.1 to 5.3 million ounces at consolidated costs applicable to sales of approximately $560 to $590 per ounce.
Attributable copper production guidance remained approximately 190 to 220 million pounds at consolidated costs of approximately $1.25 to $1.50 per pound.
2011 capital expenditures were expected to be approximately $2,700 to $3,000, with spending expected to accelerate in the second half. Amortization was expected to be approximately $1,025 to $1,035; exploration expense $335 to $345; advanced projects, research and development $405 to $415; general and administrative expense $190 to $200; and interest expense $235 to $245.
Management expected a 2011 tax rate of approximately 26% to 30%, assuming an average realized gold price of $1,450 per ounce.
The company expected Conga to begin production in late 2014 or early 2015, Akyem in late 2013 or early 2014, and Long Canyon in 2017, subject to permits, development execution and other conditions. Board funding approval for Conga was obtained after quarter-end on July 27, 2011.
The third-quarter dividend was expected to be $0.30 per share under the non-binding gold price-linked policy, based on the Q2 realized gold price. Future dividends remain subject to Board discretion.
Newmont does not hedge gold or copper sales and therefore remains exposed to metal-price volatility. It does hedge portions of foreign-currency operating and capital expenditures, diesel costs and interest-rate exposure.
At June 30, 2011, provisionally priced sales included 84 million pounds of copper and 105,000 ounces of gold. The filing estimated that a $0.10 copper price change would affect Newmont stockholders’ net income by approximately $3, while a $10 gold price change would affect it by approximately $1.
Key contingencies include the Holt property royalty, environmental and reclamation matters, Indonesian PTNNT divestiture and litigation, tax audits, and other legal proceedings. The company also had $1,365 of outstanding letters of credit, surety bonds and bank guarantees.
Management reported no material changes to the risk factors in the 2010 Form 10-K and stated that disclosure controls and procedures were effective at June 30, 2011.

Important facts for investors to verify

Reconcile the decline in first-half attributable earnings with higher realized metal prices, focusing on production shortfalls, cost inflation, taxes and the $136 Holt property charge.
Assess Batu Hijau’s lower-grade stockpile period, the timing of Phase 6 ore expected in late 2013, and its effect on production and unit costs.
Verify the funding, timing and permitting assumptions behind the $2,700–$3,000 capital-spending outlook and the Conga, Akyem, Hope Bay and Long Canyon development plans.
Review liquidity after the $2,291 Fronteer investment, $1,020 of first-half cash capital expenditures, the $1,855 cash balance and scheduled debt repayments of $572 in 2012 and $544 in 2014.
Monitor the pending closing and potential disputes concerning the final 7% PTNNT divestiture stake, the company’s resulting economic interest and continued consolidation of Batu Hijau.
Evaluate exposure to gold and copper prices, diesel, foreign exchange, energy costs, environmental liabilities and provisionally priced concentrate sales.
Review the full 10-K risk factors and Note 28 contingencies, particularly the Midnite Mine, Choropampa, PTNNT/PTPI and Holt royalty matters.