Newmont Mining Corporation 2012 Form 10-K Summary
Business context and reporting period
Newmont Mining Corporation is a global gold producer with copper and silver by-products and operations or assets in the United States, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico. The filing covers the fiscal year ended December 31, 2012; amounts are in millions except per-share, per-ounce and per-pound data unless stated otherwise. The company reported under U.S. GAAP, and PricewaterhouseCoopers LLP issued an unqualified audit opinion.
Financial and operating metrics
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Sales | $9,868 | $10,358 | Down 5% |
| Income from continuing operations | $2,194 | $1,108 | Up substantially; 2011 included a major impairment |
| Net income attributable to Newmont stockholders | $1,809 | $366 | Basic EPS increased to $3.65 from $0.74 |
| Adjusted net income | $1,850 | $2,170 | Adjusted basic EPS declined to $3.73 from $4.39 |
| Net cash from continuing operations | $2,388 | $3,591 | Down $1,203 |
| Capital expenditures | $3,210 | $2,787 | Up 15% |
| Cash and cash equivalents | $1,561 | $1,760 | Down $199 |
| Debt, including current portion | $6,298 | $4,313 | Up $1,985 |
| Net debt | $4,737 | $2,553 | Up $2,184 |
| Total assets | $29,650 | $26,111 | Up 14% |
| Gold production, consolidated | 5.583 million oz. | 5.873 million oz. | Down 5% |
| Gold production, attributable | 4.977 million oz. | 5.166 million oz. | Down 4% |
| Copper production, consolidated | 224 million lb. | 338 million lb. | Down 34% |
Average realized gold price increased 6% to $1,662 per ounce, while average realized copper price decreased 3% to $3.43 per pound. Gold costs applicable to sales increased to $677 per ounce from $591, and copper costs increased to $2.34 per pound from $1.26. Reported gold operating margin was $985 per ounce; copper operating margin was $1.09 per pound.
Gold represented approximately 92% of sales and copper approximately 8%. Gold and copper proven and probable reserves at year-end were 99.2 million attributable ounces and 9,510 million attributable pounds, respectively. Silver reserves were 185.8 million attributable ounces.
Material changes versus the prior comparable period
- Sales declined because gold and copper volumes fell, partially offset by higher gold prices. Copper sales declined $477, primarily because of 127 million fewer pounds sold.
- Production and costs were materially affected by Phase 6 waste mining and lower-grade stockpile processing at Batu Hijau in Indonesia. Batu Hijau gold production declined 78% and copper production declined 42%.
- Gold production increased in South America, mainly because of higher grade and recovery at Yanacocha, and was broadly stable in North America. Asia Pacific production fell materially.
- Operating cash flow declined because of lower Batu Hijau production, lower sales, higher costs and a $762 increase in working capital, primarily inventories.
- Debt increased following the issuance of $1,500 of 2022 senior notes and $1,000 of 2042 senior notes. The 2012 convertible notes were repaid for $517 principal plus a $172 cash conversion premium.
- Income from continuing operations benefited from the absence of the $2,084 property, plant and mine-development write-down recorded in 2011, principally related to Hope Bay. The 2012 write-down was $52.
- Adjusted earnings declined despite higher reported GAAP earnings because 2012 benefited from fewer exceptional impairment charges and a $59 income-tax benefit from internal restructuring.
- Gold reserves increased modestly from 98.8 million ounces to 99.2 million ounces after depletion of 6.2 million ounces, net additions and a 1.1 million-ounce acquisition-related increase. Copper reserves declined from 9,720 million pounds to 9,510 million pounds.
Guidance, outlook, commentary and risks
For 2013, management expected attributable gold production of approximately 4.8 to 5.1 million ounces at consolidated gold costs applicable to sales of approximately $675 to $750 per ounce. Attributable copper production was expected at approximately 150 to 170 million pounds at consolidated costs of approximately $2.25 to $2.50 per pound. All-in sustaining costs were expected at approximately $1,100 to $1,200 per gold ounce, and capital expenditures at approximately $2,400 to $2,600, with about 40% allocated to development capital.
- Akyem in Ghana was expected to begin production in late 2013, with expected first-five-year annual production of approximately 350,000 to 450,000 gold ounces. Estimated capital costs were $850 to $1,100, with $688 incurred at year-end 2012.
- Phoenix Copper Leach in Nevada was expected to begin production in the second half of 2013, with annual production of approximately 20 million pounds of copper during its first five years.
- Conga in Peru was being advanced on a “water first” basis after protests and a suspension of construction. Planned 2013 spending was approximately $250 to $300, but further development remained dependent on social support and risk-adjusted returns.
- Merian in Suriname received a positive feasibility study, with Newmont’s interest increasing to 80%; first production was targeted for 2015, subject to finalizing a mineral agreement.
- Tanami Shaft development was deferred, with reassessment expected in 2015. Hope Bay was placed on care and maintenance and was subject to a proposed sale announced in January 2013.
- Newmont does not hedge gold or copper sales, retaining direct exposure to metal prices. It hedges portions of Australian- and New Zealand-dollar operating costs and Nevada diesel costs.
Principal risks include gold and copper price volatility, rising energy, labor and contractor costs, foreign-exchange exposure, reserve estimation uncertainty, mine operating hazards, water availability, environmental and reclamation obligations, permitting delays, community opposition, political and fiscal changes in foreign jurisdictions, labor disruptions, litigation and financing risk. Batu Hijau faced Indonesian divestiture, export, permitting and contract-of-work uncertainty. Conga remained exposed to Peruvian community and political opposition.
Environmental and other obligations were significant. Reclamation and remediation liabilities totaled $1,539 at year-end, including $1,341 for current or recently producing properties and $198 for historic sites. The company also reported $1,755 of outstanding letters of credit, surety bonds and bank guarantees. Total contractual obligations were $16,934, including $11,290 of debt principal and estimated interest and $2,284 of reclamation and remediation obligations.
The fourth quarter of 2012 produced sales of $2,476, income from continuing operations of $645 and net income of $673. Quarterly results included a $59 tax benefit from internal restructuring, a $40 net gain on asset sales and a $28 gain from discontinued operations.
Important facts for investors to verify
- Reconcile GAAP net income of $1,809 with adjusted net income of $1,850 and assess the sustainability of the tax benefit and other unusual items.
- Review the effect of Batu Hijau’s lower-grade stockpile period, Phase 6 stripping, Indonesian export requirements and pending 7% divestiture on future production and consolidation.
- Assess Conga’s permitting, community support, water-reservoir construction, capital spending and potential impairment exposure.
- Compare 2013 production and cost guidance with actual quarterly performance, particularly the projected decline in gold production and increase in all-in sustaining costs.
- Evaluate leverage and liquidity after the debt issuance, including scheduled maturities, covenant compliance and the company’s ability to fund capital expenditures, dividends and reclamation obligations.
- Review reserve sensitivity to metal prices, especially the filing’s estimate that gold reserves would decline approximately 8% at a $1,300 per-ounce assumption.
- Monitor environmental liabilities, tax contingencies, pending litigation and the $16,934 contractual-obligation schedule for changes not reflected in reported earnings.
- Confirm the impact of the ERP implementation and the filing’s correction of prior condensed consolidating financial-statement presentation errors; management stated that the errors did not affect consolidated financial statements or debt covenants.