Newmont positioned for growth

With more than US$6.7 billion in available liquidity at its fingertips, Newmont Mining (NMC-T, NEM-N) is ready for its next significant development campaign on a pipeline of gold projects that includes Conga in Peru, Akyem in Ghana, Hope Bay in the Canadian Arctic and several near-mine development opportunities in the Carlin gold trend of Nevada.

“With the substantial free cash flow that we continue to generate in the current metal price environment, we remain focus on progressing the development of our next generation of mining projects,” remarked Richard O’Brien, president and chief executive of Newmont, in a press release. “Of the US$1.3-US$1.5 billion in capital we expect to spend this year, about 40% will be invested in our development pipeline, with increasing re-investment expected over the next several years.”

During the third quarter, Newmont produced 1.4 million equity oz. gold, up 6% over the same period a year ago. Cash costs of US$477 per oz., on a co-product basis, rose 18% over the comparable period.

“While we are faring better than the industry average, we are all experiencing upward cost pressures as mines age, the complexity of the ores we treat increases and average ore grades decrease,” explains Newmont’s chief executive officer Richard Ball.

Higher operating costs during the quarter are being blamed on unfavourable currency exchange rates against a higher gold price, in addition to higher cost production at the Boddington gold-copper mine in Australia and lower production from South America.

The company recognized record quarterly revenue of US$2.6 billion for the third quarter, a 27% increase compared to the prior year. With significantly higher operating margins, adjusted net income increased 37% to US$534 million (or $1.08 per share), compared to US$387 million (79¢ per share) in the third quarter of 2009.

Operating cash flow for the quarter totaled US$854 million. The company now sits with US$3.9 billion in cash. “That cash flow in turn gives us the flexibility to fund exploration, by far the cheapest source of new reserve growth and to fund our considerable project development pipeline with an expectation of favourable real returns,” says O’Brien.

The company’s North American mining operations contributed 35% of the total quarterly production, South America accounted for 13% and Africa chipped in 11%. The remaining 41% came from Newmont’s operations in the Asia Pacific region, which also accounted for all of the 83 million lbs. copper produced in the quarter.

Newmont expects its equity gold production for the year will come in at somewhere between 5.3-5.4 million oz. at a cash cost in the range of US$485 to US$500 per oz.

Within the Asia-Pacific region, Newmont’s newest mine, Boddington, produced 180,000 oz. gold and 14 million lbs. copper in the quarter at a cash cost of US$617 per oz. on a co-product basis (or US$487 per oz. on a byproduct basis). Compared to the second quarter of 2010, gold and copper production was off 2% and 12%, respectively.

Unplanned mill maintenance resulted in lower throughput and production for the months of July and August, which was partially offset by higher mill grades in September.

Boddington is a large open-pit mine in Western Australia, 130 km southeast of Perth. It produced its first gold-copper concentrate in August 2009 and achieved commercial production in November last year.

Newmont has high expectations for Boddington. It reckons the mine will average 1 million oz. annually for the first five years at a cash cost of US$300 per oz., net of byproduct credits. A mine life of more than 24 years is anticipated.

Typical of any new mine, Boddington is dealing with start-up issues, along with higher than expected mining and milling costs as it makes the transition through ramp-up to full capacity. “We continue to work at consistent production at Boddington,” says Brian Hill, executive vice-president of operations. “Our processing plant should achieve nameplate capacity in the first quarter of 2011.”

During the third quarter, Newmont strengthened its senior management team at Boddington to support this transition and formed a special project team to optimize and de-bottleneck the mine and process plant. An initial component of this optimization process has been the installation of a sixth MP-1000 secondary crusher, which will be commissioned this month.

Newmont is also faced with the problem of lower than expected gold grades, which are off by 12% from the predicted reserve model. Hill is quick to stress that this is based on less than 3% of reserves mined to date. On the positive side, metal recoveries and concentrate quality continue to exceed expectations.

Boddington hosts reserves of 966 million tons grading 0.022 oz. gold per ton and 0.11% copper. This is equivalent to 21 million oz. gold and 2 billion lbs. copper. Recoveries were estimated at 82% gold and 84% copper.

“As a 20-year plus asset with compelling exploration potential, our expectations for Boddington continue to be high,” asserts O’Brien.

“We have a number of exciting projects that will over the next several years bring reserves and resources into productive capacity, extending our mine life and providing incremental gold and copper exposure to our investors,” says O’Brien.

Africa is the company’s fastest growing region where it has three projects underway, in addition to its existing Ahafo gold mine in Ghana. Ahafo is expected to produce more than 520,000 oz. in 2010.

The Akyem project, also in Ghana, has the potential to double Newmont’s current annual gold production in Africa. The project hosts 7.7 million oz. gold in a probable reserve totaling 147 million tons grading 0.052 oz. Additional 700,000 oz. are contained in mineralization that falls outside of the reserve category.

After further infill drilling in the first half of the year, the company refined the ore model and finished metallurgical testwork. Akyem is moving towards completion of detailed engineering by the year-end, with a production decision expected in the first half of 2011. Preliminary capital costs are estimated to be in the range of US$700 million to US$1 billion.

Jumping to South America, Newmont recently received approval of an environmental impact assessment of the Conga project in Peru. Construction planning is underway supporting the company’s efforts to extend the Yanacocha gold mine’s life for decades to come.

Conga is a copper-gold porphyry located near the Yanacocha mining district. It contains reserves of 11.8 million oz. gold at a grade of 0.019 oz. gold and 3.2 billion lbs. copper averaging 0.26%. Another 3.1 million oz. gold at 0.012 oz., plus 900 million lbs. copper grading 0.17% are categorized as indicated and inferred.

“With current potential of 15-20 million gold oz. and 4-6 billion lbs. copper, Conga is one of our most compelling new projects offering a longer-term productive capacity and creating a bridge to other potential projects and opportunities at our existing Yanacocha facility and within this burgeoning mining district,” says O’Brien.

The expected capital cost of Conga is somewhere in the neighbourhood of US$2.5-US$3.5 billion.

At the company’s Hope Bay project in Nunavut, the 2010 exploration drilling program was completed on time and on budget. An underground portal was collared on Doris North and a decline initiated.

During the next phase of project development, the advancement of the underground decline will provide access for test stoping and development drilling. The objective is to prove-up mineral continuity and operating costs at Doris North. If the results prove positive, Newmont will put Doris North into production and begin assessing the feasibility of mining other deposits such as Patch 14 (Madrid) and Doris Central.

“We believe the current potential at Hope Bay is up to 9 million oz. of gold,” says O’Brien. The project covers an 80-km-long greenstone belt.

With respect to the
company’s most recent development, O’Brien says they received exploration permits in September for the Elang copper-gold project in Indonesia. Elang is 60 km east of Newmont’s 48.5%-owned Batu Hijau copper-gold mine and is covered by the same contract of work.

The company intends to resume resource definition drilling in June 2011 when the dry season returns. “Our previous exploration results and our preliminary scoping study suggests that Elang is a substantial opportunity, a deposit that could ultimately exceed the size of Batu Hijau, which contained about 19 million oz. gold and 18 billion lbs. copper in reserves and non-reserve mineralization,” says O’Brien.

O’Brien’s remarks are based on the results from the core drilling of 116 holes. “Although it’s still early in the development process, we are excited about this significant copper and gold opportunity in Indonesia,” he says.

In July, Newmont announced it was increasing its quarterly dividend by 50% to US15¢ per share.