A year after it became the world’s largest gold miner as a result of merging with Normandy Mining and Franco-Nevada Mining,
Speaking to analysts and journalists, President Pierre Lassonde made a telling case for gold’s long-term prospects. In particular, he cited two recent factors he feels have been ignored by the investment community: China’s deregulation of its gold market, and gold’s performance against the greenback.
“China has US$1 trillion in annual savings, and for the first time the Chinese population will be able to access gold in any form,” he said. “If you look at one-tenth of one-percent of those savings going into gold, [this] represents 100 tonnes per year.
“Second, gold has been one of the best-performing currencies against the U.S. dollar over the last 15 months. And when you look at the central bank’s holdings of U.S. dollars, paying 1.5% interest rates, gold only has to rise US$5 to beat that.”
Lassonde recalled how, in the 1960s, the French government switched to gold reserves, forcing the U.S. to open its own market. By 1980, the deregulation had pushed gold from US$35 to US$800 per oz.
“If you look at what’s happening today with Iraq and the geopolitical situation between France, Germany and the U.S., I think it is well worth considering history and what could happen to gold in that mode,” he said. “We continue to be very bullish on the commodity and think that [Newmont] is going from strength to strength.”
When asked about about investment demand and hedging, Lassonde said he sees the former growing and the latter shrinking. For example, 423 tons of de-hedging took place last year, putting year-end contracts with central banks at 2,500 tons.
“That is going to continue — you saw what we’ve done in the first four months of this year — and I think you are going to see other companies follow suit,” he said.
Added Chairman Wayne Murdy: “You saw the gold price dip post-conflict [in Iraq], but we’ve seen physical gold flows into India, Middle East and Asia start to pick up. Those markets are opportunistic as they look at the gold price; they want to see some stability before they come back. With the rapid rise in prices we saw in the fourth quarter last year and the early days of this year, I think you have to expect that the jewelry side of the market is going to back off a bit.
“We would like to emphasize that the average gold price in the 1990s was US$350 an ounce, so we are not in unheralded ground by any means, and we think there is a lot of movement left.”
Newmont is sensitive to swings in the gold price. On an annualized basis, every US$1 change affects earnings by US$4.2 million and cash from operations by US$5.3 million.
The optimistic outlook came on news of Newmont’s earning US$117 million (or US29 per share) in the first three months of the year, compared with a net loss of about US$9 million (US3 per share) in the similar period of 2002. The turnaround reflects a 20% increase in gold production and realized prices, with the former being related to the timing of the 3-way merger (mid-February 2002).
“Reported net income was noisy, having been affected by several non-recurring gains and losses which had a net favourable impact of approximately US$42 million,” said Murdy.
Among the items are the following:
— An aftertax, non-cash charge of about US$35 million to conform with FAS 143 (“Accounting for Asset Retirement Obligations”).
— An aftertax, non-cash gain of US$42 million to reflect income from gold derivative instruments that do not qualify as effective hedges.
— An aftertax, non-cash gain of US$68 million related to the exchange of a 45.7% interest in Echo Bay Mines for an 13.8% stake in
— An aftertax loss of US$13 million on early debt retirement.
— Miscellaneous writedowns and legacy-site reclamation charges of US$21 million relating to an equity interest in Australian Magnesium Corp., which the company acquired from Normandy.
“When you flush through all these various items, what we would say is that, on a continuing basis, we generated net income of US$75 million in the quarter, or US19 per share,” said Murdy. “The accountants and SEC staff are probably having a heart attack over my use of that number, but I feel the investors have a right to know what all these adjustments mean.”
Consolidated revenue also soared, from US$496 to US$865 million, as did cash flow from operations, from US$71 to US$136 million. The Echo Bay gain added US$84 million to the top line, and cash flow would have been US$50 million higher if not for accelerated deliveries on the Normandy hedgebook.
By May 2, Newmont had reduced its committed hedges to 2.6 million oz., practically all of which are tied to the Yandal operation in Australia. The negative market-to-market value of those positions was US$140 million.
Stronger dollar
Newmont’s attributable production in the recent period was 1.8 million oz. gold — up significantly from a year ago, owing mainly to the mergers. The major sold its production at an average price of of US$351 per oz.
By year-end, Newmont expects to have produced 7.3 million equity ounces at a total cash cost of US$200 per oz., or 3% more metal but at a similar price than had been forecast. Total cash costs in the recent quarter averaged US$201 per oz., which is US$6 higher than a year earlier, mainly reflecting a stronger Australian dollar, as well as higher fuel costs and direct operational costs Down Under.
“The specific operating issues [in Australia] are likely to be a quarter-only issue,” said John Dow, managing director of Newmont Australia.
Newmont also expects to sell more copper in 2003, having reset total equity sales to 405 million lbs. Total cash costs should ring in at US30 per lb., or US2 more than originally expected, on 380 million lbs. of production.
“We continue to see outstanding operations at our Batu Hijau mine in Indonesia,” said Murdy.
Batu Hijau, a massive copper-gold porphyry deposit in which Newmont holds a 45%-equity stake, contributed US$7.4 million to the bottom line. It would have contributed more if not for a delayed shipment of concentrate at year-end and the elimination of inferred material from depreciation.
Batu Hijau is one of two base-metal operations under Newmont’s belt. The other is the wholly owned Golden Grove zinc-copper mine in Australia.
Simplification
Murdy also highlighted Newmont’s progress in rationalizing its assets and simplfying its corporate structure. Of note were the major’s departure from a joint venture with TVX Gold (now part of Kinross) and the simplification of Newmont Australia, such as the hedgebook reduction and the upcoming delisting of subsidiaries Newmont NFM and Otter Gold Mines.
“Frankly, on synergy realization, we’ve done very well on tax, and we see more tax synergies going forward than we had anticipated,” Murdy said. “We are disappointed with our performance in G&A, and that largely relates to the complexities we inherited in Australia, but we are working diligently to clean this up.”
For instance, Newmont Australia now allocates technical services and administrative expenses to cash costs instead of G&A, bringing it in-line with other regional offices. The re-allocation accounts for US$14 of the quarter-over-quarter increase in cash costs at the Australian operations.
Newmont now expects the mergers to give rise to US$80-85 million in annual savings, or US$10-15 million more than originally predicted. To date, annual savings of US$50-55 million have been realized.
By year-end, Newmont expects to have increased equity reserves, net of production. The major has budgeted US$85 million for 2003 and has 92 drill rigs turning at its various projects worldwide in hopes of repeating last year’s success, which kept reserves steady at 2.4 billion tons averaging 0.04 oz. per ton.
One country attracting particular attention is Ghana, where the major is exploring the advanced
Ahafo and Akyem projects. Combined reserves stand at 70.7 million tons averaging 0.07 oz. per ton.
Cautious
“Power, and the availability of it, is a very real issue in Ghana, so we are spending a substantial amount of time understanding the Ghanian economy and the impacts there,” said Murdy. “On the surface, the two projects look attractive, but these are not decisions you make quickly.”
Murdy expects the projects’ simple metallurgy to result in a straightforward flow sheet.
Newmont also made progress at its Gold Quarry mine in Nevada. Deep drilling has intersected new mineralization beneath the Dos Equis and Chukar deposits, which may support a pit expansion or underground mine.
“In the Gold Quarry environment, we’ve had a couple of holes test a lower stratigraphy that happens to host a lot of the gold mineralization in the north area,” said Jeffrey Huspeni, vice-president of exploration. “The holes suggest there is mineralization in what we call the top of the Roberts Mountain formation. These are very early days, but indications are that the horizon is favourable too, and that’s what we are going to continue testing.”
The hole, drilled off the Chukar deposit, intersected 100 ft. of what are described as underground minable grades. The dimensions of the zone remain unknown.
Also in Nevada, Newmont remains on schedule and on budget at the Gold Quarry South Layback (GQSL) and Leeville development projects. Starting in the fourth quarter, GQSL is expected to start producing 420,000-440,000 oz. annually at a total cash cost of US$200-215 per oz.
Shaft-sinking
At Leeville, sinking of a new ventilation shaft and production shaft has begun. The production shaft will eventually bottom at 2,000 ft.
Starting in late 2005 or early 2006, Leeville is expected to add 500,000-550,000 oz. to Newmont’s annual production. Total cash costs are pegged at US$195-205 per oz. Reserves at GQSL can support six years of production, and those at Leeville, seven years. Combined capital costs are projected at US$222 million.
In all, Newmont owns outright or has interests in 1.83 billion tons of resources averaging 0.027 oz. The company has economic benchmarks of US$150 per oz. for greenfield projects and US$180 per oz. for advanced ones.
Newmont has scheduled the next exploration and development update for mid-year. A development decision on Ahafo and Akyem themselves will follow later the year.
As for debt, Newmont repaid US$183 million during the recent quarter, of which US$136 million went to early retirements. This knocks US$9 million off future annual interest payments and reduces to 18% the company’s long-term debt to capitalization.
At the end of March, Newmont had US$359 million in working capital and US$1.6 billion in long-term debt. Cash or equivalents stood at US$380 million, and the company had US$750 million in undrawn credit.
By year-end, Newmont expects to have spent US$560-580 million on capital projects. Expenditures totalled US$81 million in the first quarter.
“In terms of financial capacity, . . . liquidity is not something I’m tremendously worried about in the short-term,” said Chief Financial Officer Bruce Hansen.
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