Newmont sees profits surge in 2002 (April 02, 2003)

Newmont Mining (NEM-N) improved its bottom line dramatically in 2002, thanks to rising gold prices and the inclusion of revenues gained though its February 2002 merger with Normandy Mining and Franco-Nevada Mining.

For the year, Newmont turned a profit of US$154 million (or US41 per diluted share) on revenue of US$2.7 billion, up from a loss of US$54 million (28 per share) on revenue of US$1.7 billion in 2001.

The fourth quarter of 2002 was Newmont’s best: a US$75-million profit on US$777 million in revenue, compared with the US$18 million gained on US$450 million in the corresponding period in 2001.

“Newmont had a good year,” says Chairman and CEO Wayne Murdy. “2002 was remarkable for the pace of change within the company. At a strategic level, the Normandy and Franco-Nevada acquisitions are essentially complete, and we have taken a ‘best-of-the-best’ approach in order to truly transform the company.”

Meanwhile, PricewaterhouseCoopers has completed its audit of the company’s financial statements for 1999 through to 2001. As a result, Newmont will be restating its 2001 and 2002 quarterly results, though the company emphasizes that “these restatements had a nominal impact on 2002 net income.”

The world’s biggest gold company, both in terms of production and market capitalization (US$10 billion), sold 7.6 million oz. gold in 2002, up from 5.5 million oz. in 2001.

On a regional basis, Newmont’s 2002 equity sales were as follows:

• North America (primarily Nevada) — 3.2 million oz. mined at a total production cost of US$271 per oz.
• South America (primarily Yanacocha in Peru) — 1.4 million oz. at US$189 per oz.
• Australia — 1.7 million oz. at US$265 per oz.
• Other regions (including Indonesia, Uzbekistan and Turkey) — 637,000 oz. at US$235 per oz.

Production costs between the two periods rose just US$7, to US$242 per oz., while the company’s average realized price for its production jumped US$42, to US$313 per oz.

Highlights

Operational highlights in 2002 are outlined below:

• The company’s flagship Nevada mines sold 2.7 million equity oz. at a total cash cost of US$225 per oz., with both figures up slightly from 2001. Newmont’s two major development projects in Nevada, GQSL and Leeville, are on schedule and on budget and will contribute 6.5 million oz. gold over their proposed mine lives.
• The Yanacocha mine in Peru saw a 20% rise in output to 1.2 million equity oz. sold, owing to greater tonnage placed on the leach pads, which more than offset lower grades. Total cash costs were up slightly at US$125 per oz. In 2003, Newmont expects Yanacocha to contribute 1.3 million equity oz. gold at a cash cost of US$115 per oz.
• In Australia, Newmont’s star performer was the Pajingo mine, which cranked out 296,000 equity ounces at a total cash cost of just US$95 per oz., ranking it as the company’s lowest-cost producer.
• The Batu Hijau mine in Indonesia had a great year, with equity sales of 164,000 tonnes copper and 278,000 oz. gold, at a low, net cash cost of US$684 per tonne (31 per lb.). Newmont is currently studying the viability of exploiting Batu Hijau’s underground resources using block-caving methods.
• The Zerafshan tailings-reprocessing facility in Uzbekistan saw output rise 15% to 256,000 equity ounces gold, thanks to higher grades and recovery rates. Total cash costs were slightly lower at US$134 per oz.

Year over year, on a pro forma basis, Newmont reduced its committed, hedged ounces to 5.1 million oz. from 9 million oz., while its uncommitted hedged ounces stood at 1.5 million at year-end.

At the end of 2002, the hedge book had a negative value of US$433 million, with about two-thirds relating to the controversial Yandal operations in Australia.

By late March 2003, Newmont had further reduced its committed ounces to 3.9 million oz., both through repurchases and deliveries.

“As we’ve stated previously and as we’ve demonstrated, we will continue to reduce this liability prudently,” says Murdy.

Clauses

There are two problems at Yandal: some hedging counterparties have right-to-break clauses, and in December 2002 and January 2003, one counterparty exercised its option; and the operation has a US$300-million bond issue due in April 2008.

Both these liabilities are non-recourse to Newmont.

“With [Yandal’s] limited reserves and limited ability to gain access to additional sources of liquidity, creditors have expressed concerns about whether or not they will be repaid,” says Bruce Hansen, Newmont’s chief financial officer. “We share these concerns, and it is our intention to sit down with Yandal’s creditors and see if there is a way out of the current predicament.”

Hansen stresses that Yandal currently is cash-flow-positive, and will likely be so for at least another year. “But if counterparties continue to exercise their right-to-break clauses, we could see a liquidity issue in the summer of 2004. Our goal is to look forward and be fair and transparent in whatever solution is reached, cognizant that we have a fiduciary duty to what is in the best interest of the creditors, but primarily to Newmont shareholders.”

He says Newmont has been conservative in how it treats the Yandal liability on its books.

While overall debt rose almost US$400 million, to US$1.8 billion, Newmont’s net-debt-to-capitalization ratio fell to 20% at the end of 2002 from 42% a year earlier, and the company says it intends to reduce this number to 10%.

Cash and equivalents added up to US$402 million at the end of 2002.

Looming large in Newmont’s balance sheet is US$3 billion in goodwill, a hangover from the Normandy acquisition, which may be partially written down later this year.

Next phase

“We want to have an extremely strong balance sheet as we move this company forward to its next phase of growth,” says Murdy.

In 2003, Newmont expects its equity gold sales to be 7-7.2 million oz. gold at a total cash cost of US$193-US$200 per oz.

The lower sales reflect the January 2003 closing of the sale of Newmont’s interest in the TVX-Newmont Americas joint venture and the conversion of an equity interest in Echo Bay Mines into a 13.8% interest in Kinross Gold.

The higher cash costs are attributed to a higher Australian dollar and higher fuel costs.

Newmont ended 2002 with 401.7 million outstanding shares (403 million when diluted), up from 195.1 million at the end of 2001, and the company notes that a US$1-per-oz. rise in the gold price will increase earnings by US1 per share.

Year-end gold reserves were 83.2 million oz., using a US$300-per-oz. gold price and taking into account the above sale and conversion. Some 60% of the reserves are in North America and Australia.

At US$350-per-oz. gold, reserves increase by 12.4 million oz., or 15%.

Newmont spent US$89 million on exploration and research in 2002.

Reserves were added at all four core operating regions in 2002, as well as at the greenfields Akyem gold project in Ghana, where 1.6 million equity ounces were brought into reserves.

The Ghanaian assets, which include the Yamfo-Sefwi project, were acquired through the Normandy takeover.

Ntotoroso

Newmont recently consolidated its holdings in the Yamfo-Sefwi belt by striking a deal to buy Moydow Mining International‘s (MOY-T) stake in the Ntotoroso project (T.N.M., March 31-April 6/03).

“While Newmont has not made a formal development decision [at Akyem or Yamfo-Sefwi], I’m confident Ghana has the scope to be a fifth core business unit for Newmont, with potential annual production in the 700,000-to-800,000-ounce-range,” says Newmont President Pierre Lassonde. “We said it would take us three years to rationalize the company and optimize the asset base. Our focus in 2002 was on non-core asset sales, but in 2003 we will look to [expand] the company organically by focusing on developing our project pipeline.”

To this end, Newmont has budgeted a further US$85 million for exploration in 2003.

Adds Murdy: “As I look to 2003, I am increasingly confide
nt in our ability to grow reserves from the drill bit.”

Commenting on the gold price and its retreat during the war in Iraq, Lassonde says gold’s bullish fundamentals are tied to the weakening U.S. dollar and that this trend will “reassert itself with renewed vigor once the [Iraq] sideshow is over.

“When you look at the situation of the dollar, it is quite evident that it follows Stein’s Law, which says that a thing that can’t go on forever.”