Restructured Newmont proves profitable

Shareholders of Newmont Mining (NEM-N) got their first hard look at their “new” company, as the Denver-based gold giant released its first quarterlies, showing the full effects of its February merger with Franco-Nevada Mining and Normandy Mining.

So far so good: the company posted a net profit of US$64.8 million (or US16 per diluted common share) on revenue of US$712.3 million, compared with a loss of US$33.5 million (US17 per share) on income of US$365.8 million during the corresponding period last year.

In particular, gold sales rose 67% between the two periods to US$604.4 million, representing a record 1.8 million equity ounces sold at US$314 per oz. These ounces were produced at a total cash cost of US$195 per oz. and a total production cost of US$261 per oz., compared with costs of US$193 and US$250, respectively, a year ago.

However, on second glance, the quarterly profit does not look quite so strong, since the company booked as income a US$47.3-million gain on the sale of its stake in Lihir Gold (lihry-q).

For the first six months of 2002, net income totalled US$54.1 million (US$0.16) on revenue of US$1.2 billion, compared with a net loss of US$72.6 million (US$0.37) for the first half of 2001. Between the two periods, the company benefited from a US$38-per-oz. rise in average realized gold price to US$304 per oz.

Second-quarter production was highlighted by Newmont’s flagship Nevada operations, which cranked out moderately lower gold sales of 599,000 oz. at a total cash cost of US$243 per oz.

Newmont’s Yanacocha mine recorded improved quarterly sales of 478,000 oz. (or 245,000 equity ounces) at a higher total cash cost of US$139 per oz.

The Australian operations completed their first full quarter under Newmont, selling 458,000 equity ounces gold at a total cash cost of US$196 per oz. and a total production cost of US$265 per oz. The star performer in Oz was Pajingo, which sold 74,000 oz. at a total cash cost of US$95 per oz.

The Batu Hijau mine in Indonesia delivered a reduced 158.8 million lbs. copper (89.3 million equity pounds) at a cash cost of US$0.31 per lb., after gold credits.

During a conference call with analysts, Newmont Chief Financial Officer Bruce Hansen said cost savings arising from the merger are likely to approach US$75 million annually by the end of the fourth quarter.

Showing the influence of the incoming Franco pair and renowned debt-haters Seymour Schulich and Pierre Lassonde, Newmont slashed its debt burden during the quarter by almost US$400 million to end the period with US$1.7 billion in long-term debt.

Using proceeds from a variety of asset sales, Newmont repaid: US$150 million of 8 5/8 notes due April 1, 2002; US$171 million of bank debt; and US$63 million in redemption of other notes. Newmont also redeemed its US$3.25 convertible preferred stock by issuing 4.4 million common shares, thus eliminating US$7.5 million of annual preferred dividends.

By the end of the year, Hansen said, the company will likely have a net-debt-to-total-capitalization ratio below 20%, down from 20.8% at mid-year.

Taking into account the above debt repayments, Newmont’s cash and equivalents totalled US$285.4 million on June 30, up from US$76.6 million a year earlier.

Hedge book

Newmont’s controversial gold hedge book, acquired from Normandy, was reduced to 6.6 million committed ounces by the end of the quarter, as the company delivered into or closed out a total of 724,000 oz. of committed gold positions.

Scheduled deliveries for the rest of 2002 will total 827,000 oz. and, for 2003, 1.43 million committed ounces.

Commenting on hedge reduction, Hansen said Newmont has “done a lot already, but we’re far from being done, and I will tell you we intend to do much more than the currently published schedule of deliveries. We are actively examining options for a more rapid close out of this book, including buying back positions with cash.”

He said the mark-to-market of the hedge book on June 30 was minus US$364 million. Although this is an improvement from the US$411-million figure on March 31, Hansen said Newmont “wants to reduce this liability just as we’re reducing debt — as quickly as practicable.”

Looking ahead, Newmont expects to meet its industry-leading gold-sales target of 7.5 million equity ounces for the full year. Chairman Wayne Murdy says the company remains on track to deliver earnings this year of US40-50 per common share, before mark-to-market adjustments, and net cash flow from operations of US$750 million, assuming a gold price of US$300 per oz.

“All our core operations — Nevada, Yanacocha in Peru, Australia and our Batu Hijau operation in Indonesia — will be stepping up production and lowering costs over the third and fourth quarters,” said Murdy. “Clearly the best is to come, in the second half.”

Newmont also gave the green light to the co-development of two new, neighbouring gold mines in Nevada: Leeville and Gold Quarry South Layback (GQSL).

The high-grade, underground Leeville mine will cost around US$180 million to build, with the first gold pour slated for 2006. At mining rate of about 3,500 tons per day, the mine should produce an average of 450,000-500,000 oz. per year, or 4 million oz. over a minimum 7-year mine life.

Newmont expected GQSL to begin producing gold in 2004, yielding 2.6 million oz. gold over a mine life of six years. Capital costs are pegged at US$36 million, and most of that represents prestripping.

Combined, average cash costs for the two mines are estimated at US$205 per oz. over their lives.

“At both of these projects, we believe there is considerable exploration upside,” said Murdy. “Leeville accelerates Nevada’s transition to a greater proportion of high-grade, low-cost underground production. This year, ounces from our underground operations will account for about 30% of ounces sold; next year that will rise to about 35%.”

He added that funding for both projects will come from the company’s internal generation of cash flow.

‘Seasonal pattern’

Regarding the price of gold, Newmont President Pierre Lassonde said “what we’ve seen in the past month is typical of a seasonal pattern of a weak summer price as the Italian jewelry manufacturing industry goes on vacation. Typically, the gold price increases in the fall as the gold buying for the holiday season approaches, and I think we will see that pattern repeat itself again.”

The fact that gold did not break the US$300-per-oz. floor in the past month is “very, very encouraging,” he added.

Overall, Lassonde said, Newmont remains “bullish on the gold price for the rest of the year, and for the longer term, as the supply-demand picture remains unchanged with strong fundamentals.” These including a weaker U.S. dollar, lower overall gold production, and net hedging buyback by producers.