To the consternation of its hedging counterparties and noteholders,
The precipitating event occurred on May 21, when Newmont-Yandal received a notice from a gold-hedging counterparty that it wanted to exercise its right to terminate a hedging contract before its scheduled maturity.
In recent years, two hedging counterparties — Germany’s Dresdner Bank and France’s Socit Generale — have exercised options to terminate hedge contracts with Newmont-Yandal.
Newmont describes this latest termination demand as based on an “alleged occurrence of an early termination event” under the contract, and estimates that the payment required to be made under the contract would be US$46 million, based on a spot gold price of A$560 per oz. (or US$369 per oz. at presstime).
The situation is unusual in that Newmont-Yandal is financially isolated from the rest of Newmont’s assets, meaning Newmont could legally walk away from the property, though this would do severe damage to the company’s relations with its counter-party banks and noteholders.
However, Newmont is responding to the termination request by offering to buy back all of Newmont-Yandal’s gold hedges for a deeply discounted sum of US$110.8 million.
The offer includes two alternatives: counterparties may elect to receive US50 for each dollar of net mark-to-market liability under the individual hedge contracts, as of May 22, 2003; or, in lieu of cash, the counterparty may enter into new hedging contracts with Newmont, such that Newmont would assume obligations equal to 40% of Newmont-Yandal’s existing hedge obligations with the counterparty.
The three bullion dealers involved are Credit Suisse First Boston, Goldman Sachs and JP Morgan Chase, according to Bill Murphy, chairman of the Gold Anti-Trust Action Committee, though Newmont would not reveal their names.
In terms of ounces hedged against future production, as of June 30, 2002, Newmont-Yandal had 1.06 million oz. gold sold forward at A$550 per oz. and 836,000 oz. of put and convertible options at A$665 per oz. (At presstime, spot gold was trading at A$559 or US$367 per oz.)
The crux of the matter is that Newmont-Yandal also had the following “excess” hedges (that is, ounces not covered by its reserve base) on June 30, 2002: 495,000 oz. sold forward at A$565 per oz.; 1.3 million oz. of put and convertible options at A$612 per oz.; and 600,000 oz. of gold swaps at A$543 per oz.
At Dec. 31, 2002, Newmont’s total hedging contracts covered 3.4 million oz. gold at a net A$518 per oz. (currently US$341 per oz.).
(Note that Newmont-Yandal’s financial year-end has been June 30, but Newmont is changing the year-end to Dec. 31. to bring it in line with its accounting.)
For the year ended June 30, 2002, Newmont-Yandal’s derivatives losses were A$223 million, relating to the mark-to-market deficit of excess hedges, primarily as a result of hedge positions exceeding sales forecasts.
Newmont is simultaneously making an offer to acquire all of the 87/8% senior notes at Yandal that it does not already own, for US50 for every dollar of principal amount plus accrued interest.
Another Newmont subsidiary, Yandal Bond Co., holds US$62.8 million in principal amounts of these notes, so Newmont is effectively offering US$118.6 million for the US$237.2-million principal amount not already in its hands.
The Yandal notes were issued in 1998 and are due in April 2008. Of the US$300 million raised by the issue, US$184 million were swapped into a gold-commodity contract, half of which was fixed at 3.87% and half of which was floating.
At Dec. 31, 2002, the mark-to-market value of the principal component of the gold-commodity obligation was negative A$53.4 million, and the mark-to-market value of the floating component was negative A$101 million.
Interest expenses on the notes have been about A$30 million annually.
Combining the outstanding notes, the hedges and other obligations, Newmont-Yandal had, as of June 30, 2002, a total of A$1.05 billion in contractual cash obligations due over the next decade, including A$758 million due within 2-5 years.
Credit rating
In the early spring of 2003, Standard and Poor’s sensed trouble ahead: it lowered Newmont-Yandal’s corporate credit rating and chopped the rating on its US$300-million notes from BBB to B-.
At that time, S&P also revised Newmont-Yandal’s outlook from “stable” to “negative.”
In a filing, Newmont-Yandal said S&P took the actions based on concern over the company’s “future liquidity position in June 2004 if hedge counterparties exercise their rights to break existing contracts.”
Newmont-Yandal also said its ability to raise funds from external sources was “severely limited.”
Newmont Mining propped up Newmont-Yandal in early April with an advance of up to US$10 million to enable the latter to pay new debts that do not include money owed to hedging counterparties or noteholders.
Newmont-Yandal’s cash and equivalents had stood at A$107 million on June 30, 2002, when the company warned “a substantial or extended rise in gold prices may adversely affect [our] financial position.”
One more factor is that Newmont-Yandal is obliged to pay counterparties certain amounts of gold if the gold price is above A$540 per oz. at the end of March or September in the years 2003-2008.
This semi-annual liability rises linearly from 0 oz. at A$540 per oz. to 42,224 oz. at a capped price of A$627 per oz. (On March 31, 2003, spot gold closed at US$334.85 or A$554 per oz.)
“After a thorough review of Yandal’s condition, we have put together these offers in an equitable and transparent manner,” says Newmont Chairman and CEO Wayne Murdy. “We believe that they represent significant premiums to the alternative of an insolvency administration.”
Consolidation
Newmont also said that the Yandal operation will be unaffected while the offers are outstanding, and in the event the offers are successful, the company does not believe they will affect employees or regular trade creditors “in any way.”
The Yandal operations were developed over the past two decades by several different companies, including Australian-listed Great Central Mines. These companies were acquired in the 1990s by Australia’s Normandy Mining, which succeeded in consolidating most of the district by early 2000.
The operation then changed its name to Newmont-Yandal in April 2002, following Newmont’s February 2002 acquisition of Normandy.
Yandal consists of three gold mines, Bronzewing, Jundee-Nimary and Wiluna, in the Yandal and Wiluna greenstone belts, north of Leonora in Western Australia.
For the year ended June 30, 2002, production from the three operations totalled 750,000 oz. gold at a cash cost of A$349 per oz.
Over that period, Newmont-Yandal lost A$488 million on revenue of A$404 million, resulting in accumulated losses of A$758 million.
At Dec. 31, 2002, total reserves stood at 14.5 million tonnes grading 4.53 grams gold per tonne (or 2.1 million contained ounces), divided between: Bronzewing, with 3.3 million tonnes at 3.21 grams gold (343,000 oz.); Jundee-Nimary, with 10.2 million tonnes at 4.92 grams gold (1.6 million oz.); and Wiluna, with 1 million tonnes at 4.98 grams gold (167,000 oz.).
Including reserves, the resource base at year-end stood at: 8.3 million tonnes at 2.68 grams gold (710,000 oz.) at Bronzewing; 15.6 million tonnes of 5.71 grams gold (2.9 million oz.) at Jundee-Nimary; and 7.4 million tonnes of 4.69 grams gold (1.1 million oz.) at Wiluna.
Price-insensitive
Most of the reserves were calculated at A$545 per oz. (US$360 per oz.) and are relatively insensitive to the gold price, owing to the style of mineralization.
Capital expenditures at all three mines for the three and a half years ended Dec. 31, 2002, totalled A$173 million, and the three mines now have the following status:
— The underground Bronzewing mine is expected to close in late 2003 or early 2004, when reserves are depleted.< P>— At Jundee-Nimary, open-pit mining ceased when near-surface reserves were depleted in late 2002, and mining continues from underground. However, gold mineralization in the lower levels of the Jundee-Nimary’s key Barton Deeps deposit has proved to be “more discontinuous with greater grade variation” than experienced in the upper levels, resulting in a 497,000-oz. reduction in Barton Deeps’ reserve from June 30 to Dec. 31, 2002.
Overall, though, Jundee-Nimary’s reserves rose 55% over that 6-month period with the addition of reserves from the promising, high-grade Westside deposit, and from new open-pit deposits and the Invicta underground deposit.
— Most of the ore produced from the underground Wiluna mine is now considered refractory. Based on the current mine plan, production is expected to cease by year-end.
In September 2002, Newmont-Yandal had arranged to sell Wiluna to Australia’s Agincourt Resources, but the deal was never consummated.
For 2003, Newmont-Yandal has budgeted A$13.1 million for exploration, divided between mine-site work (A$4.1 million) and district-wide efforts (A$9 million).
Since 1992, Newmont-Yandal and its predecessor companies have discovered 10 million oz. gold in the district, where the company holds 3,150 sq. km under 387 granted tenements and 1,560 sq. km under 182 licence applications.
One more headache for Newmont in Australia is its Australian-listed subsidiary,
After Newmont sank A$100-million into AMC in January, the magnesium junior announced in late May that it is halting work at its partially built A$1.3-billion Stanwell magnesium project in Queensland.
The project has suffered cost overruns and still needs an injection of several hundred million dollars before construction can be completed.
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