A bit of transparency to a murky state of affairs ... but also a warning on events to come from the industry
mips1.net
Newmont's dire hedging prediction comes true
By: Tim Wood
Posted: 2002/05/15 Wed 19:00 | © Miningweb 1997-2002
PRINCETON, New Jersey -- The gold business may be short on profits, but not irony. After crusading against gold hedging during the unruly takeover war for Australia's Normandy, Newmont [NEM] now sits with a massive loss on its acquired hedge book – exactly what it warned would happen to rivals.
There are not too many people who expected Newmont to report a hedging loss - $411 million as at the end of March and equal to nearly all Newmont's cash. The figure is recorded on the balance sheet, but is unrealised so does not affect cash earnings.
The more heavily hedged AngloGold had an unrealised hedging loss of $495 million at the end of the first quarter when the gold price.
Newmont's uncompromising attitude on hedging is at odds with the Normandy book that it has retained despite the market being led to believe it would be liquidated at the earliest opportunity. Reality made clearing 8 million odd ounces – bound up in watertight counterparty contracts – all but impossible and Newmont has now defaulted to winding up the book in an "orderly and timely" manner.
7.3 million ounces remain trapped by hedging, or roughly 8 per cent of Newmont's proven and probable reserves. That leaves the company a long way out of the hedging big league, but neither is it insignificant at nearly a full-year's production.
Rivals AngloGold and Barrick [ABX] have around 19 and 29 per cent respectively of total reserves covered by hedging; equivalent to around three and four years of estimated 2002 production respectively.
So far, AngloGold has proved to have the most flexible hedge book of the majors, closing out nearly five million ounces in the least half year, 1.7 million of those in the quarter to end March. Newmont could only liquidate 250,000 ounces in the first quarter.
Newmont president Pierre Lassonde says the hedge book is Australian dollar denominated so further strengthening in that currency against the US dollar should ease losses.
One bit of information the company provided, but which others haven't disclosed as clearly yet, illustrates some of the obfuscation used in reporting hedging proceeds. Companies routinely show gold prices received well above spot prices and attribute the difference to hedging, but Newmont added the cost of borrowing which shows the true net impact.
This year, Newmont is obliged to deliver at least 1 million ounces into its hedges at a price of $303 per ounce. That seems reasonable enough except that "associated gold borrowing costs" reduce the final price by $17 per ounce to $286. With spot gold expected to average $305 an ounce this year, that's an opportunity cost of $19 million for the year on the minimum ounces to be delivered.
If only this sort of transparency was available in all producer reporting... Indeed, Newmont can take a bow for one of the most comprehensive and clear quarterly reports despite coming out of a tumultuous acquisition.
That gave Lassonde the room to continue his aggressive promotion of Newmont as a "non-hedger" and to further its claim to be "the gold standard". Not quite, but it's certainly making progress and there is a lot more buzz about this merger than there was about Barrick-Homestake.
Lassonde remains resolutely bullish on gold, characterising the recent upward drift in prices as "climbing the wall of worry." He refuted suggestions that gold has lost its allure as a safe haven and believes it will endure as a portfolio diversifier used to counter the business cycle.
Noise
Chief executive Wayne Murdy pleaded with investors to wait until the second quarter so that the "noise" of the merger could be better filtered out.
He focused on projections for the full-year that will see Newmont produce 7.5 million ounces, reduce debt gearing to less than a fifth of total capitalisation, replace reserves net of production and realize $400 million from non-core asset sales.
Reserve replacement has occupied a good deal of attention in figuring out valuation models and Lassonde was explicit in warning investors not to expect a continuation of traditionally wasteful reserve policies.
The trend will be to lower reserve life at existing operations although there is a commitment to find new ounces through organic exploration; concentrated around its existing Nevada holdings. Lassonde also said the firm's extensive land holdings would be "open for business" to exploration companies.
As predicted earlier this year by Miningweb, Newmont has assumed $2.5 billion in goodwill – the excess it paid over fair market value for Normandy – which will be adjusted on an annual basis. The probability of an impairment makes a profit essential in Q1 2003 if Newmont is not to be knocked out of the all important long-term return on equity ratings.
By the numbers
Newmont reported a net loss of $10.9 million, or 4 cents per share, for the first quarter, which includes a one-off derivative related gain, compared with a loss in the year-earlier period of $39.1 million ($0.2 per share).
It sold 1.464 million ounces of gold (1.422moz) with total production costs up sharply to $262 an ounce ($220). |
