NEM: NEWMONT HOLDS THE LINE ON CASH COSTS
Salomon Smith Barney
Friday, May 07, 1999
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--SUMMARY:--Newmont Mining Corp.--Precious Metals * Newmont Mining reported a first-quarter EPS of $0.08, exceeding expectations by two cents. * The better-than-anticipated performance reflected Newmont's ability to hold the line on cash costs. * Gold production fell 7% to 956,100 equity ounces, while cash costs declined to $181 per ounce. * Batu Hijau, Newmont's 45%-owned copper/gold project in Indonesia, is 90% complete, under budget and on track for a fourth-quarter start up. * Year-end reserve replacement appears likely, with Yanacocha as the largest contributor. * The highly-leveraged shares offer great value, even after climbing more than 50% in the past month. --EARNINGS:----------------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 12/98 EPS $0.20A $0.16A $0.04A $0.03A $0.43E Previous 12/99 EPS $0.06E $0.13E $0.23E $0.36E $0.78E Current 12/99 EPS $0.08A $0.13E $0.23E $0.34E $0.78E Previous 12/00 EPS $N/A $N/A $N/A $N/A $1.20E Current 12/00 EPS $N/A $N/A $N/A $N/A $1.20E Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/A Current 12/01 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: EPS are fully diluted. --FUNDAMENTALS:------------------------------------------------------------- Current Rank........:1-H Price 05/06/99......:$26.06 Prior Rank..........: Target Price........:$40.00 P/E 12/99...........:33.4X 52 Wk Price Range...:30.50 - 13.68 P/E 12/00...........:21.7X Proj. 5yr EPS Grth..:N/A% Return on Equity 98.:3.40% BookValue...........:$8.68 LT Debt-to-Capital..:46.61% Dividend............:$.12 Revenue 1999........:$1429.60 mil Yield...............:.4% Shares Outstanding..:166.50 mil Convertible.........:No Mkt. Capitalization.:$4338.99 mil Hedge Clause(s).....: Comments............: --OPINION:------------------------------------------------------------------ Newmont Mining reported a first-quarter EPS of $0.08, exceeding expectations by two cents. The better-than-anticipated performance reflected Newmont's ability to hold the line on cash costs, which declined slightly to $181 per ounce. Gold production fell 7% in the quarter to 956,100 equity ounces as an effort to maximize cash flow from the flagship Nevada operations called for a reduction in mining rates. Full-year gold production is currently expected to hit the high end of management's target range of 3.6-4.0 million ounces, with cash costs under $180 per ounce. Newmont's primary development project, the $1.85 billion copper/gold Batu Hijau operation in Indonesia, is 90% complete and on track for a fourth-quarter start up. North American Operating Results. Nevada production of 606,700 ounces reflects a planned reduction in mining rates at the operation, designed to optimize cash flow. Improved operating performance resulted in higher-than-projected cash flow, despite a slight increase in cash costs to $209 per ounce. The increased cash costs reflect the higher proportion of refractory ore processed and a slight decline in overall grades. The Mesquite mine in California had a good quarter, generating 41,700 ounces at a cash cost 28% lower than a year ago of $142 per ounce. Overseas Operating Results. Increased production from overseas operations partially offset the decline in Nevada. The 51%-owned Yanacocha mine in Peru, 80%-owned Minahasa mine in Indonesia and 50%-owned Zarafshan operation in Uzbekistan generated 15% more ounces in the quarter for a total of 301,000 ounces to Newmont's account. Overall cash costs declined slightly to $130 per ounce. The 51%-owned Yanacocha mine in Peru produced 173,900 equity ounces at a cash cost of $114 per ounce. Full-year production is now expected to hit 1.5 million ounces (765,000 ounces to NEM), at cash costs of approximately $110 per ounce. Minahasa production jumped 24% in the quarter to 72,200 equity ounces with 7% lower cash costs of $130 per ounce, while Zarafshan production climbed 10% to 54,900 equity ounces at cash costs of $183 per ounce. Progress at Batu Hijau. Newmont's Batu Hijau gold/copper project in Indonesia is now 90% complete and on schedule for an October commissioning of the first SAG line, with commercial production expected in early 2000. Last week, we visited the project and came away with confidence that the construction phase is proceeding better than target and that the transition from construction to operations is set to proceed smoothly, with a number of Newmont expatriates already having assumed key site management roles. The project looks as if it could come in $100 million under budget (of $1.85 million) and will have lower unit cash costs than the company's recently reduced estimates. Cash costs initially estimated at $0.65 per pound of copper (net of gold credits) are now expected to be below $0.50 per pound. Mining has reached 200,000 tonnes per day, in line with the projected ramp up. From a financial standpoint, at $285 per ounce gold, management believes the Batu Hijau project should breakeven from a income perspective at a $0.60 copper price, or at $0.70 including the pay down of principle. Exploration Success and Potential Reserve Additions. In an analyst/investor conference call with management, Newmont outlined the status of exploration targets and areas of likely reserve additions. It appears reserves will be replaced at year end, with Yanacocha standing out as the most significant contributor. Cerro Quilish is sizing up to be a good-sized deposit with potential to add 2 to 3 million ounces to proven and probable reserves by year end. The La Quinua and Chaquicocha deposits also appear to have good growth potential, with the former likely to add more than a million ounces to reserves by year end. Development of the Deep Post deposit in Nevada began in the quarter, and is anticipated to be another source for reserve additions. The high- grade, 2.35 million ounce gold deposit is being accessed through a decline from the Betze/Post pit, in accordance with the previously announced land-swap agreement with Barrick Gold. The decline and a drift from the nearby Deep Star deposit to Deep Post will offer an inside look to potentially high-grade ground - hopefully resulting in an eventual addition to reserves. By using the decline to access the ore body, as opposed to a shaft, production can begin 2 years earlier than originally planned - now scheduled for late 2001. Production from Deep Post is expected to reach 400,000 ounces per year in 2003 with cash costs of $150 per year. Great Vaue in the Shares; Highly Leveraged to the Gold Price. We continue to view Newmont as our favorite large-cap gold producer. It has one of the best exploration track records in the industry, a low-cost structure and world-class assets. With very little hedging in place, Newmont is highly leveraged to the gold price - as evidenced by a one month, 51.8% run up in the shares to a Thursday close of 26 1/16 for a 10 point (3.4%) rise in spot gold per ounce to $289.55. We continue to rate the shares 1H (Buy, High Risk) and maintain a price target of $40. |
