Newmont Doubles Earnings But Faces Key Challenges Ahead
By Jon A. Nones
31 Oct 2007 at 03:14 PM GMT-04:00
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- The world’s no. 2 gold producer, Newmont Mining Corp. [NYSE:NEM], doubled its third-quarter earnings on one-time gains from a joint venture settlement and a tax credit, but narrowed its gold sale expectations for the year, citing mining costs. The company faces key challenges moving forward.
Newmont said profit for the three months ended September rose to $397 million, or 88 cents a share, from $198 million, or 44 cents, in the year-ago quarter. Revenue jumped 49% to $1.6 billion, which generated net cash of $521 million from continuing operations, up substantially from $201 million in the year ago quarter.
Profits were boosted by $84 million related to foreign tax credits and $54 million related to a settlement related to the Zarafshan-Newmont joint venture in Uzbekistan.
In July 2007, Newmont transfer its 50% stake in the Zarafshan-Newmont Joint Venture (ZNJV) to Uzbekistan in exchange for $80 million. Newmont lost control of the JV in August 2006 when Uzbek authorities seized gold and some of the assets belonging to the venture and launched two tax claims for payments it said were due between 2002 and 2005.
Excluding extraordinary items, the company earned 41 cents a share, well above analysts' average forecast of 25 cents, according to Thomas Financial. Shares in Newmont promptly jumped nearly 10% today up $4.46 at $50.90.
Challenges
However, Newmont sold 1.326 million equity gold ounces in the quarter, down from 1.379 million ounces in Q3 2007, and once again lowered its production outlook for 2007 due largely to rising costs at Phoenix and the suspension of operations at Midas in Nevada. Costs applicable to sales climbed to $388 per ounce from $318 per ounce.
Last month, the company projected equity gold sales of 5.2 million to 5.6 million equity ounces with costs at $375 to $400 per ounce for 2007. Newmont now expects equity gold sales of between 5.2 and 5.4 million ounces, at costs applicable to sales of between $400 and $430 per ounce for the year.
Newmont is having difficulty replacing its proven and probable gold reserves at its aging mines, while problems continue to plague Nevada operations. Based on the results of the first nine months, the company has narrowed the expected range for equity gold sales in Nevada from between 2.3 and 2.6 million ounces to between 2.3 and 2.4 million ounces for 2007.
Average realized gold prices increased 11% to $681 an ounce, said Newmont. But despite gold’s surge to 28-year highs, Newmont's stock [NYSE:NEM] has not climbed as dramatically as its peers. Shares rose 12.1% in the July-through-September period; however, the company trails Barrick, Kinross and Goldcorp, with gains of 38%, 28% and 26% in Q3, respectively. The GLD gold ETF gained 13.5%.
Strategies
On July 5, Newmont eliminated its entire portfolio of forward sales contracts in June, covering 1.85 million ounces of gold at cost of $578 million to better leverage itself with the rising gold price. As a result, the company will post a pre-tax loss of $531 million, after a $47 million reversal of previously recognized deferred revenue.
However, shortly thereafter on July 10, the bullish news was partially offset by Newmont’s decision to offer $1 billion in convertible debt to repay all amounts outstanding under its corporate revolving credit facility.
At the same time of the hedge closure, Newmont decided to dispose of its merchant banking segment, taking a non-cash impairment charge of $1.7 billion in the second quarter of 2007. And late Tuesday, the company announced that its Franco-Nevada Corp. has made a preliminary filing with Canadian securities regulators for a possible public offering, with proceeds earmarked to buy the royalty assets and certain other investments of Newmont.
This is in line with the company’s decision to monetize certain components in order to focus on the development of its mines and on making acquisitions. Newmont has made large strides to replenish resources with deals in recent months.
Earlier this month, Newmont made an offer of $1.53 billion for Miramar Mining [AMEX:MNG; TSX:MAE], obtaining one of the largest undeveloped gold properties in North America. Miramar’s Hope Bay project contains 10.7 million ounces of resources, and the company plans an additional 70,000 metres of drilling at the site this year.
On Wednesday, the company announced intersections of 5.1 g/t for over 34 metres at the Naartok target and 4.1 g/t over 32.6 metres at Rand. Regionalexploration drilling on the belt continues with one drill testing priority targets along the 21 kilometre long Madrid trend.
Earlier this month, Newmont announced plans to team up with Cornerstone Capital Resources [TSX-V:CGP] for exploration projects in southern Ecuador, Evolving Gold [TSX-V:EVG] for exploration projects in Nevada and Cardero Resource Corp. [TSX:CDU; AMEX:CDY] for exploration projects in Argentina.
Looking Ahead
The price of gold rose $100 an ounce in the July-through-September period. Since then, the metal continued its climb all the way to within $5 of the long-awaited $800 mark. On Wednesday, gold soared $8.20 to $796 on news that the U.S. Federal Reserve cut the interest rate by a quarter point to 4.5%.
Richard O’Brien, President and Chief Executive Officer, said the company continues to work toward achieving its goal of providing shareholders with a sustainable and profitable production base with optimized leverage to the rising gold price.
Concerning the company’s development projects, Newmont continues to make substantial progress on the gold mill at Yanacocha, Boddington in Australia and the power plant in Nevada.
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Progress on the gold mill continues as expected, with construction approximately 85% complete at the end of the third quarter. The company continues to anticipate commercial production in the first half of 2008.
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The company is in the process of completing a definitive estimate to update the Boddington capital costs, expected to be complete in the first quarter of 2008.
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Construction of the 200 megawatt coal-fired power plant in Nevada was approximately 82% complete at the end of the third quarter and remains on schedule for completion in the first half of 2008.
“We need to look at the portfolio and balance it better,” said O’Brien in a conference call. “It’s not just to get bigger, it’s to get better.” |
