Newmont Mining : Announces Second Quarter 2017 Results

Newmont Mining Corporation (NYSE: NEM) (Newmont or the Company) announced second quarter 2017 results that demonstrated improved operational and financial performance.

• Net income: Delivered GAAP net income attributable to stockholders from continuing operations of $192 million or $0.36 per diluted share, and adjusted net income¹ of $248 million or $0.46 per diluted share
• EBITDA: Generated $698 million in adjusted EBITDA², up 16 percent from the prior year quarter
• Cash flow: Reported net operating cash flow from continuing operations of $529 million and free cash flow³ of $346 million
• Gold costs applicable to sales (CAS)⁴: Reported CAS of $664 per ounce in line with the prior year quarter, favorable to guidance
• Gold all-in sustaining costs (AISC)⁵: Improved AISC by three percent to $884 per ounce, favorable to guidance
• Attributable gold production: Produced 1.4 million ounces of gold, up 13 percent from the prior year quarter, in-line with guidance
• Portfolio improvements: Approved the high grade, low cost Twin Underground mine in Nevada; acquired a 19.9% stake in Continental Gold to support development of the Buriticá project in Colombia; mined first ore at Subika Underground in Africa; on track for commercial production of the Tanami Expansion Project in Australia in the third quarter of 2017
• Financial strength: Reduced net debt to $1.5 billion, ending the quarter with $3.1 billion cash on hand, and an industry-leading, investment-grade credit profile; in July 2017, further deleveraged and simplified the balance sheet with the full repayment of $575 million convertible senior notes; second quarter dividend triples from the prior year quarter to $0.075 per share
• Outlook: Improved production and cost outlook for 2017; attributable production guidance improves to between 5.0 and 5.4 million ounces of gold; CAS guidance improves to between $675 and $715 per ounce; AISC guidance⁶ improves to between $900 and $950 per ounce; capital guidance lowered to between $890 and $990 million; G&A guidance improved

“Operational execution has driven superior second quarter results, further investment in profitable growth, and improved guidance for 2017,” said Gary J. Goldberg, President and Chief Executive Officer. “We increased adjusted EBITDA by $98 million compared to the prior year quarter to nearly $700 million, and reported free cash flow of $346 million. Operations across the portfolio outperformed, reducing all-in sustaining costs to $884 per ounce and producing 13 percent more gold on an attributable basis. We expect to sustain this performance through strong technical fundamentals and ongoing investment in value-adding technology, and have improved our cost, capital and production outlook as a result. This performance gives us the means to fund near-term growth through our new Twin Underground mine and profitable expansions at Ahafo, Tanami and Northwest Exodus, and to invest in maintaining our profitability for years to come with new greenfields prospects as well as our interest in the high grade Buriticá project in Colombia, and the promising Plateau opportunity in the Yukon.”

Second Quarter 2017 Summary Results

GAAP Net income attributable to shareholders from continuing operations of $192 million or $0.36 per diluted share for the quarter, up $178 million from $14 million or $0.02 per share in the prior year quarter.

Adjusted net income improved by 59 percent to $248 million or $0.46 per diluted share from $155 million or $0.29 per share in the prior year quarter mostly due to higher sales volumes. The primary adjustments to net income include $0.11 per share net tax adjustments primarily related to valuation allowances.

Revenue rose 12 percent to $1,875 million for the quarter due to increased sales volumes.

Average realized price⁷ for gold was $1,250 per ounce for the quarter compared to $1,257 in the prior year quarter; average realized price for copper improved $0.46 to $2.46 per pound.

Attributable gold production increased 13 percent to 1.4 million ounces for the quarter as new production from Merian and Long Canyon more than offset lower grades at Tanami and Yanacocha.

Gold CAS totaled $955 million for the quarter. Gold CAS per ounce was mostly unchanged at $664 per ounce for the quarter compared to $661 in the prior year quarter.

Gold AISC improved three percent to $884 per ounce compared to $913 in the prior year quarter primarily due to lower sustaining capital and higher sales volumes.

Attributable copper production from Phoenix and Boddington increased 15 percent to 15,000 tonnes for the quarter. Copper CAS totaled $44 million for the quarter. Copper CAS per pound improved 27 percent to $1.38 per pound for the quarter on higher sales volumes, full potential improvements and lower co-product allocation of costs to copper. Copper AISC improved 22 percent to $1.69 per pound on improved unit CAS.

Capital expenditures⁸ decreased 35 percent from the prior year quarter to $183 million as growth projects including Merian and Long Canyon moved into commercial production partially offset by increased spending on capital projects in Africa.

Consolidated operating cash flow from continuing operations decreased 21 percent from the prior year quarter to $529 million primarily due to changes in working capital. Free cash flow was $39 million lower at $346 million for the quarter on improved volumes and lower capital expenditures, offset by working capital changes.

Balance sheet improved as Newmont ended the quarter with $3.1 billion cash on hand, a leverage ratio of 0.6x net debt to adjusted EBITDA and one of the best credit ratings in the mining sector. On July 17, the Company announced the retirement of $575 million of convertible senior notes. Since 2013, Newmont has streamlined its balance sheet and reduced gross debt by over 30% and net debt by over 70%.The Company is committed to maintaining an investment grade credit profile.

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Projects update

Newmont’s capital-efficient project pipeline supports stable production with improving margins and mine life. Near-term projects are presented below. Funding for the Tanami Expansion, Subika Underground, Ahafo Mill Expansion and Twin Underground projects has been approved. Additional projects represent incremental improvements to production and cost guidance.

• Tanami Expansion (Australia) includes a second decline in the mine and incremental capacity in the plant to increase profitable production and serve as a platform for future growth. The project is on track to reach commercial production in the third quarter of 2017 and will maintain Tanami’s annual gold production at 425,000 to 475,000 ounces at AISC of between $700 and $750 per ounce for the first five years of production. Capital costs are estimated at between $100 and $120 million with expenditure of $30 to $50 million in 2017.
• Subika Underground (Africa) leverages existing infrastructure and an optimized approach to develop Ahafo’s most promising underground resource. Achieved first production in June 2017 with commercial production expected in the second half of 2018. The project is expected to increase average annual gold production by between 150,000 and 200,000 ounces per year for the first five years beginning in 2019 with an initial mine life of approximately 11 years. Capital costs for the project are estimated at between $160 and $200 million with expenditure of $80 to $90 million in 2017. The project has an IRR of more than 20 percent at a $1,200 gold price.
• Ahafo Mill Expansion (Africa) is designed to maximize resource value by improving production margins and accelerating stockpile processing. The project also supports profitable development of Ahafo’s highly prospective underground resource. First production is expected in the first half of 2019 with commercial production expected in the second half of 2019. The expansion is expected to increase average annual gold production by between 75,000 and 100,000 ounces per year for the first five years beginning in 2020. Capital costs for the project are estimated at between $140 and $180 million with expenditure of approximately $40 to $50 million in 2017. The project has an IRR of more than 20 percent at a $1,200 gold price.
  
  Together the Ahafo expansion projects (Ahafo Mill Expansion and Subika Underground) improve Ahafo’s production to between 550,000 and 650,000 ounces per year for the first five full years of production (2020–2024). During this period Ahafo’s CAS is expected to be between $650 and $750 per ounce and All-in sustaining cost is expected to be between $800 and $900 per ounce. This represents average production improvement of between 200,000 and 300,000 ounces at CAS improvement of between $150 and $250 per ounce and AISC improvement of $250 to $350 per ounce, compared to 2016 actuals.
• Twin Underground (North America) is a portal mine beneath Twin Creek’s Vista surface mine with similar mineralization. First production is expected in the fourth quarter of 2017 with commercial production mid-2018. The expansion is expected to average between 30,000 and 40,000 ounces per year for the first five years (2018 to 2022). During this period CAS is expected to be between $525 and $625 per ounce and AISC between $650 and $750 per ounce. Capital costs are expected to be between $45 and $55 million with expenditure of $15 to $25 million in 2017, up from prior estimates due to higher production and additional infrastructure to support a phased approach with exploration upside. IRR is expected to be about 20 percent at a $1,200 gold price.
• Quecher Main (South America) would add oxide production at Yanacocha, and serve as a bridge to development of Yanacocha’s considerable sulfide deposits. An investment decision is expected in the second half of 2017 with first production in 2019. Quecher extends the life of the Yanacocha operation to 2025 with average annual gold production of approximately 200,000 ounces per year between 2020 and 2025 (100 percent basis). Capital costs for the project are estimated at between $275 and $325 million with expenditure of $10 to $15 million in 2017.

Outlook

Newmont’s outlook reflects steady gold production and ongoing investment in its current assets and best growth prospects. Newmont does not include potential cost and efficiency improvements in its outlook beyond 2017, nor does it include development projects that have not yet been funded or reached the execution stage – both of which represent upside to guidance. Economic assumptions include $1,200 per ounce gold, $2.50 per pound copper, $55 per barrel WTI and $0.75 Australian dollar exchange rate.

Attributable gold production guidance is improved — Production guidance for 2017 improves to between 5.0 and 5.4 million ounces on Full Potential improvements in North America and Africa. Compared to the prior year, full year production at Merian and Long Canyon more than offsets declines at Twin Creeks and Yanacocha. Production guidance for 2018 and longer-term guidance is unchanged at between 4.7 and 5.2 million ounces with production from the Ahafo expansions and new production at Twin Underground offsetting declines at maturing assets. Expansion at Yanacocha represents upside to both production and cost guidance.

• North America production guidance is improved. Production guidance for 2017 improves to between 2.1 and 2.2 million ounces following changes to blend management at Twin Creeks and improved mill grade and leach volumes at Cripple Creek & Victor. Compared to the prior year, a full year of operation at Long Canyon offsets the impact of higher planned stripping at Twin Creeks. Guidance is unchanged at between 1.9 and 2.1 million ounces in 2018 and between 1.8 and 2.0 million ounces in 2019 due to planned stripping at Carlin and continued stripping at Twin Creeks. Both sites are expected to return to higher production levels in 2020.
• South America production guidance is unchanged. Production guidance remains between 630,000 and 690,000 ounces in 2017 and between 625,000 and 725,000 ounces in 2018 as Merian increases production. Guidance remains at between 500,000 and 600,000 ounces in 2019 due to declining production at Yanacocha and higher stripping at Merian. The Company continues to advance oxide and sulfide potential at Yanacocha; both opportunities represent additional upside not currently captured in guidance.
• Australia production guidance is unchanged. Production guidance for 2017 and 2018 remains at between 1.5 and 1.7 million ounces and between 1.4 and 1.6 million ounces for 2019 as Boddington stripping results in lower grades before returning to higher production levels in 2020. The Company is studying a further expansion at Tanami which represents additional upside not currently captured in guidance.
• Africa production guidance is improved. Production guidance for 2017 improves to between 775,000 and 835,000 ounces following Full Potential improvements to throughput and recovery at Akyem. Guidance remains at between 750,000 and 850,000 ounces in 2018 as Subika Underground offsets depletion of softer ores and higher grade stockpiles at Akyem. Production in 2019 remains at between 1.0 and 1.1 million ounces as Ahafo reaches higher grade ore in the Subika pit and the Ahafo Mill Expansion achieves commercial production.

Gold cost outlook is improved – CAS guidance for 2017 is improved to between $675 and $715 per ounce on increased production and mining and processing improvements in North America, Africa and Australia. Guidance remains between $700 and $800 per ounce for 2018 and between $650 and $750 per ounce for 2019-2021, before any portfolio improvements expected through the Full Potential program. AISC guidance for 2017 is improved to between $900 and $950 per ounce on CAS improvements and reduction of sustaining capital in North America, Africa and Australia. Guidance remains between $950 and $1,050 per ounce for 2018, excluding further cost and efficiency improvements. Longer-term AISC guidance is unchanged at between $870 and $970 per ounce as increased production from Ahafo – combined with ongoing productivity, cost and capital improvements – is expected to more than offset inflation and partially counter the effects of lower grades.

• North America cost guidance is improved. CAS per ounce guidance for 2017 improves to between $675 and $725 on increased production, mine plan improvements at Carlin and Full Potential cost savings at Cripple Creek & Victor and Long Canyon. Guidance remains between $750 and $850 in both 2018 and 2019. AISC per ounce guidance for 2017 improves to between $855 and $930 on lower CAS and sustaining capital. Guidance remains at between $950 and $1,050 in 2018 and between $930 and $1,030 in 2019, as a result of planned stripping at Carlin combined with lower grades at Twin Creeks and Cripple Creek & Victor.
• South America cost guidance is unchanged. CAS per ounce guidance remains at between $675 and $725 in 2017, between $650 and $750 in 2018 and between $575 and $675 in 2019. AISC per ounce guidance is unchanged at between $880 and $980 in 2017, between $850 and $950 in 2018 and between $810 and $910 in 2019. Costs decrease as lower cost production from Merian replaces higher cost production from Yanacocha. Yanacocha reaches higher grade ore in Tapado Oeste in 2019.
• Australia cost guidance is improved. CAS per ounce guidance for 2017 improves to between $640 and $690 on Full Potential improvements to mining costs at Boddington. Guidance remains at between $675 and $775 in both 2018 and 2019. AISC per ounce guidance for 2017 improves to between $795 and $855 on lower CAS and sustaining capital improvements. Guidance remains at between $850 and $950 in both 2018 and 2019. Higher costs year-on-year are due to lower grades as a result of stripping at Boddington, lower grades at Tanami, and treatment of additional lower grade stockpile ore at Kalgoorlie in 2019.
• Africa cost guidance is improved. CAS per ounce guidance for 2017 improves to between $695 and $745 on Full Potential at Akyem and lower inventory adjustments and direct costs at Ahafo. Guidance remains at between $800 and $900 in 2018 and between $475 and $575 in 2019. AISC per ounce guidance for 2017 improves to between $870 and $920 on lower CAS. Guidance remains at between $960 and $1,060 for 2018 and between $680 and $780 for 2019. Medium term costs increase due to Akyem processing harder, lower-grade ore, which is more than offset as the Subika Underground mine achieves production in 2018, and higher-grade ore is reached in the Subika open pit in 2019.

Copper — Together, Boddington and Phoenix are expected to produce between 40,000 and 60,000 tonnes of copper per year, unchanged from previous guidance. CAS guidance remains at between $1.45 and $1.65 per pound and AISC guidance remains at between $1.85 and $2.05 per pound; higher costs at Phoenix due to lower copper grades are offset by lower costs at Boddington due to improved mine planning and cost improvements. Longer term cost guidance is unchanged; CAS guidance remains at between $1.50 and $1.90 per pound and AISC guidance remains at between $1.85 and $2.15 per pound.

Capital — Capital guidance for 2017 is lowered to between $890 and $990 million, including the remaining capital for the Northwest Exodus and Tanami Expansion projects, the initial capital for Subika Underground and the Ahafo Mill Expansion and Twin Underground. Guidance is unchanged at between $900 million and $1.0 billion for 2018 and between $630 million and $730 million for 2019. Sustaining capital outlook for 2017 is lowered to between $575 and $675 million and remains between $600 and $700 million per year longer-term. Newmont expects to reach a development decision on the Quecher Main project in the second half of this year; this is currently excluded from outlook.

Non-GAAP Financial Measures

Non-GAAP financial measures are intended to provide additional information only and do not have any standard meaning prescribed by U.S. generally accepted accounting principles (“GAAP”). These measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Unless otherwise noted, we present the Non-GAAP financial measures of our continuing operations in the tables below. For additional information regarding our discontinued operations, see Note 3 to the Company’s Condensed Consolidated Financial Statements.

Adjusted net income (loss)

Management uses Adjusted net income (loss) to evaluate the Company’s operating performance and for planning and forecasting future business operations. The Company believes the use of Adjusted net income (loss) allows investors and analysts to understand the results of the continuing operations of the Company and its direct and indirect subsidiaries relating to the sale of products, by excluding certain items that have a disproportionate impact on our results for a particular period. Adjustments to continuing operations are presented before tax and net of our partners’ noncontrolling interests, when applicable. The tax effect of adjustments is presented in the Tax effect of adjustments line and is generally calculated using the Company’s statutory effective tax rate of 35%. Management’s determination of the components of Adjusted net income (loss) are evaluated periodically and based, in part, on a review of non-GAAP financial measures used by mining industry analysts. Net income (loss) attributable to Newmont stockholders is reconciled to Adjusted net income (loss) as follows:

Earnings before interest, taxes and depreciation and amortization and Adjusted earnings before interest, taxes and depreciation and amortization

Management uses Earnings before interest, taxes and depreciation and amortization (“EBITDA”) and EBITDA adjusted for non-core or certain items that have a disproportionate impact on our results for a particular period (“Adjusted EBITDA”) as non-GAAP measures to evaluate the Company’s operating performance. EBITDA and Adjusted EBITDA do not represent, and should not be considered an alternative to, net income (loss), operating income (loss), or cash flow from operations as those terms are defined by GAAP, and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. Although Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements by other companies, our calculation of Adjusted EBITDA is not necessarily comparable to such other similarly titled captions of other companies. The Company believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Management’s determination of the components of Adjusted EBITDA are evaluated periodically and based, in part, on a review of non-GAAP financial measures used by mining industry analysts. Net income (loss) attributable to Newmont stockholders is reconciled to EBITDA and Adjusted EBITDA as follows:

Free Cash Flow

Management uses Free Cash Flow as a non-GAAP measure to analyze cash flows generated from operations. Free Cash Flow is Net cash provided by (used in) operating activities less Net cash provided by (used in) operating activities of discontinued operations less Additions to property, plant and mine development as presented on the Condensed Consolidated Statements of Cash Flows. The Company believes Free Cash Flow is also useful as one of the bases for comparing the Company’s performance with its competitors. Although Free Cash Flow and similar measures are frequently used as measures of cash flows generated from operations by other companies, the Company’s calculation of Free Cash Flow is not necessarily comparable to such other similarly titled captions of other companies.

The presentation of non-GAAP Free Cash Flow is not meant to be considered in isolation or as an alternative to net income as an indicator of the Company’s performance, or as an alternative to cash flows from operating activities as a measure of liquidity as those terms are defined by GAAP, and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. The Company’s definition of Free Cash Flow is limited in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, the Company believes it is important to view Free Cash Flow as a measure that provides supplemental information to the Company’s Condensed Consolidated Statements of Cash Flows.

The following table sets forth a reconciliation of Free Cash Flow, a non-GAAP financial measure, to Net cash provided by (used in) operating activities, which the Company believes to be the GAAP financial measure most directly comparable to Free Cash Flow, as well as information regarding Net cash provided by (used in) investing activities and Net cash provided by (used in) financing activities.

Costs applicable to sales per ounce/pound

Costs applicable to sales per ounce/pound are non-GAAP financial measures. These measures are calculated by dividing the costs applicable to sales of gold and copper by gold ounces or copper pounds sold, respectively. These measures are calculated for the periods presented on a consolidated basis. Costs applicable to sales per ounce/pound statistics are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Other companies may calculate these measures differently.

The following tables reconcile these non-GAAP measures to the most directly comparable GAAP measures.

All-In Sustaining Costs

Newmont has worked to develop a metric that expands on GAAP measures, such as cost of goods sold, and non-GAAP measures, such as Costs applicable to sales per ounce, to provide visibility into the economics of our mining operations related to expenditures, operating performance and the ability to generate cash flow from our continuing operations.

Current GAAP-measures used in the mining industry, such as cost of goods sold, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that all-in sustaining costs is a non-GAAP measure that provides additional information to management, investors, and analysts that aid in the understanding of the economics of our operations and performance compared to other producers and in the investor’s visibility by better defining the total costs associated with production.

All-in sustaining cost (“AISC”) amounts are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Other companies may calculate these measures differently as a result of differences in the underlying accounting principles, policies applied and in accounting frameworks such as in International Financial Reporting Standards (“IFRS”), or by reflecting the benefit from selling non-gold metals as a reduction to AISC. Differences may also arise related to definitional differences of sustaining versus development capital activities based upon each company’s internal policies.

The following disclosure provides information regarding the adjustments made in determining the all-in sustaining costs measure:

Costs applicable to sales. Includes all direct and indirect costs related to current production incurred to execute the current mine plan. We exclude certain exceptional or unusual amounts from Costs applicable to sales (“CAS”), such as significant revisions to recovery amounts. CAS includes by-product credits from certain metals obtained during the process of extracting and processing the primary ore-body. CAS is accounted for on an accrual basis and excludes Depreciation and amortization and Reclamation and remediation, which is consistent with our presentation of CAS on the Condensed Consolidated Statements of Operations. In determining AISC, only the CAS associated with producing and selling an ounce of gold is included in the measure. Therefore, the amount of gold CAS included in AISC is derived from the CAS presented in the Company’s Condensed Consolidated Statements of Operations less the amount of CAS attributable to the production of copper at our Phoenix and Boddington mines. The copper CAS at those mine sites is disclosed in Note 4 to the Condensed Consolidated Financial Statements. The allocation of CAS between gold and copper at the Phoenix and Boddington mines is based upon the relative sales value of gold and copper produced during the period.

Reclamation costs. Includes accretion expense related to Asset Retirement Obligation (“ARO”) and the amortization of the related Asset Retirement Cost (“ARC”) for the Company’s operating properties. Accretion related to the ARO and the amortization of the ARC assets for reclamation does not reflect annual cash outflows but are calculated in accordance with GAAP. The accretion and amortization reflect the periodic costs of reclamation associated with current production and are therefore included in the measure. The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.

Advanced projects, research and development and exploration. Includes incurred expenses related to projects that are designed to increase or enhance current production and exploration. We note that as current resources are depleted, exploration and advanced projects are necessary for us to replace the depleting reserves or enhance the recovery and processing of the current reserves. As this relates to sustaining our production, and is considered a continuing cost of a mining company, these costs are included in the AISC measure. These costs are derived from the Advanced projects, research and development and Exploration amounts presented in the Condensed Consolidated Statements of Operations less the amount attributable to the production of copper at our Phoenix and Boddington mines. The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.

General and administrative. Includes costs related to administrative tasks not directly related to current production, but rather related to support our corporate structure and fulfill our obligations to operate as a public company. Including these expenses in the AISC metric provides visibility of the impact that general and administrative activities have on current operations and profitability on a per ounce basis.

Other expense, net. Includes certain administrative costs to support current gold production. We exclude certain exceptional or unusual expenses from Other expense, net, such as restructuring, as these are not indicative to sustaining our current operations. Furthermore, this adjustment to Other expense, net is also consistent with the nature of the adjustments made to Net income (loss) attributable to Newmont stockholders as disclosed in the Company’s non-GAAP financial measure Adjusted net income (loss). The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.

Treatment and refining costs. Includes costs paid to smelters for treatment and refining of our concentrates to produce the salable metal. These costs are presented net as a reduction of Sales on our Condensed Consolidated Statements of Operations.

Sustaining capital. We determined sustaining capital as those capital expenditures that are necessary to maintain current production and execute the current mine plan. Capital expenditures to develop new operations, or related to projects at existing operations where these projects will enhance production or reserves, are generally considered development. We determined the classification of sustaining and development capital projects based on a systematic review of our project portfolio in light of the nature of each project. Sustaining capital costs are relevant to the AISC metric as these are needed to maintain the Company’s current operations and provide improved transparency related to our ability to finance these expenditures from current operations. The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.