Why did Newmont's financial profile change so much in 2002?

The February 2002 acquisitions of Normandy Mining and Franco-Nevada were the main driver. They added Australian production (Kalgoorlie, Yandal, Tanami, Pajingo), Turkey's Ovacik mine, New Zealand's Martha mine and a royalty portfolio. Results include the Normandy operations only from February 16, 2002, so 2003 should show a full year of contribution, but the acquisitions also substantially increased debt, goodwill and derivative liabilities.

How exposed is Newmont to its legacy gold hedges despite the no-hedging policy?

Newmont says it generally sells production at spot and is working to reduce the Normandy hedge books, which were cut by over 3 million ounces to about 6.6 million ounces at year-end 2002. The mark-to-market liability was $433 million, and a $1.00 move in the gold price changes that value by about $6.6 million. Most of the exposure sits at NYOL, which is non-recourse to Newmont but could face cash settlement obligations above its available funds if counterparties terminate early.

What do the 2003 divestitures mean for reserves and earnings?

Selling the TVX Newmont Americas interest and exchanging Echo Bay reduced reported equity reserves by about 3.7 million ounces, from 86.9 million to about 83.2 million. The transactions produced $180 million in cash and an approximately $90 million pre-tax gain on the Echo Bay exchange, and they remove the equity earnings and by-product contributions those interests had provided.

What risks should investors focus on beyond gold price movements?

Key risks include currency exposure (the Australian dollar strengthened about 5% in 2002, adding roughly $18.3 million to Australian operating costs), reliance on Indonesia and Peru where political and regulatory risks are elevated, the Ovacik mine's legal challenges in Turkey, the Carlin, Nevada labor contract that expired in September 2002, and a $268 million reclamation accrual plus $48 million of environmental remediation liabilities. The company also has $1.8 billion of debt, which it says it expects to service from operating cash flow.

NEM/NEMCL 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2003. Cited figures are marked; the original filing is the authoritative source.

Newmont Mining's 2002 10-K reflects a transformational year driven by the February 2002 acquisitions of Normandy Mining (Australia's largest gold company) and Franco-Nevada (a leading precious-metals royalty company), which together cost about $4.3 billion^a and added roughly $3.0 billion of goodwill.

Gold sales rose 54% to $2.57 billion^b, total revenues reached $2.75 billion (versus $1.67 billion in 2001), and net income applicable to common shares swung to $154.3 million ($0.42 basic per share) from a $54.1 million loss. Equity gold sales increased to 7.63 million ounces, average realized price rose to $313 per ounce, and total cash costs were $189 per ounce. Operating cash flow nearly doubled to $670.3 million.

Total assets more than doubled to $10.15 billion^c and debt rose to about $1.8 billion, though net debt fell as a share of capitalization. The filing also highlights significant risk and portfolio activity. Newmont maintains a stated 'no-hedging' philosophy, yet inherited Normandy hedge books with a mark-to-market liability of about $433 million at year-end 2002, most of it at the NYOL (Yandal) subsidiary, whose hedge counterparties can terminate contracts early.

Management is pruning non-core assets: it exchanged its Echo Bay stake for a 13.8% interest in the restructured Kinross and sold its 49.9% TVX Newmont Americas interest for $180 million^d in January 2003, and it is buying out minority holders in Newmont NFM and Otter Gold Mines. Proven and probable gold reserves stood at 86.9 million equity ounces, falling to about 83.2 million after the January 2003 divestitures, and the company guided to over $75 million in annual synergies from 2003.

For investors, the key trade-offs are a sharply larger, more diversified asset base and cash flow that benefits from higher gold prices, against higher leverage, legacy derivative exposure, Australian dollar cost pressure, and integration and reserve-replacement risk. The company also notes a restatement of several quarterly 2002 results and labor-contract risk at Carlin, Nevada.

02—Key points

Key Highlights

Revenue rose to $2.75 billion in 2002 from $1.67 billion, driven mainly by the Normandy acquisition and a higher realized gold price of $313/oz (vs. $271 in 2001).
Net income applicable to common shares of $154.3 million ($0.42 basic EPS) compared with a net loss of $54.1 million in 2001, aided by a $47.3 million Lihir gain and a roughly $90 million Echo Bay exchange gain booked in early 2003.
Operating cash flow increased to $670.3 million from $369.7 million, while total cash costs averaged $189 per equity ounce (vs. $184 in 2001).
Total assets nearly tripled to $10.15 billion, including about $3.0 billion of goodwill from the Normandy and Franco-Nevada acquisitions.
Normandy gold hedge books carried a $433 million negative mark-to-market at year-end 2002, with NYOL's $288 million exposure subject to counterparty early-termination rights, despite the company's stated no-hedging policy.
Portfolio rationalization continued: the TVX Newmont Americas stake was sold for $180 million and Echo Bay was exchanged for a 13.8% stake in Kinross, both closed January 31, 2003; minority buyouts in Newmont NFM and Otter Gold Mines are in progress.
Gold reserves totaled 86.9 million equity ounces at year-end 2002 (about 83.2 million excluding TVX Newmont Americas and Echo Bay), with 2003 capital spending guided at $560 to $590 million and synergies exceeding $75 million annually.

03—Questions

Frequently Asked Questions

Why did Newmont's financial profile change so much in 2002?
The February 2002 acquisitions of Normandy Mining and Franco-Nevada were the main driver. They added Australian production (Kalgoorlie, Yandal, Tanami, Pajingo), Turkey's Ovacik mine, New Zealand's Martha mine and a royalty portfolio. Results include the Normandy operations only from February 16, 2002, so 2003 should show a full year of contribution, but the acquisitions also substantially increased debt, goodwill and derivative liabilities.
How exposed is Newmont to its legacy gold hedges despite the no-hedging policy?
Newmont says it generally sells production at spot and is working to reduce the Normandy hedge books, which were cut by over 3 million ounces to about 6.6 million ounces at year-end 2002. The mark-to-market liability was $433 million, and a $1.00 move in the gold price changes that value by about $6.6 million. Most of the exposure sits at NYOL, which is non-recourse to Newmont but could face cash settlement obligations above its available funds if counterparties terminate early.
What do the 2003 divestitures mean for reserves and earnings?
Selling the TVX Newmont Americas interest and exchanging Echo Bay reduced reported equity reserves by about 3.7 million ounces, from 86.9 million to about 83.2 million. The transactions produced $180 million in cash and an approximately $90 million pre-tax gain on the Echo Bay exchange, and they remove the equity earnings and by-product contributions those interests had provided.
What risks should investors focus on beyond gold price movements?
Key risks include currency exposure (the Australian dollar strengthened about 5% in 2002, adding roughly $18.3 million to Australian operating costs), reliance on Indonesia and Peru where political and regulatory risks are elevated, the Ovacik mine's legal challenges in Turkey, the Carlin, Nevada labor contract that expired in September 2002, and a $268 million reclamation accrual plus $48 million of environmental remediation liabilities. The company also has $1.8 billion of debt, which it says it expects to service from operating cash flow.

04—Continue

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