How much did Newmont earn in 2003 and what drove the improvement?

Net income applicable to common shares was $475.7 million, or $1.16 per basic share, compared with $154.3 million in 2002 and a net loss of $54.1 million in 2001. The main driver was higher gold prices: the average realized price rose to $366 per ounce from $313, while full-year contributions from the 2002 Normandy and Franco-Nevada acquisitions added production. Income was also boosted by one-time items, including gains on the NYOL bond and hedge extinguishments ($114.0 million and $106.5 million), an $84.3 million gain on the Echo Bay exchange, and $97.0 million of foreign currency gains. These were partly offset by a $119.5 million loss on Australian Magnesium Corporation and a $30.0 million charge on the QMC debt guarantee.

Is Newmont exposed to gold price movements?

Yes, heavily. Newmont follows an unhedged philosophy and generally sells gold at market prices. The filing estimates that a $10-per-ounce change in the gold price would move cash flow from operations by about $55 million and net income by about $50 million in 2004. Copper is also significant through the Batu Hijau and Golden Grove operations: a $0.10-per-pound change would move net income by about $25.2 million. Because costs in Australian dollars are sensitive to the Australian dollar, a one-cent move in that currency changes total cash costs by roughly $0.85 per ounce.

What growth is expected in production and capital spending?

Management expects gold production of 7.0 to 7.5 million equity ounces per year through 2006. Capital expenditures are projected to rise to $700 million to $750 million in 2004, up from $501.4 million in 2003. Key projects include Leeville in Nevada (about 500,000 ounces per year starting late 2005), Phoenix in Nevada (400,000 to 450,000 ounces of gold and 18 to 20 million pounds of copper starting in 2006), and Ahafo in Ghana (about 500,000 ounces per year starting in 2006, with development costs of about $350 million). The Akyem project in Ghana faces a development decision in late 2004.

What are the main risks flagged in the filing?

Key risks include a sustained fall in gold prices, which could trigger write-downs, reserve reductions and project delays; goodwill impairment if the assumptions behind the 2002 and 2003 valuations are not achieved; and political and economic risk in foreign jurisdictions, especially Indonesia, Peru and Turkey. The Ovacik mine in Turkey faces court challenges over cyanide use that could force closure, and new Turkish VAT rules could lead to an impairment charge in early 2004. Environmental remediation liabilities could also exceed accruals, and several Nevada permits face appeals. Newmont carries about $1.1 billion of debt and does not insure against political risk.

What is the impact of consolidating Batu Hijau?

Newmont has identified the Batu Hijau operation in Indonesia as a variable interest entity and determined that it is the primary beneficiary. Beginning January 1, 2004, Newmont expects to consolidate Batu Hijau rather than account for it as an equity investee, which management states will have a material impact on reported operating and financial results. Previously, Newmont reported its economic share (56.25%) through equity income, which was $82.9 million in 2003. Consolidation will shift the mine's revenues, costs, debt (scheduled principal of about $86.7 million per year on third-party project debt) and minority interest onto Newmont's consolidated statements, so reported revenue and expenses will rise substantially even though the net economic interest is unchanged.

NEM/NEMCL 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.

Newmont Mining Corporation, the world's largest gold producer, closed 2003 with a sharp earnings recovery driven by higher gold prices.

Net income applicable to common shares rose to $475.7 million^a ($1.16 per basic share) from $154.3 million in 2002, on revenues of $3.21 billion (up 21%). Average realized gold price climbed to $366 per ounce from $313, while weighted-average total cash costs per equity ounce rose to $203 from $189. Equity gold sales were 7.38 million ounces, slightly below 2002 because of divestitures of non-core investments.

The balance sheet was substantially strengthened during the year. Newmont raised roughly $1.0 billion^b in a November 2003 equity offering, reduced long-term debt from $1.82 billion to $1.08 billion, and ended the year with $1.31 billion in cash. Stockholders' equity rose to $7.38 billion.

The company also substantially eliminated the Normandy-acquired gold hedge books, leaving it nearly unhedged, consistent with its stated policy. Looking forward, management expects gold production of 7.0 to 7.5 million equity ounces per year through 2006, with new projects at Leeville and Phoenix in Nevada and Ahafo in Ghana. Investors should weigh several items: the planned 2004 consolidation of Batu Hijau under FIN 46R, goodwill of about $3.0 billion^c dependent on assumptions about future gold prices and investment returns, the high sensitivity of earnings to gold prices, and ongoing legal and environmental matters, including challenges to the Ovacik mine in Turkey.

02—Key points

Key Highlights

Revenue rose 21% to $3.21 billion and net income applicable to common shares more than tripled to $475.7 million, or $1.16 per basic share, as the average realized gold price increased to $366 per ounce from $313.
Debt was cut by about $740 million to $1.08 billion, and the company ended 2003 with $1.31 billion in cash after a roughly $1.0 billion equity raise in November 2003.
Proven and probable gold reserves rose to 91.3 million equity ounces from 86.9 million, a 5% increase despite the divestiture of 4.2 million ounces of non-core reserves.
Total cash costs per equity ounce increased to $203 from $189, driven by Nevada and Australian cost increases and a stronger Australian dollar, which added about $76 million to U.S.-dollar costs in Australia.
The company largely unwound its Normandy gold hedge books; the mark-to-market liability fell from negative $433 million at year-end 2002 to about negative $12 million at year-end 2003.
Goodwill of about $3.0 billion (28% of total assets) is allocated to Merchant Banking, Exploration and mine sites, and depends on a $360 per ounce long-term gold price assumption; future impairment charges are possible.
Batu Hijau is expected to be consolidated effective January 1, 2004 under FIN 46R, which management expects to have a material impact on reported results.

03—Questions

Frequently Asked Questions

How much did Newmont earn in 2003 and what drove the improvement?
Net income applicable to common shares was $475.7 million, or $1.16 per basic share, compared with $154.3 million in 2002 and a net loss of $54.1 million in 2001. The main driver was higher gold prices: the average realized price rose to $366 per ounce from $313, while full-year contributions from the 2002 Normandy and Franco-Nevada acquisitions added production. Income was also boosted by one-time items, including gains on the NYOL bond and hedge extinguishments ($114.0 million and $106.5 million), an $84.3 million gain on the Echo Bay exchange, and $97.0 million of foreign currency gains. These were partly offset by a $119.5 million loss on Australian Magnesium Corporation and a $30.0 million charge on the QMC debt guarantee.
Is Newmont exposed to gold price movements?
Yes, heavily. Newmont follows an unhedged philosophy and generally sells gold at market prices. The filing estimates that a $10-per-ounce change in the gold price would move cash flow from operations by about $55 million and net income by about $50 million in 2004. Copper is also significant through the Batu Hijau and Golden Grove operations: a $0.10-per-pound change would move net income by about $25.2 million. Because costs in Australian dollars are sensitive to the Australian dollar, a one-cent move in that currency changes total cash costs by roughly $0.85 per ounce.
What growth is expected in production and capital spending?
Management expects gold production of 7.0 to 7.5 million equity ounces per year through 2006. Capital expenditures are projected to rise to $700 million to $750 million in 2004, up from $501.4 million in 2003. Key projects include Leeville in Nevada (about 500,000 ounces per year starting late 2005), Phoenix in Nevada (400,000 to 450,000 ounces of gold and 18 to 20 million pounds of copper starting in 2006), and Ahafo in Ghana (about 500,000 ounces per year starting in 2006, with development costs of about $350 million). The Akyem project in Ghana faces a development decision in late 2004.
What are the main risks flagged in the filing?
Key risks include a sustained fall in gold prices, which could trigger write-downs, reserve reductions and project delays; goodwill impairment if the assumptions behind the 2002 and 2003 valuations are not achieved; and political and economic risk in foreign jurisdictions, especially Indonesia, Peru and Turkey. The Ovacik mine in Turkey faces court challenges over cyanide use that could force closure, and new Turkish VAT rules could lead to an impairment charge in early 2004. Environmental remediation liabilities could also exceed accruals, and several Nevada permits face appeals. Newmont carries about $1.1 billion of debt and does not insure against political risk.
What is the impact of consolidating Batu Hijau?
Newmont has identified the Batu Hijau operation in Indonesia as a variable interest entity and determined that it is the primary beneficiary. Beginning January 1, 2004, Newmont expects to consolidate Batu Hijau rather than account for it as an equity investee, which management states will have a material impact on reported operating and financial results. Previously, Newmont reported its economic share (56.25%) through equity income, which was $82.9 million in 2003. Consolidation will shift the mine's revenues, costs, debt (scheduled principal of about $86.7 million per year on third-party project debt) and minority interest onto Newmont's consolidated statements, so reported revenue and expenses will rise substantially even though the net economic interest is unchanged.

04—Continue

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