Why did Newmont's net income decline in 2005 even though gold prices rose?

Gold prices averaged $441 per ounce, up from $412, but several items offset the benefit: a $41 million Nevada goodwill impairment, $111 million of other expenses (including $56 million for Minahasa and Buyat Bay legal and environmental costs), a $52 million loss from discontinued operations, higher costs applicable to sales ($236 versus $216 per ounce), a $30 million tax valuation allowance, and 3% fewer gold ounces sold.

How much cash did Newmont generate, and where did it go?

Net cash from continuing operations was $1.25 billion. Roughly $1.23 billion went to capital expenditures, principally Nevada (Phoenix, Leeville, power plant) and Ahafo in Ghana, and $365 million went to dividends, $179 million to common shareholders and $186 million to minority interests. Newmont also issued $583 million of net new debt and sold assets including Golden Grove, Ovacik, and Mezcala for about $226 million in total proceeds.

What is the risk that Newmont must sell part of its Batu Hijau interest?

Under the Indonesian Contract of Work, a portion of the project must be offered to the Indonesian government or nationals each year from 2005 to 2010. An Indonesian national already holds 20%, requiring a 3% offering in 2006. If the cumulative requirement is met, the Newmont/Sumitomo partnership's ownership could fall to 49% by the end of 2010. The offer price is set at the highest of replacement cost, Jakarta listing value, or fair market value.

What should investors expect for 2006?

Management guides to about 8.0 million consolidated gold ounces sold at costs applicable to sales of $280-285 per ounce, capital expenditures of $1.35-1.5 billion before the Boddington stake acquisition, exploration of $155-160 million, and depreciation of $740-780 million. Ahafo (Ghana) is expected to start production in mid-2006, Phoenix in mid-2006, and Akyem in the second half of 2008. Gold sales are expected to decline about 3% in 2007 as Yanacocha and some Canadian and Nevada mines wind down.

Are there outstanding regulatory or legal matters that could affect the stock?

Yes. The criminal trial over alleged pollution at Buyat Bay in Indonesia is expected to conclude in mid-2006, though a civil suit was settled on February 16, 2006 with a $30 million funding commitment. The SEC sent comment letters in December 2005 and February 2006 on goodwill valuations for the Exploration and Merchant Banking segments. Shareholder class actions and derivative suits filed in 2005 remain pending. The Peru national election in 2006 and the Nevada Sierra Club-type challenges to permits add further uncertainty.

NEM/NEMCL 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 2, 2006. Cited figures are marked; the original filing is the authoritative source.

Newmont Mining (NYSE: NEM) closed 2005 as one of the world's largest gold producers, the only gold company in the S&P 500, with 8.55 million consolidated gold ounces sold, a 52.875%^a economic interest in Batu Hijau (Indonesia), and a Denver headquarters.

Net income fell to $322 million^b ($0.72 per diluted share) from $443 million in 2004, while revenues were roughly flat at $4.41 billion. Earnings were pressured by a $41 million Nevada goodwill impairment, $111 million in other expenses (including Minahasa/Buyat Bay costs of $56 million and reclamation charges), a $52 million loss from discontinued operations (Golden Grove and Holloway), and a $30 million valuation allowance on foreign tax credits. Higher costs (gold costs applicable to sales rose to $236 per ounce from $216) and a 3% decline in gold sales offset most of the benefit of a higher average realized gold price of $441 per ounce.

Balance-sheet and cash-flow picture: operating cash flow from continuing operations was $1.25 billion^c, but capital expenditures of $1.23 billion (led by Nevada and Ahafo in Ghana) and $365 million of dividends to common and minority holders absorbed most of it. Total debt rose to $1.93 billion from $1.60 billion after issuing $600 million of 5 7/8% notes due 2035, while cash and equivalents reached $1.08 billion. Stockholders' equity grew to $8.38 billion, helped by a $282 million unrealized gain on equity securities, principally Canadian Oil Sands Trust.

Management guides to about 8.0 million ounces of 2006 gold sales at $280^d-285 per ounce in costs and capital spending of $1.35-1.5 billion, with the Ahafo and Akyem projects in Ghana, the Phoenix and Leeville projects in Nevada, and the Boddington expansion as the main growth drivers. Key risks for investors include the Indonesian Buyat Bay pollution prosecution (trial expected to conclude mid-2006), a civil settlement signed February 2006, a required partial sale of Batu Hijau to Indonesian parties that could reduce Newmont's stake to 49% by 2010, SEC comment letters on goodwill valuation of the Exploration and Merchant Banking segments, a Peru presidential election in 2006 affecting Yanacocha, and shareholder class and derivative actions filed in 2005. Management's 2006 accounting change under EITF 04-6 is expected to reduce beginning retained earnings by $75-85 million.

02—Key points

Key Highlights

Net income of $322 million ($0.72 per diluted share) fell 27% from $443 million in 2004, reflecting goodwill impairment, higher costs, and discontinued operations losses.
Gold sales were 8.55 million ounces, down 3%, while the average realized gold price rose to $441 per ounce from $412, and gold revenue net of treatment charges reached $3.73 billion.
Costs applicable to sales per gold ounce rose to $236 from $216, driven by Nevada and Australia/New Zealand cost inflation and a stronger Australian dollar.
Operating cash flow from continuing operations was $1.25 billion, while capital expenditures were $1.23 billion, leaving thin free cash flow after $365 million of dividends.
Total debt increased to $1.93 billion after issuing $600 million of 5 7/8% notes due 2035; cash and equivalents rose to $1.08 billion.
Proven and probable gold reserves ended 2005 at 93.2 million equity ounces, up from 92.4 million, after 9.4 million ounces of additions against 8.6 million of depletion and divestitures.
Key legal and regulatory exposures include the Buyat Bay criminal trial in Indonesia, a 2006 Peru election affecting Yanacocha, potential Batu Hijau ownership dilution to 49% by 2010, and SEC comment letters on goodwill.

03—Questions

Frequently Asked Questions

Why did Newmont's net income decline in 2005 even though gold prices rose?
Gold prices averaged $441 per ounce, up from $412, but several items offset the benefit: a $41 million Nevada goodwill impairment, $111 million of other expenses (including $56 million for Minahasa and Buyat Bay legal and environmental costs), a $52 million loss from discontinued operations, higher costs applicable to sales ($236 versus $216 per ounce), a $30 million tax valuation allowance, and 3% fewer gold ounces sold.
How much cash did Newmont generate, and where did it go?
Net cash from continuing operations was $1.25 billion. Roughly $1.23 billion went to capital expenditures, principally Nevada (Phoenix, Leeville, power plant) and Ahafo in Ghana, and $365 million went to dividends, $179 million to common shareholders and $186 million to minority interests. Newmont also issued $583 million of net new debt and sold assets including Golden Grove, Ovacik, and Mezcala for about $226 million in total proceeds.
What is the risk that Newmont must sell part of its Batu Hijau interest?
Under the Indonesian Contract of Work, a portion of the project must be offered to the Indonesian government or nationals each year from 2005 to 2010. An Indonesian national already holds 20%, requiring a 3% offering in 2006. If the cumulative requirement is met, the Newmont/Sumitomo partnership's ownership could fall to 49% by the end of 2010. The offer price is set at the highest of replacement cost, Jakarta listing value, or fair market value.
What should investors expect for 2006?
Management guides to about 8.0 million consolidated gold ounces sold at costs applicable to sales of $280-285 per ounce, capital expenditures of $1.35-1.5 billion before the Boddington stake acquisition, exploration of $155-160 million, and depreciation of $740-780 million. Ahafo (Ghana) is expected to start production in mid-2006, Phoenix in mid-2006, and Akyem in the second half of 2008. Gold sales are expected to decline about 3% in 2007 as Yanacocha and some Canadian and Nevada mines wind down.
Are there outstanding regulatory or legal matters that could affect the stock?
Yes. The criminal trial over alleged pollution at Buyat Bay in Indonesia is expected to conclude in mid-2006, though a civil suit was settled on February 16, 2006 with a $30 million funding commitment. The SEC sent comment letters in December 2005 and February 2006 on goodwill valuations for the Exploration and Merchant Banking segments. Shareholder class actions and derivative suits filed in 2005 remain pending. The Peru national election in 2006 and the Nevada Sierra Club-type challenges to permits add further uncertainty.

04—Continue

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