01—Abstract
Summary
Summary of the 10-K/A filed October 26, 2006. Cited figures are marked; the original filing is the authoritative source.
Newmont's 10-K/A (Amendment No. 1 to the FY2005 Form 10-K, filed October 26, 2006) is a narrow amendment that adds disclosure on Exploration Segment goodwill ($1,126 milliona, about 99% of the segment's total assets) and its valuation model, responding to the goodwill impairment-testing disclosures.
It does not restate other items of the original March 2, 2006 filing. The core financials remain: 2005 revenues of $4,406 millionb, net income of $322 million ($0.72 per diluted share), and income from continuing operations of $374 million, down from $453 million in 2004. Gold sales were 8.55 million ounces at an average realized price of $441/oz, and costs applicable to sales rose to $236/oz from $216/oz.
The amendment's most important point for investors is the sensitivity of the goodwill case. The Exploration Segment valuation depends on perpetual reserve additions and more than 100% of its fair value sits in terminal value, with negative cash flows for roughly the first 10 years. Cutting the annual reserve addition and terminal growth rate from 5% to 4% would reduce its fair value by about $1.9 billionc.
In 2005 the company replaced 8.6 million ounces of depletion with 9.4 million ounces of additions, but the valuation assumed 8.6 million attributable ounces, so actual additions fell about 1.8 million ounces short of the prior-year assumption. Newmont also took a $41 milliond goodwill impairment on its Nevada unit in 2005. Balance-sheet and cash-flow strength is a positive.
Cash and equivalents reached $1,082 million, marketable securities and investments were substantial (the Canadian Oil Sands Trust stake alone was $650 million), and total debt rose to $1,929 million. Operating cash flow was $1,253 million from continuing operations. Key forward risks include Indonesian legal and ownership-dilution exposure at Batu Hijau, the Minahasa/Buyat Bay matter, Nevada and Yanacocha operating costs, and a required EITF 04-6 cumulative-effect charge of roughly $75 to $85 million to beginning 2006 retained earnings.
02—Key points
Key Highlights
- Revenue of $4,406M in 2005 was roughly flat versus $4,411M in 2004, while net income fell to $322M ($0.72/diluted share) from $443M, largely on a $41M Nevada goodwill impairment, $56M in Minahasa/Buyat Bay costs, and a $52M loss from discontinued operations.
- Goodwill of $2,879M (21% of total assets) is concentrated in the Exploration ($1,126M) and Merchant Banking ($1,562M) segments; the amendment discloses that the Exploration valuation relies heavily on terminal value and that a 1-point cut in the growth assumption would lower its fair value by about $1.9B.
- Gold production was 8.56M ounces, with consolidated costs applicable to sales rising to $236/oz from $216/oz; management guided 2006 gold sales to about 8.0M ounces at $280-285/oz.
- Reserves were 93.2M equity ounces of gold at year-end 2005 (up from 92.4M after 9.4M ounces of additions and 8.6M ounces of depletion), with the Conga and Ahafo projects in Peru and Ghana key to future growth.
- Liquidity was solid: $1,082M cash and $817M of short-term securities, with long-term equity investments (mainly Canadian Oil Sands Trust) valued at $917M; debt rose to $1,929M after issuing $600M of 5 7/8% notes due 2035.
- Batu Hijau faces a Contract of Work requirement to offer Indonesian parties an increasing stake through 2010, which could reduce Newmont's partnership ownership to 49%; the Buyat Bay criminal trial is expected to conclude in mid-2006.
- The company expects EITF 04-6 adoption on January 1, 2006 to reduce beginning retained earnings by about $75-85M, with no cash impact.
03—Questions
Frequently Asked Questions
Why did Newmont file this 10-K/A, and does it change the financial results?
The amendment was filed to add detail on Exploration Segment goodwill in Item 1, the goodwill risk factor, and the Critical Accounting Policies section. It does not restate the financial statements or other items of the March 2, 2006 original 10-K, and it does not reflect events after that date.
How much goodwill is at risk of impairment?
Goodwill totals $2,879M, of which $1,126M is in the Exploration Segment and $1,562M in Merchant Banking. The Exploration valuation is more than 100% terminal-value driven and has negative cash flows for about 10 years, so a lower reserve-addition or growth assumption could trigger a significant impairment. The company has not been required to perform Step 2 of the goodwill test for that segment.
What drove the decline in net income in 2005?
Income from continuing operations fell to $374M from $453M, and net income fell to $322M from $443M. Contributing factors included higher costs applicable to sales (gold cost per ounce up 9% to $236), a $41M Nevada goodwill write-down, $56M in Minahasa and Buyat Bay costs, $43M in long-lived asset write-downs, and a $52M loss from discontinued operations (Golden Grove and Holloway), partly offset by higher gold prices and $269M of other income.
What are the main risks to the company's outlook?
Key risks include gold and copper price declines (Newmont largely avoids hedging gold), rising operating costs in Nevada and Australia, Peruvian political and community opposition at Yanacocha, the Indonesian Buyat Bay litigation and potential Batu Hijau ownership dilution, and possible future goodwill impairments in the Exploration and Merchant Banking segments.
What does the company expect for 2006?
Management expects consolidated gold sales of about 8.0 million ounces at costs applicable to sales of $280-285/oz, capital expenditures of $1,350-1,500M, and exploration spending of $155-160M. Effective tax rate is expected at 30-34%, and gold sales are expected to decline about 3% in 2007 as Yanacocha output falls and some mines close.
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