Why did Newmont's earnings rise so sharply despite lower gold production?

Earnings were driven mainly by price. The average realized gold price increased by about $158/oz, adding roughly $1.1B to gold sales, which more than offset the roughly $505M revenue loss from lower ounces sold. Pre-tax other income also rose, including the $266M gain on the Alberta Oil Sands sale. Net income was $791M, compared with $322M in 2005.

What is the outlook for production and costs in 2007?

Management expects gold sales of 6.1 to 6.6 million ounces, down from 7.36 million in 2006, mainly due to lower output at Yanacocha and Australia and the closure of Lone Tree and Golden Giant. Costs applicable to sales per ounce are expected to be about 25% higher than in 2006, driven by lower volumes and higher labor, consumables and energy prices, with additional risk from power shortages in Ghana.

How is Newmont funding its large capital program?

Capital expenditures of $1.8 to $2.0B are planned for 2007, including Boddington, the Nevada power plant and the Yanacocha gold mill. Management states that operating cash flow, existing cash, the $1.25B revolving credit facility and project financing will fund these needs, but it also notes that new capital sources may be required at current metal prices and that a funding shortfall could constrain dividends and new projects.

What are the most significant legal and political risks?

The main risks are the Buyat Bay criminal case in Indonesia, where prosecutors sought a three-year sentence for the President Director and a verdict is expected in Q2 2007; the possible reduction of Newmont's Batu Hijau stake to 49% under Indonesia's Contract of Work by 2010; the $101M write-off of Zarafshan in Uzbekistan, which is subject to international arbitration; and political and fiscal pressure in Peru, including a new 3.75% net profit royalty and continuing community protests.

Is Newmont's goodwill at risk of impairment?

Goodwill totals $3.0B, about 19% of total assets, and is mainly allocated to the Exploration ($1.13B) and Merchant Banking ($1.66B) segments. The Exploration valuation relies on sustained reserve additions, and about 100% of its fair value sits in terminal value. Management says a reduction in the terminal growth rate from 4% to 3% would reduce fair value by about $1B. Reserve additions fell short of assumptions in 2005 and 2006, so an impairment charge is a meaningful possibility.

NEM/NEMCL 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 2007. Cited figures are marked; the original filing is the authoritative source.

Newmont Mining's 2006 10-K shows a year of strong pricing offset by operational setbacks.

Revenue rose 15% to $4,987 million^a and net income reached $791 million ($1.75 diluted EPS), versus $322 million in 2005. The gain was driven by an average realized gold price of $599/oz (up from $441) and a $266 million pre-tax gain on the Alberta Oil Sands sale. Gold sales fell 13% to 7.36 million ounces, mainly from lower grades and throughput at Yanacocha, Batu Hijau and Australia, and copper sales fell 24% to 435 million pounds.

Costs applicable to sales per ounce rose to $304^b from $237, and DD&A was broadly flat at $636 million. Management's outlook for 2007 is weaker on volumes and costs. Gold sales are guided to 6.1 to 6.6 million ounces, and costs applicable to sales per ounce are expected to rise about 25%.

Capital expenditures are planned at $1.8 to $2.0 billion^c, largely for Boddington, the Nevada power plant and the Yanacocha mill, and the company expects new capital sources to be needed. Proven and probable gold reserves were 93.9 million equity ounces at year-end, up slightly, but exploration replaced only about 5.9 million ounces against 8.9 million depleted, and the company recorded a $101 million loss on the expropriation of its Zarafshan joint venture in Uzbekistan.

Balance sheet strength is solid: cash was $1.17 billion^d, total debt $1.91 billion, and stockholders' equity $9.34 billion. Key risks flagged include Indonesian legal exposure from the Buyat Bay case, where a verdict is expected in Q2 2007, political risk in Peru and Indonesia, a Batu Hijau divestiture obligation that could reduce Newmont's stake to 49% by 2010, and goodwill of $3.0 billion (19% of assets) that depends on reserve replacement assumptions.

02—Key points

Key Highlights

Revenue up 15% to $4,987M; net income $791M, or $1.75 diluted EPS, versus $322M in 2005
Average realized gold price rose to $599/oz from $441/oz, while gold sales volume fell 13% to 7.36M oz
Costs applicable to sales per gold ounce rose to $304 from $237 on lower production and higher labor and energy costs
2007 guidance: gold sales of 6.1 to 6.6M oz, with cost per ounce expected to rise about 25%
Capex planned at $1.8 to $2.0B for 2007, including Boddington, the Nevada power plant and the Yanacocha mill
Gains of $266M from the Alberta Oil Sands sale were offset by a $101M Zarafshan expropriation loss and a $40M debt extinguishment loss
Year-end cash of $1.17B and total debt of $1.91B; stockholders' equity of $9.34B

03—Questions

Frequently Asked Questions

Why did Newmont's earnings rise so sharply despite lower gold production?
Earnings were driven mainly by price. The average realized gold price increased by about $158/oz, adding roughly $1.1B to gold sales, which more than offset the roughly $505M revenue loss from lower ounces sold. Pre-tax other income also rose, including the $266M gain on the Alberta Oil Sands sale. Net income was $791M, compared with $322M in 2005.
What is the outlook for production and costs in 2007?
Management expects gold sales of 6.1 to 6.6 million ounces, down from 7.36 million in 2006, mainly due to lower output at Yanacocha and Australia and the closure of Lone Tree and Golden Giant. Costs applicable to sales per ounce are expected to be about 25% higher than in 2006, driven by lower volumes and higher labor, consumables and energy prices, with additional risk from power shortages in Ghana.
How is Newmont funding its large capital program?
Capital expenditures of $1.8 to $2.0B are planned for 2007, including Boddington, the Nevada power plant and the Yanacocha gold mill. Management states that operating cash flow, existing cash, the $1.25B revolving credit facility and project financing will fund these needs, but it also notes that new capital sources may be required at current metal prices and that a funding shortfall could constrain dividends and new projects.
What are the most significant legal and political risks?
The main risks are the Buyat Bay criminal case in Indonesia, where prosecutors sought a three-year sentence for the President Director and a verdict is expected in Q2 2007; the possible reduction of Newmont's Batu Hijau stake to 49% under Indonesia's Contract of Work by 2010; the $101M write-off of Zarafshan in Uzbekistan, which is subject to international arbitration; and political and fiscal pressure in Peru, including a new 3.75% net profit royalty and continuing community protests.
Is Newmont's goodwill at risk of impairment?
Goodwill totals $3.0B, about 19% of total assets, and is mainly allocated to the Exploration ($1.13B) and Merchant Banking ($1.66B) segments. The Exploration valuation relies on sustained reserve additions, and about 100% of its fair value sits in terminal value. Management says a reduction in the terminal growth rate from 4% to 3% would reduce fair value by about $1B. Reserve additions fell short of assumptions in 2005 and 2006, so an impairment charge is a meaningful possibility.

04—Continue

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