01—Abstract
Summary
Summary of the 10-K filed February 21, 2008. Cited figures are marked; the original filing is the authoritative source.
Newmont Mining's FY2007 10-K shows a company in transition: a sharply higher gold price drove revenue to $5.5 billiona (up 13%), but a large non-cash charge pushed the company to a net loss of $1.9 billion, or $4.17 per share.
The loss was driven by a $1.665 billionb write-off of Merchant Banking goodwill, a $1.122 billion write-down of Exploration Segment goodwill, and a $531 million loss from settling price-capped forward sales contracts. Excluding these items, operations were considerably healthier. Gold sales fell to 6.2 million ounces from 7.2 million as lower grades at Nevada and Yanacocha offset the first full year at Ahafo, while average realized gold prices rose to $697 per ounce.
Costs applicable to sales rose to $406c per ounce from $303, reflecting cost inflation and Australian dollar strength. Management guides to 2008 gold sales of 5.9 to 6.4 million ounces and costs of $425 to $450 per ounce. The balance sheet and funding picture is more demanding.
Long-term debt rose to $2.9 billiond from $1.9 billion after the $1.15 billion convertible notes issuance and the approximately $991 million Miramar acquisition, which gives Newmont control of the Hope Bay project in Nunavut. Stockholders' equity fell to $7.5 billion from $9.3 billion. Management says operating cash flow is insufficient to fund planned 2008 capital expenditures of $1.8 to $2.0 billion, which points to possible new capital sources, asset sales or deferred projects.
The December 2007 sale of the royalty portfolio to new Franco-Nevada for $1.187 billion partly offset these needs. Key risks for investors include Indonesia's Batu Hijau. On February 11, 2008, the government's Department of Energy and Mineral Resources alleged breach of the Contract of Work over divestiture requirements and threatened termination.
Newmont disputes this and is considering international arbitration. The filing also flags an uncertain forest use permit that is needed by May 2008, plus ongoing political protests at Yanacocha, Peru. The Batu Hijau economic interest was reduced to 45% in May 2007 when the minority partner repaid its carried-interest loan.
02—Key points
Key Highlights
- Net loss of $1.886 billion ($4.17 per share) in 2007, versus net income of $791 million in 2006, driven mainly by $1.665 billion in Merchant Banking goodwill impairment and $1.122 billion in Exploration goodwill write-down
- Revenue rose 13% to $5.526 billion on an average realized gold price of $697/oz (up from $594), partly offset by lower volumes of 6.2 million oz versus 7.2 million oz
- Costs applicable to sales rose to $406/oz from $303/oz, citing labor and diesel inflation and Australian dollar strength; 2008 guidance is $425 to $450/oz
- Proven and probable gold reserves fell to 86.5 million equity ounces from 93.9 million, with depletion of 7.3 million oz and Ahafo cost-driven revisions of 2.4 million oz
- Long-term debt rose to $2.94 billion after a $1.15 billion convertible notes issuance and a roughly $991 million purchase of Miramar shares, which gives Newmont the Hope Bay project; management says operating cash flow is insufficient to fund planned 2008 capex of $1.8 to $2.0 billion
- Net cash from continuing operations fell 53% to $525 million, hit by the $578 million settlement of price-capped forward sales contracts and a $276 million Normandy tax settlement
- Indonesian government issued a February 11, 2008 default notice over Batu Hijau divestiture obligations, threatening Contract of Work termination; Newmont is evaluating international arbitration
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 21, 2008Financial Statements
| R&D Expenses | $62.00M |
| Operating Expenses | $5.84B |
| Operating Income | -$988.00M |
| Interest Expense | $118.00M |
| Net Income | -$1.90B |
05—Questions
Frequently Asked Questions
Why did Newmont report a large net loss in 2007 despite higher gold prices?
The loss came almost entirely from non-cash and one-time items. The largest were a $1.665 billion goodwill impairment tied to ceasing Merchant Banking, a $1.122 billion goodwill write-down for the Exploration segment (which management valued at negligible fair value after lowering its reserve growth assumption and raising the discount rate), and a $531 million loss on early settlement of price-capped forward sales contracts. Discontinued operations also contributed a $923 million loss, after the goodwill charge partly offset by the $905 million gain on the royalty portfolio sale.
What is the outlook for gold production and costs in 2008?
Management expects consolidated gold sales of 5.9 to 6.4 million ounces, lower mainly due to Australia and Batu Hijau. Costs applicable to sales are guided to $425 to $450 per ounce, reflecting industry cost pressure and the strong Australian dollar. Copper sales are expected at 345 to 365 million pounds at $1.30 to $1.40 per pound. Depreciation is expected at $725 to $775 million, and capital spending at $1.8 to $2.0 billion.
What are the main risks to Newmont's Indonesian operations?
Batu Hijau faces three issues. First, the government has alleged the Contract of Work divestiture obligations are unmet and threatened termination, though Newmont and Sumitomo dispute this. Second, the forest use permit (pinjam pakai), which has been under renewal discussion for over two years, must be received by May 2008 or operating and financial results could be adversely affected. Third, further divestiture obligations of 7% are due by March 2008, with a path toward 51% Indonesian ownership by 2010. Newmont's economic interest in the mine is 45%.
How is Newmont funding its growth capital program?
Operating cash flow of $525 million from continuing operations in 2007 was insufficient to cover planned 2008 capex and dividends. Funding sources include the $2.0 billion revolving credit facility (with $2.0 billion available at year-end), project financing, the July 2007 issuance of $1.15 billion of 1.25% and 1.625% convertible notes, and the December 2007 royalty portfolio sale for $1.187 billion. The filing notes that equity issuance, asset sales or deferred projects may be needed to keep the investment-grade rating.
What did Newmont gain from the Miramar acquisition?
Newmont acquired approximately 70% of Miramar Mining in late 2007 for about $991 million, bringing its stake to 78%, and reached 96% in January 2008 after buying about 40 million more shares at C$6.25 per share. Miramar controls the Hope Bay gold project in Nunavut, Canada, which Newmont describes as a potential new core gold district in a AAA-rated country. The purchase price allocation is preliminary, and Miramar was excluded from the 2007 internal control assessment.
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