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Anders Pauley

Vincent McPhillip

NEM AT A GLANCE

P/E ► 27.4 LOW EV/EBITDA ► 10.9 HIGH ROA ► 4.8% AVG ROE ► 8.1% AVG Debt to Equity ► 0.941 AVG Current Ratio ► 2.13 HIGH Interest Coverage Ratio ► 8.61 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses Research & DevelopmentSG&AAmortization & Depreciation

Newmont Mining Corporation (NYSE: NEM) is the world's second largest gold producer by ounces produced. The company has mining operations in the United States, Australia, Africa, and several other international locations.^[1] Although Newmont maintains silver, copper, and zinc operations, gold accounted for 78% of Newmont's net income in 2007.^[1] Newmont ended that year with gold reserves, or un-mined gold still in the ground, of 86.5 million ounces^[1] and sales of 6.2 million ounces of gold that generated over $4 billion in net revenue.^[2]

Since 2001, Newmont's revenues have benefited from rapidly rising gold prices, which have gone from $271 per ounce in 2001 to as high as $875 per ounce in the first quarter of 2008.^[3] High gold prices have fattened the company's operating margins, resulting in record earnings. Newmont's total gold production, however, decreased 9% between 2005 and 2007 because the company's larger, more mature mines dropped off in production capacity (due to low ore grades from the remaining metals in the mine) at a time when virtually no new discoveries were made across the mining industry.^[4] Newmont depletes its reserves at 10 ounces a minute and needs a replacement discovery rate of near 14 ounces a minute, which is problematic since the gold industry is spending more and more on exploration without discovering reserves as large as it used to - only 4 percent of gold deposits in the world hold more than five million ounces. ^[5]

Newmont's operating costs increased 28% in 2006 and continued to increase in 2007 as a result of rising labor, energy, and raw material costs.^[6] The company also faced political issues and lawsuits that resulted in loss of its operations in Uzbekistan and the eventual loss of its operations in Indonesia by 2010, and saw declines in sales volume for both gold and copper. ^[6] Newmont began 2008 with a first quarter net revenue of $40 million, well behind two of its major competitors, Barrick Gold Corporation (ABX) and Gold Fields, Ltd. (GFI).^[4]

[edit] Company Overview

Newmont Gold Sales 2005-2007

Newmont Copper Sales 2005-2007

Newmont 2007 Revenue by Region

Newmont is the world's second largest gold producer in terms of ounces produced, and gold sales made up 78% of its revenues in 2007.^[7] It sells gold for use in the production of jewelry, electronics, dental equipment, industrial and decorative products, medals, medallions, and official coins, or as gold bullion for gold investors. Newmont is also involved in copper production, which makes up the majority of its earnings after gold sales, at about 22% of net revenues in 2007.^[1] Newmont's copper supply is composed of both current production and recycled scrap, which Newmont refines to sell for use in wire and cable products, consumer electronics, brass production, and many other electronic and mechanical uses.^[1]

[edit] Business and Financial Metrics

• Although rising gold prices have increased Newmont's net revenues, its gold and copper sales' volumes have each dropped around 25% since 2005^[2] and Newmont has predicted (and is on track to reach) gold sales at least 11% lower in 2008.^[8]
• Gold and copper production remained steady between 2006 and 2007; however,gold production has dropped 9% since 2005 and it remains up to Newmont's exploration projects and new operations or acquisitions to stimulate production and maintain its reserves (un-mined gold still in the ground), which dropped by 7.4 million ounces between 2006 and 2007.^[9] This may prove difficult in spite of the record gold price increases and massive amounts of money spent on gold exploration in the 2000s, since global mine production dropped 6.4% in 2007 and "virtually no new discoveries" have been made.^[10]
• Newmont's total sales revenues for 2007 were up 30% from 2005, in spite of its lower sales volume, lower production, and increased operating costs due to the record gold prices of that year.^[2]
• Newmont's operating costs per ounce of gold mined have increased over 28% since 2005 and Newmont expects a continued increase both to maintain existing operations and to begin new ones. Newmont expects this to be especially true in areas where labor, fuel, and raw materials are more expensive and regulations more strict, such as Nevada, or in foreign countries with currencies that have become stronger than the dollar, such as Australia.^[7] Rising operating costs created difficulties for Newmont in Q1 2007 and led to a "significant decrease in revenue" (around 67%) that was only alleviated by rising gold prices as the year went on.^[11].

[edit] Business Segments

[edit] Gold (78% of sales):

In 2007, Newmont's gold additions decreased from the 5.9 million ounces of the previous year to 0.8 million net ounces, which did not match the 8.2 million ounces lost to depletion and divestitures during the year.^[1] This dropoff is attributable to a number of factors, which include the December 2007 sale of the Pajingo Operation in Australia, the reduction of Newmont's ownership interest in the Batu Hijau Operation in Indonesia from 52.87% to 45% as a result of a full loan repayment to a Newmont subsidary by the minority owner, and the slowing production of Newmont's more mature gold mines due to lower ore grades, which produce less gold per ton mined.^[1] Newmont's gold revenues, however, increased about 20% between 2005 and 2007, owing to the extremely high price of gold, even as sales volume decreased.^[2]

[edit] Copper Production (22% of sales):

Newmont's copper sales in 2007 dropped in volume by only 2% from those of 2006 (although overall copper sales have dropped 25% since 2005) and its net sales revenues increased by 45% owing to higher copper prices during the year, especially during the final deliveries of the copper collar contracts in February.^[2] Newmont's sole copper operation is in Indonesia at Batu Hijau.^[2] This fact has proven problematic for Newmont in the first two quarters of 2008, as conflicts with Indonesian government have threatened to further reduce Newmont's ownership in the mine.^[12] In May 2007, Newmont's ownership in the Batu Hijau Operation was decreased from a majority 52.75% to a plurality 45% after the operation's minority owner full repaid a loan from a Newmont subsidary.^[1] Newmont faces further losses in its copper operation since, under its Contract of Work, the local work unity, PT Newmont Nusa Tenggara, is required to sell 51% of its share to local investors.^[13] Although Newmont has sought arbitration, Newmont's Tengarra subsidary has agreed to complete its divestiture by 2010.^[14]

[edit] Production Regions

[edit] Nevada:

Newmont’s Nevada operations accounted for 29% of its total earnings in 2007, producing $1.6 billion worth in sales; however, its total production costs per ounce of gold were second only to Newmont’s Australia/New Zealand operations at $449 per ounce, up from $346 in 2005.^[6] This is attributable to the relatively high cost of labor in the United States, as well as the rising costs of energy and raw materials. The Nevada operations' production dropped off from 2007-2006 due to lower ore grades but was still up from 2005 production levels.^[6]

[edit] Indonesia:

Newmont’s Indonesia operations accounted for 28% of its 2007 revenues, turning out 548,000 ounces of gold and about 47 million pounds of copper.^[9] This level of production was down 31% from 2005 levels. Production costs in Indonesia were lower than those of Nevada or Australia/New Zealand; however, they too increased around 61% for gold and 107% for copper from 2005’s levels.^[9] Newmont has faced difficulties with their Indonesian operation, Batu Hijau, since May of 2007, when a loan repayment to a Newmont subsidary by the mine's minority owner reduced Newmont's share in the operation from a majority 52.87% to 45%.^[1] Newmont has also pledged to fulfill its obligation in its Contract of Work to sell 51% of its share of Batu Hijau by 2010.^[14] The decrease in Newmont's ownership will only decrease its copper production capabilities, since Batu Hijau is its sole source of the metal.

[edit] Peru:

Newmont’s mines in Peru produced 1.6 million ounces of gold in 2007, down 53% from 2005. These gold sales accounted for 20% of Newmont’s revenue in that year. Its production costs increased by about the same margin as its production decreased.^[9]

[edit] Australia/New Zealand:

Operations in Australia and New Zealand accounted for 15% of Newmont’s 2007 gross revenue, producing a little over a million ounces of gold. The strengthening of the Australian dollar in 2006 and 2007 has significantly increased Newmont’s operating costs there by around 47% since 2005.^[9]

[edit] Ghana:

Ghana accounted for only 6% of Newmont’s total revenue in 2007. Its production levels, however, more than doubled between 2006 and 2007, while its total production costs increased 25%.^[9]

[edit] Key Trends and Forces

[edit] The price of gold has a major impact on Newmont's revenues

Newmont's business depends on the realized price of gold and copper. Not only does the price of gold have a major effect on Newmont's revenues, but it also has an effect on the underlying value of Newmont's assets and untapped gold reserves. Since 2001, gold prices have risen steadily from around $275 per ounce to as high as $1,000 an ounce in early 2008.^[15] These prices, however, are subject to change as a result of gold sales and leasing by governments and central banks, the strength of the U.S. Dollar (USD), economic recessions, speculation, and decreased demand.^[15] In fact, in August 2008 a surge in the American dollar to a 6 month high against the Euro dropped gold prices below $800 an ounce, its lowest price since November 2007,^[16] and Newmont shares fell 3.2% with it as the prospect of more record profits dimmed.^[17] Newmont's lower production rates (down 9% between 2005 and 2007)^[4] and lower sales volumes (down 25% between 2005 and 2007 and on track to drop another 11% in 2008)^[18] make the price of gold increasingly important to the company's revenue.^[16] In addition to sales volume and production trends since 2005, Newmont's increasing production costs have also made profit margins slimmer^[19] and drops in gold prices like those in August 2008 can close the gap between operating costs and gold prices.

[edit] Newmont's continued gold and copper accumulation is dependent on the success of exploratory operations or acquisitions

Newmont and other gold companies work to keep production ahead of depletion and increase gold reserves to maintain flexibility in sales. Newmont's gold reserves dropped during 2007, resulting in a net loss of 7.4 million ounces of gold from its reserves.^[19] This depletion was a result of several factors. Newmont’s 2006 loss of its 50% share in the Zarafshan Operation in Uzbekistan following a change in tax laws in Uzbekistan that led the government to seek back taxes and penalties from Newmont brought production down the following year.^[11] The loss of Newmont's majority 52.87% share in the Batu Hijau Operation in Indonesia (now only 45%) as a result of the full repayment of a loan to a Newmont subsidary from the operation's minority owner also contributed to production loss.^[20] Finally, the decline in production of some of Newmont's more mature mines due to lower ore grades lessened production.^[1] Exploration operations can be long and, often, unproductive; in the end, they often come down to luck and circumstance. Even successful explorations take time and major startup costs to bring into production, during which time changes in revenues or company circumstances can inhibit their viability.^[19] Global mine production has dropped 6.4% in 6 years, with virtually no new discoveries being made and safety and pollution issues hampering efforts at existing mines.^[4] As Newmont's general manager for Australia Adriaan van Kersen has noted, "Newmont depletes its reserves at 10 ounces a minute and needs a replacement discovery rate of near 14 ounces a minute"^[21] in order to expand its reserves and produce gold for profit. The drop in global mine production will make it increasingly difficult for Newmont to maintain this rate of discovery.

[edit] Newmont's ability to expand and maintain operations is dependent on the levels of operating costs for labor, fuel, and raw materials

Operating costs have increased across the mining industry since 2001, owing to the rising prices of oil, steel, commodities, and labor.^[22] Newmont's production per ounce of gold rose over 66% between 2005 and 2007.^[9] 2008, higher than expected operating costs in Nevada and Peru has been balanced out by lower than expected costs in Australia/New Zealand and Ghana.^[23] Newmont only expects operating costs to increase in the coming years due to the rising prices of oil, commodities, exploration, and labor^[6] and has made controlling operating costs the focus of its 2008 strategy^[23] (with mixed results, since Newmont began 2008 with a first quarter net revenue of $40 million, well behind two of its major competitors, Barrick Gold Corporation (ABX) and Gold Fields, Ltd. (GFI).^[4]

[edit] Newmont’s expansion and efficiency in extracting gold and copper are affected by environmental laws and regulations

Newmont’s operation domestically and abroad are governed by increasingly prevalent and stringent environmental protection laws. Newmont is noted for owning three of the ten most polluting mines in the United States based on tons of waste produced.^[24] Newmont could face production restrictions and cash penalties if punished for its pollution levels and has faced the possibility in the past. Newmont dodged investigations of its operations for environmental crimes in Indonesia in April 2007^[25] and in Peru in 2005^[26]; however, penalties for violations will have an adverse effect on Newmont’s earnings if investigations lead to successful lawsuits in the future.^[19] Newmont runs a continual risk of running afoul of environmental laws, just as any mining company does. A 2001 EPA report revealed that mines produced 45% of all pollution in their their Toxic Release Reporting System while accounting for only 0.36% of all industrial facilities.^[27]

[edit] Newmont's operations abroad are subject to the hazards of international business

Newmont lists among the risks of carrying out operations abroad: changes in foreign laws and regulations, expropriation of nationalization of property, currency fluctuations (such as that with the Australian dollar), import and export regulations and restrictions (especially on gold).^[19] Newmont has had past issues with these risks. In June 2006 Newmont was forced to give up their 50% share of a joint operation with Zarafshan in Uzbekistan to the Uzbekistani government following a change in tax laws that led the Uzbek government to demand $48 million from Newmont for back taxes and penalties for the period 2002-2005.^[1] Newmont was also forced to reduce its majority 52.87% ownership share in its Indonesian operation to 45% when a Newmont Subsidiary | subsidary]] was repaid by the minority owner of the Batu Hijau Operation for a loan.^[1] Newmont has also had issues with the Indonesian government, which has demanded that it complete making divestitures of 51% of its holdings to the Indonesian government or parties of its choosing by 2010 as per its contract of work with the government,^[13] further reducing its ownership over its sole copper production facility (which makes up 22% of company profits). Lawsuits against Newmont in Indonesia^[25] for violation of environmental protection laws have ended in Newmont victories but reveal the possibilties for difficulty in Newmont's future.

[edit] Competition

Newmont is among the top three gold producers in the world in overall gold production, facing off against AngloGold Ashanti (AU) and Barrick Gold Corporation (ABX) with fourth-largest gold producer, Gold Fields, Ltd. not far off.

Barrick Gold Corporation (ABX): Only Barrick has generated more revenue than Newmont in previous years.^[28] Powered by some well-received acquisitions in 2007 and maintaining a good average between the price it receives for gold and the current market price for gold, Barrick has had excellent first quarter net income for 2008 at $1.8 billion, as compared to Newmont’s lackluster $41 million.^[4]

AngloGold Ashanti (AU): AngloGold’s earnings have tapered off of late due to a number of factors. Difficulties matching realized gold prices with market prices, the struggle with the African power crisis, and major increases in production costs have led to losses, with AngloGold’s net losses for the first quarter of 2008 at $1.6 billion.^[4]

Gold Fields, Ltd. (GF): Gold Fields, Ltd. operates major gold mines in South Africa, the earnings from which account for nearly 78% of its earnings. Much like AngloGold, Gold Fields (GFI) has had to face the issues of the African power crisis. Additionally, GFI’s mines in Africa are aging and production has lagged since the mid-1990’s, dropping a steady 9% since 2005.^[29] The high costs of African operations have indebted many of GFI’s operations there and GFI depends on high gold prices to continue to create revenue. Thus far, GFI has been fortunate as gold prices have remained high and their quarter one earnings for 2008 stand at around half a billion dollars.^[28]

[edit] References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12} NEM 2007 10k - Item 1: Business, page 4
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9} NEM 2007 10-k - Item 7: Management Discussion, page 47
3. ↑ Yahoo Finance Gold Overview
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} Seeking Alpha, "All That Glitters: The Top Three Gold Producers," 5/11/08
5. ↑ Reuters, "Newmont says gold discoveries getting tougher," 4/2/2008
6. ↑ ^{6.0 6.1 6.2 6.3 6.4} Newmont 2006 10k- Letter to Shareholders
7. ↑ ^{7.0 7.1} Reuters, "Newmont Mining Corp (New York Stock Exchange),"
8. ↑ Gold Mining News, "Newmont Mining reiterates 2008 gold sales guidance of 5.1 million to 5.4 million ounces," 7/25/08
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5 9.6} Newmont Annual Report, Item 2: Properties, page 26
10. ↑ Mineweb, "Barrick concerned about lack of new gold industry discoveries, drop in global mine production," 5/7/08
11. ↑ ^{11.0 11.1} Resource Investor, "Newmont Sees Significant Revenue Drop as Costs Increase," 4/26/07
12. ↑ Mineweb, "Indonesia threatens to revoke Newmont's Batu Hijau copper/gold mine contract," 2/14/08
13. ↑ ^{13.0 13.1} Mineweb "Newmont feels Batu Hijau copper gold project divestment being undermined," 3/1/08
14. ↑ ^{14.0 14.1} Mineweb, "Newmont finally has good news, and a substantial increase in net profit 4/25/08
15. ↑ ^{15.0 15.1} USA Gold, "Historical Gold Prices"
16. ↑ ^{16.0 16.1} Reuters, "GLOBAL MARKETS-Dollar surge knocks down commodities, stocks rise," 8/15/08
17. ↑ The Wall Street Journal, "Gold Futures Tumble Down 'Metals' Stand," 8/17/08
18. ↑ Gold Mining News, "Newmont Mining reiterates 2008 gold sales guidance of 5.1 million to 5.4 million ounces," 7/25/08
19. ↑ ^{19.0 19.1 19.2 19.3 19.4} NEM 2007 10-k - Item 1A: Risk Factors, page 9
20. ↑ Mineweb, "Indonesia threatens to revoke Newmont's Batu Hijau copper/gold mine contract," 2/14/08
21. ↑ Reuters, "Newmont says gold discoveries getting tougher," 4/2/2008
22. ↑ Economic News, "PwC Reports High Mining Profits Undercut by Rising Operating Costs," 6/17/08
23. ↑ ^{23.0 23.1} Newmont News Release, "Newmont's Second Quarter Adjusted Net Income(1) Rises to $230 Million ($0.51 per Share); Nevada Power Plant and Yanacocha Gold Mill in Commercial Production," 7/24/08
24. ↑ The Daily Green, "Mining Companies Use Your Land for Free, and You Pay to Clean Up: Top 10 Most Polluting Mines," 12/11/07
25. ↑ ^{25.0 25.1} The New York Times, "Indonesian Court Acquits Newmont Mining," 4/25/07
26. ↑ Daily Grist, "Things to Do in Denver When You're Ill: Newmont Mining fights off lawsuit over mercury pollution in Peru," 3/14/05
27. ↑ Environmental Working Group, "Who Owns the West?"
28. ↑ ^{28.0 28.1} Yahoo Finance Chart - NEM and Competitors
29. ↑ ^{29.0 29.1 29.2} GFI 2007 - 20-f Item 5: Operating Financial Review and Employees, page 140
30. ↑ ABX 2007 40-f Item 1: General, page 11
31. ↑ AngloGold Ashanti, "Annual Report 07: Financial Statements"
32. ↑ AngloGold Ashanti, "Annual Report '07 Overview"
33. ↑ AngloGold Ashanti, "Annual Report '07 Overview"
34. ↑ Mineweb, "AngloGold reports 335 U.S. cents loss per share in Q2," 7/31/08
35. ↑ Morningstar, "AU: AngloGold Ashanti Stock Report"
36. ↑ The Gold Report, "Gold Fields, Ltd.,"
37. ↑ Trading Markets, "Gold Fields Improves Operational Performance Due to Stabilization of Power Supplies in South Africa," 8/1/08
38. ↑ Google Finance, "Gold Fields, Ltd."