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Newmont Mining Corporation (NEM) |
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WIKI ANALYSIS
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] Newmont also maintains silver, copper, and zinc operations.[1] With gold prices rising in 2009 by 12%, Newmont's revenues increased by 26% to a record $7.7 billion.[2]
Newmont's proven equity gold reserves increased by 8% in 2009 to 91.8 million ounces, while its equity copper reserves increased by 17% to 9.1 billion pounds.[2] Nearly 83% of Newmont's 2009 sales were from gold, while the remaining 17% of sales were from copper.[2]
Gold is widely considered to be an effective hedge against inflation, which means that when the dollar depreciates, demand for gold increases. In addition, during times of economic and political uncertainty, the demand for gold rises due to its high intrinsic value and relative stability. Moreover, the introduction of gold ETFs and the increasing wealth in emerging markets, such as China, India, and Latin America have contributed to rising demand for gold. Newmont reported a 105% increase in net income and a 46% increase in sales from 2008 to 2009. The sharp increase in net income and sales is largely attributable to the 22% increase in the average realized gold price during 2009.
Company Overview
Newmont is the world's second largest gold producer in terms of ounces produced, and gold sales make up 83% of its revenues.[3] 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 17% of net revenues.[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]
Business and Financial Metrics
First Quarter 2010 Results[4]
Newmont reported adjusted net income of $408 million ($0.83 per share) compared to $199 million ($0.42 per share) in the prior year quarter. Sales totaled $2.2 billion, an increase of 46% over the first quarter of 2009. The sharp increase in net income is largely attributable to the 22% increase in the average realized gold price and an increase in Newmont's operating margin to 32% to $626 per ounce.
Newmont announced equity gold production for the quarter of 1.3 million ounces with an average realized gold price was $1,106 per ounce. Costs applicable to sales for gold were $480 per ounce. Newmont's gold operating margin was 57%, up from 52% in the first quarter of 2009.
Copper production totaled 90 million pounds. The average realized copper price was $3.33 per pound. Costs applicable to sales for copper were $0.78 per pound.
Business Segments
Gold (83% 2009 of sales):
Newmont reported gold sales of 6.5 million ounces (5.3 million equity ounces) in 2009.[2] Of Newmont's 2009 gold sales, approximately 32% came from North America, 32% from South America, 28% from Asia Pacific and 8% from Africa.[2] Most of Newmont's gold revenue comes from the sale of refined gold in the international market. The end product at gold operations, however, is generally doré bars. Doré is an alloy consisting primarily of gold but also containing silver and other metals. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% gold.[2]
Gold is generally used for fabrication or investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions, and coins.
A combination of current mine production and draw-down of existing gold stocks held by governments, financial institutions, industrial organizations and private individuals make up the annual gold supply. Based on public information available for the years 2006 through 2009, on average, current mine production has accounted for approximately 71% of the annual gold supply.[2]
Copper Production (17% of 2009 sales):
Newmont reported copper sales of 507 million pounds (226 million equity pounds) in 2009.[2] Copper production at Batu Hijau, in Indonesia, and Boddington, in Australia, is in the form of saleable concentrate that is sold to smelters for further treatment and refining. At December 31, 2009, Newmont had a 35.44% ownership interest but reported a 52.44% economic interest in the Batu Hijau operation in Indonesia, which began production in 1999.[2]
Refined copper is incorporated into wire and cable products for use in the construction, electric utility, communications and transportation industries. Copper is also used in industrial equipment and machinery, consumer products and a variety of other electrical and electronic applications and is also used to make brass. Copper substitutes include aluminum, plastics, stainless steel and fiber optics. Refined, or cathode, copper is also an internationally traded commodity. Copper Supply. A combination of current mine production and recycled scrap material make up the annual copper supply.[2]
Production Regions
Nevada:
Gold sales from Nevada totaled approximately 2.0 million ounces for 2009 with ore mined from eight open pit and six underground mines. At December 31, 2009 Newmont reported 28.5 million equity ounces of gold reserves in Nevada, with 84% of those ounces in open pit mines and 16% in underground mines.
Mexico
Newmont has a 44% interest in La Herradura, which is located in Mexico’s Sonora desert. La Herradura is operated by Fresnillo PLC (which owns the remaining 56% interest) and comprises open pit operations with run-of-mine heap leach processing. La Herradura sold 112,500 ounces of gold attributable to Newmont in 2009 and at December 31, 2009 Newmont reported 1.8 million equity ounces of gold reserves at La Herradura.
Canada
Newmont owns 100% of the Hope Bay project, a large undeveloped gold project in the Nunavut Territory of Canada. Since acquiring this property in early 2008, Newmont has made significant infrastructure improvements and identified an additional 45 new drilling targets.
Indonesia:
Batu Hijau is located on the island of Sumbawa, approximately 950 miles east of Jakarta. Batu Hijau is a large porphyry copper/gold deposit, which Newmont discovered in 1990. Development and construction activities began in 1997 and start-up occurred in late 1999. In 2009, copper sales were 497.7 million pounds (217.0 million equity pounds), while gold sales were 550,500 ounces (239,700 equity ounces) and at December 31, 2009 Newmont reported 4,520 million equity pounds of copper reserves and 4.5 million equity ounces of gold reserves at Batu Hijau.
Peru:
Yanacocha, Peru
Yanacocha began production in 1993. Newmont holds a 51.35% interest in Yanacocha with the remaining interests held by Compañia de Minas Buenaventura, S.A.A. (“Buenaventura”) (43.65%) and the International Finance Corporation (5%).
Conga, Peru
The Conga project (51.35% owned) is located within close proximity of existing operations at Yanacocha. Feasibility studies on the company's preferred development option were completed in late 2009 and a construction decision is expected in the fourth quarter of 2010 assuming government approval. The project is progressing into the development stage with production expected in late 2014 to 2015. At December 31, 2009 Newmont reported 6.1 million equity ounces of gold reserves and 1,660 million equity pounds of copper reserves at Conga.
Australia/New Zealand:
Boddington
Boddington is located 81 miles southeast of Perth in Western Australia. Boddington has been wholly owned since June 2009 when Newmont acquired the final 33.33% interest from AngloGold Ashanti Australia Limited (“AngloGold”). Boddington poured its first gold on September 30, 2009, commenced commercial production in November 2009 and expects a 12 month ramp-up period to design capacity. Boddington sold 103,300 ounces of gold, including 8,200 incremental start-up ounces, and 9.0 million pounds of copper. Other sites in Australia and and New Zealand include Jundee, Kalgoorlie, Tanami, and Waihi.
Ghana:
Newmont recently received the Environmental Permit and the Mining Lease for Akyem, Ghana, and it is advancing the project towards a development decision in the second half of 2010, which could result in production in late 2013 to 2014. At December 31 2009 Newmont reported 7.7 million equity ounces of gold reserves at Akyem.
Trends and Forces
The prices of gold and copper have 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 $1,244 an ounce in mid-2010[5] 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.[5]
Newmont reported adjusted net income of $408 million ($0.83 per share) compared to $199 million ($0.42 per share) in the prior year quarter. Sales totaled $2.2 billion, an increase of 46% over the first quarter of 2009. The sharp increase in net income is largely attributable to the 22% increase in the average realized gold price.
Gold is widely considered to be an effective hedge against inflation, which means that when the dollar depreciates, demand for gold increases. In addition, during times of economic and political uncertainty, the demand for Gold rises due to its high intrinsic value and relative stability. Moreover, the introduction of gold ETFs and the increasing wealth in emerging markets, such as China, India, and Latin America have contributed to rising demand for gold.
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. 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 start-up costs to bring into production, during which time changes in revenues or company circumstances can inhibit their viability. 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. The drop in global mine production will make it increasingly difficult for Newmont to maintain this rate of discovery.
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.[6] Newmont could face production restrictions and cash penalties if punished for its pollution levels and has faced the possibility in the past. Penalties for violations will have an adverse effect on Newmont’s earnings if investigations lead to successful lawsuits in the future.
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). 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, further reducing its ownership over its sole copper production facility (which makes up 22% of company profits). Lawsuits against Newmont in Indonesia and Peru[7] for violation of environmental protection laws have ended in Newmont victories but reveal the possibilties for difficulty in Newmont's future.
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.[8]
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.
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.[9]. 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.[8]
| Metric | Net Gold Sales ($ US Millions) | Gold Ounces Produced (Millions) | Gold Ounces Sold (Millions) | Average Production Cost per Ounce (in $ US) | Total Gold Reserves (Millions) |
| Newmont Gold Corporation (NEM) | $4,305 | 6.215 | 6.184 | $499 | 86.5 |
| Barrick Gold (ABX)[10] | $5,027 | 8.060 | 8.108 | $455 | 124.6 |
| AngloGold Ashanti (AU) | $3,280[11] | 5.5[12] | 5.45[13] | $434[14] | 73.1[15] |
| Gold Fields (GFI) | $2,735.2[9] | 4.289[9] | 4.02[16] | $476[17] | 89.7[18] |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 NEM 2007 10k - Item 1: Business, page 4
- ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 Newmont 2009 Annual Report
- ↑ Reuters, "Newmont Mining Corp (New York Stock Exchange),"
- ↑ PR Newswire: "Newmont Generates First Quarter 2010 Operating Cash Flow of $728 Million; Adjusted Net Income(1) of $408 million, up 105% from First Quarter 2009" April 27, 2010
- ↑ 5.0 5.1 USA Gold, "Historical Gold Prices"
- ↑ The Daily Green, "Mining Companies Use Your Land for Free, and You Pay to Clean Up: Top 10 Most Polluting Mines," 12/11/07
- ↑ Daily Grist, "Things to Do in Denver When You're Ill: Newmont Mining fights off lawsuit over mercury pollution in Peru," 3/14/05
- ↑ 8.0 8.1 Yahoo Finance Chart - NEM and Competitors
- ↑ 9.0 9.1 9.2 GFI2007-20-f Item 5 Operating Financial Review and Employees, page 140
- ↑ | ABX 2007 40-f Item 1: General, page 11
- ↑ AngloGold Ashanti, "Annual Report 07: Financial Statements"
- ↑ AngloGold Ashanti, "Annual Report '07 Overview"
- ↑ AngloGold Ashanti, "Annual Report '07 Overview"
- ↑ Mineweb, "AngloGold reports 335 U.S. cents loss per share in Q2," 7/31/08
- ↑ Morningstar, "AU: AngloGold Ashanti Stock Report"
- ↑ The Gold Report, "Gold Fields, Ltd.,"
- ↑ Trading Markets, "Gold Fields Improves Operational Performance Due to Stabilization of Power Supplies in South Africa," 8/1/08
- ↑ Google Finance, "Gold Fields, Ltd."
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