Newmont Mining Corporation 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Fiscal Year Ended December 31, 2007
For the Transition Period From to
Commission File Number 001-31240
Newmont Mining Corporation
(Exact Name of Registrant as Specified in Its Charter)
Registrants telephone number, including area code (303) 863-7414
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 29, 2007, the aggregate market value of the registrants voting and non-voting common equity held by non-affiliates of the registrant was $17,524,404,968 based on the closing sale price as reported on the New York Stock Exchange. There were 435,838,958 shares of common stock outstanding (and 17,449,759 exchangeable shares exchangeable into Newmont Mining Corporation common stock on a one-for-one basis) on February 14, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrants definitive Proxy Statement submitted to the Registrants stockholders in connection with our 2008 Annual Stockholders Meeting to be held on April 23, 2008, are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
This document (including information incorporated herein by reference) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve a degree of risk and uncertainty due to various factors affecting Newmont Mining Corporation and our affiliates and subsidiaries. For a discussion of some of these factors, see the discussion in Item 1A, Risk Factors, of this report.
Newmont Mining Corporation is primarily a gold producer with significant assets or operations in the United States, Australia, Peru, Indonesia, Ghana, Canada, Bolivia, New Zealand and Mexico. As of December 31, 2007, Newmont had proven and probable gold reserves of 86.5 million equity ounces and an aggregate land position of approximately 42,680 square miles (110,550 square kilometers). Newmont is also engaged in the production of copper, principally through its Batu Hijau operation in Indonesia. Newmont Mining Corporations original predecessor corporation was incorporated in 1921 under the laws of Delaware.
Newmonts corporate headquarters are in Denver, Colorado, USA. In this report, Newmont, the Company, our and we refer to Newmont Mining Corporation and/or our affiliates and subsidiaries. All dollars are in millions, except per share, per ounce, and per pound amounts.
Newmonts revenues and long-lived assets are geographically distributed as follows:
During June 2007, Newmonts Board of Directors approved a plan to cease Merchant Banking activities. Merchant Banking previously provided advisory services to assist in managing the Companys portfolio of operating and property interests. Merchant Banking was also engaged in developing value optimization strategies for operating and non-operating assets, business development activities, merger and acquisition analysis and negotiations, monetizing inactive exploration properties, capitalizing on proprietary technology and know-how and acting as an internal resource for other corporate groups to improve and maximize business outcomes. As a result of the Boards approval of managements plan to cease Merchant Banking activities, the Company recorded a $1,665 non-cash charge to impair the goodwill associated with the Merchant Banking Segment in the second quarter of 2007.
On October 9, 2007, the Company announced the proposed acquisition of Miramar Mining Corporation (Miramar) and offered to acquire all of the outstanding common shares of Miramar for C$6.25 in cash. As of December 31, 2007, approximately 155 million common shares of Miramar had been validly deposited to Newmonts offer. Newmont accepted and paid for such shares, representing approximately 70% of the common shares of Miramar which, in addition to the 18 million shares previously owned by the Company, brought the Companys interest in Miramar to approximately 78%. Miramar is a Canadian gold company that controls the
Hope Bay project, a large undeveloped gold project in Nunavut, Canada. The Hope Bay project is consistent with the Companys strategic focus on exploration and project development and was acquired with the intention of adding higher grade ore reserves and developing a new core gold mining district in a AAA-rated country.
In January 2008, Newmont acquired approximately 40 million additional common shares of Miramar at a price of C$6.25 per common share, bringing its interest in Miramar to 96%. This successfully completed the offer to acquire all of the outstanding common shares of Miramar. Newmont has mailed a notice of compulsory acquisition pursuant to the Business Corporations Act (British Columbia) to acquire all the remaining common shares of Miramar that were not acquired pursuant to the offer. As a result of the acquisition, Newmont owns the Hope Bay gold mining project in the Nunavut Territory of Canada.
On December 20, 2007, Newmont sold its portfolio of royalty assets and certain other non-core investments to the new Franco-Nevada Corporation in a cash transaction for $1,187, resulting in a $905 pre-tax gain.
For additional information, see Item 7, Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations.
Segment Information, Export Sales, etc.
We have operating segments of Nevada, Yanacocha in Peru, Australia/New Zealand, Batu Hijau in Indonesia, Africa and Other Operations comprised of smaller operations in Bolivia, Mexico and Canada. We also have an Exploration Segment. See Note 30 to the Consolidated Financial Statements for information relating to our business segments, our domestic and export sales, and our non-dependence on a limited number of customers.
General. We had consolidated sales of 6.2 million ounces of gold (5.3 million equity ounces) in 2007, 7.2 million ounces of gold (5.9 million equity ounces) in 2006 and 8.2 million ounces (6.5 million equity ounces) in 2005. For 2007, 2006 and 2005, 78%, 86% and 84%, respectively, of our net revenues were attributable to gold sales. Of our 2007 gold sales, approximately 38% came from Nevada, 25% from Yanacocha, 19% from Australia/New Zealand, 8% from Batu Hijau and 7% from Africa. References in this report to equity ounces or equity pounds mean that portion of gold or copper produced, sold or included in proven and probable reserves that is attributable to our ownership or economic interest.
Most of our revenue comes from the sale of refined gold in the international market. The end product at our gold operations, however, is generally doré bars. Doré is an alloy consisting mostly of gold but also containing silver, copper and other metals. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% pure gold. Under the terms of our refining agreements, the doré bars are refined for a fee, and our share of the refined gold and the separately-recovered silver are credited to our account or delivered to buyers. Gold sold from Batu Hijau, and a portion of the gold from Phoenix in Nevada, is contained in a concentrate.
Gold Uses. Gold has two main categories of use: fabrication and investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and jewelry.
Gold Supply. The supply of gold consists of a combination of current production from mining and the draw-down of existing stocks of gold held by governments, financial institutions, industrial organizations and private individuals. In recent years, current mine production has accounted for 60% to 70% of the annual supply of gold.
Gold Price. The following table presents the annual high, low and average afternoon fixing prices for gold over the past ten years, expressed in U.S. dollars per ounce, on the London Bullion Market.
On February 14, 2008, the afternoon fixing price for gold on the London Bullion Market was $906 per ounce and the spot market price of gold on the New York Commodity Exchange was $907 per ounce.
We generally sell our gold at the prevailing market price during the month in which the gold is delivered to the customer. We recognize revenue from a sale when the price is determinable, the gold has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured.
General. We had consolidated sales of 428 million pounds of copper (204 million equity pounds) in 2007, 435 million pounds of copper (230 million equity pounds) in 2006 and 573 million pounds (303 million equity pounds) in 2005. For 2007, 2006 and 2005, 22%, 14% and 16%, respectively, of our net revenues were attributable to copper. As of December 31, 2007, we had a 45% ownership interest in the Batu Hijau operation in Indonesia, which began production in 1999. Production at Batu Hijau is in the form of a copper/gold concentrate that is sold to smelters for further treatment and refining.
Copper Uses. 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. The supply of copper consists of a combination of current production from mining and recycled scrap material. Copper supply has not kept pace with increasing demand in recent years, resulting in price increases reflected in the chart below.
Copper Price. The price of copper is quoted on the London Metal Exchange in terms of dollars per metric ton of high grade copper. The following table presents the dollar per pound equivalent of the annual high, low and average prices of high grade copper on the London Metal Exchange over the past ten years.
On February 14, 2008, the closing price of high grade copper was $3.53 per pound on the London Metal Exchange. Our ability to sell copper at market prices is limited in some cases by hedging activities, more particularly described in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and Note 14 to the Consolidated Financial Statements.
We generally avoid gold hedging. Our philosophy is to provide shareholders with leverage to changes in the gold price by selling our gold production at market prices. We have, however, historically entered into derivative contracts to protect the selling price for certain anticipated gold and copper production and to manage risks associated with commodities, interest rates and foreign currencies.
For additional information, see Hedging in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and Note 14 to the Consolidated Financial Statements.
Our exploration group is responsible for all activities, regardless of location, associated with our efforts to discover new mineralized material and, if successful, advance such mineralized material into proven and probable reserves. We conduct exploration in areas surrounding our existing mines for the purpose of locating additional deposits and determining mine geology, and in other prospective gold regions globally. Near-mine exploration can result in the discovery of new gold mineralization, which will receive the economic benefit of existing operating, processing, and administrative infrastructures. Greenfields exploration is where a discovery of new gold mineralization would likely require the investment of new capital to build a separate, stand-alone operation away from any of our existing infrastructure. Our exploration group employs state-of-the-art technology, including airborne geophysical data acquisition systems, satellite location devices and field-portable imaging systems, as well as geochemical and geological prospecting methods, to identify prospective targets. We expensed $177 in 2007, $166 in 2006 and $143 in 2005 on Exploration.
As of December 31, 2007, we had proven and probable gold reserves of 86.5 million equity ounces. We added 0.8 million net equity ounces to proven and probable reserves, with 8.2 million equity ounces of depletion and divestitures during 2007. A reconciliation of the changes in proven and probable reserves during the past three years is as follows:
In Nevada, reserves decreased by depletion of 3.7 million equity ounces, resulting in total proven and probable reserves of 29.4 million equity ounces as of December 31, 2007.
In Peru, reserves decreased to 14.2 million equity ounces, after additions of 0.3 million equity ounces and depletion of 1.2 million equity ounces.
In Australia/New Zealand, reserves increased to 19.4 million equity ounces after depletion of 1.5 million equity ounces, the sale of the Pajingo assets during 2007, and 2.3 million equity ounces of reserve additions, primarily from Boddington and Jundee.
At Batu Hijau, we depleted 0.3 billion equity pounds of copper and 0.3 million equity ounces of gold, and added 0.4 billion equity pounds of copper and 0.3 million equity ounces of gold due to increased metal prices. Additions were partially offset by higher costs and revised geotechnical assumptions. On May 25, 2007, the minority owner of Batu Hijau fully repaid a loan from a Newmont subsidiary. As a result of the loan repayment, our economic interest was reduced from 52.875% to 45%. We reported proven and probable reserves of 4.1 billion equity pounds of copper and 4.2 million equity ounces of gold as of December 31, 2007.
At Ahafo in Ghana, proven and probable reserves decreased by 2.4 million equity ounces as a result of increased cost impacts and by 0.5 million equity ounces due to depletion. As of December 31, 2007, we reported reserves of 9.7 million equity ounces at Ahafo and 7.7 million equity ounces at Akyem.
For additional information, see Item 2, Properties, Proven and Probable Reserves.
Licenses and Concessions
Other than operating licenses for our mining and processing facilities, there are no third party patents, licenses or franchises material to our business. In many countries, however, we conduct our mining and exploration activities pursuant to concessions granted by, or under contract with, the host government. These countries include, among others, Australia, Bolivia, Canada, Ghana, Indonesia, Peru, New Zealand and Mexico.
The concessions and contracts are subject to the political risks associated with foreign operations. See Item 1A, Risk Factors, Risks Related to Newmont Operations, below. For a more detailed description of our Indonesian Contract of Work, see Item 2, Properties, below.
Condition of Physical Assets and Insurance
Our business is capital intensive, requiring ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. For more information, see Item 7, Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Liquidity and Capital Resources, below.
We maintain insurance policies against property loss and business interruption and insure against risks that are typical in the operation of our business, in amounts that we believe to be reasonable. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to environmental liability and political risk. There can be no assurance that claims would be paid under such insurance policies in connection with a particular event. See Item 1A, Risk Factors, Risks Related to Newmont Operations, below.
Our United States mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment, including the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Endangered Species Act; the Federal Land Policy and Management Act; the National Environmental Policy Act; the Resource Conservation and Recovery Act; and related state laws. These laws and regulations are continually changing and are generally becoming more restrictive. Our activities outside the United States are also subject to governmental regulations for the protection of the environment.
We conduct our operations so as to protect public health and the environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Each operating mine has a reclamation plan in place that meets all applicable legal and regulatory requirements. We have made, and expect to make in the future, expenditures to comply with such laws and regulations. We have made estimates of the amount of such expenditures, but cannot precisely predict the amount of such future expenditures. Estimated future reclamation costs are based principally on legal and regulatory requirements. As of December 31, 2007, $569 was accrued for reclamation costs relating to currently developed and producing properties.
We are also involved in several matters concerning environmental obligations associated with former, primarily historic, mining activities. Generally, these matters concern developing and implementing remediation plans at the various sites. We believe that the related environmental obligations associated with these sites are similar in nature with respect to the development of remediation plans, their risk profile and the activities required to meet general environmental standards. Based upon our best estimate of our liability for these matters, $125 was accrued as of December 31, 2007 for such obligations associated with properties previously owned or operated by us or our subsidiaries. These amounts are included in Other current liabilities and Reclamation and remediation liabilities. Depending upon the ultimate resolution of these matters, we believe that it is reasonably possible that the liability for these matters could be as much as 61% greater or 18% lower than the amount accrued as of December 31, 2007. The amounts accrued for these matters are reviewed periodically based upon facts and circumstances available at the time. Changes in estimates are charged to costs and expenses in the period when estimates are revised.
For a discussion of the most significant reclamation and remediation activities, see Item 7, Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations, and Notes 24 and 32 to the Consolidated Financial Statements, below.
There were approximately 15,000 people employed by Newmont as of December 31, 2007.
Certain statements contained in this report (including information incorporated by reference) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided for under these sections. Our forward-looking statements include, without limitation:
Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by those forward-looking statements. Such risks include, but are not limited to: the price of gold, copper and other commodities; currency fluctuations; geological and metallurgical assumptions; operating performance of equipment, processes and facilities; labor relations; timing of receipt of necessary governmental permits or approvals; domestic and foreign laws or regulations, particularly relating to the environment and mining; domestic and international economic and political conditions; the ability of Newmont to obtain or maintain necessary financing; and other risks and hazards associated with mining operations. More detailed information regarding these factors is included in Item 1, Business, Item 1A, Risk Factors, and elsewhere throughout this report. Given these uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements.
All subsequent written and oral forward-looking statements attributable to Newmont or to persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Newmont disclaims any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Newmont maintains an internet web site at www.newmont.com. Newmont makes available, free of charge, through the Investor Information section of the web site, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Newmonts Corporate Governance Guidelines, the charters of key committees of its Board of Directors and its Code of Business Ethics and Conduct are also available on the web site. Any of the foregoing information is available in print to any stockholder who requests it by contacting Newmonts Investor Relations Department.
The Company filed with the New York Stock Exchange (NYSE) on May 24, 2007, the annual certification by its Chief Executive Officer, certifying that, as of the date of the certification, he was not aware of any violation by the Company of the NYSEs corporate governance listing standards, as required by Section 303A.12(a) of the NYSE Listed Company Manual. The Company has filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of its public disclosures as Exhibits 31.1 and 31.2 to this report.
Every investor or potential investor in Newmont should carefully consider the following risks, which have been separated into two groups:
A Substantial or Extended Decline in Gold or Copper Prices Would Have a Material Adverse Effect on Newmont
Our business is dependent on the realized price of gold and copper, which are affected by numerous factors beyond our control. Factors tending to put downward pressure on prices include:
Any drop in the realized price of gold or copper adversely impacts our revenues, net income and cash flows, particularly in light of our philosophy of generally avoiding gold hedging. We have recorded asset write-downs in the past and may experience additional impairments as a result of low gold or copper prices in the future.
In addition, sustained low gold or copper prices can:
Also see the discussion in Item 1, Business, Gold or Copper Price.
Gold and Copper Producers Must Continually Replace Reserves Depleted By Production
Gold and copper producers must continually replace reserves depleted by production. Depleted reserves must be replaced by expanding known ore bodies or by locating new deposits in order to maintain production levels over the long term. Exploration is highly speculative in nature, involves many risks and frequently is unproductive. Our new or ongoing exploration programs may not result in new mineral producing operations. Once mineralization is discovered, it will likely take many years from the initial phases of exploration until production, during which time the economic feasibility of production may change.
Estimates of Proven and Probable Reserves Are Uncertain
Estimates of proven and probable reserves are subject to considerable uncertainty. Such estimates are, to a large extent, based on the price of gold and interpretations of geologic data obtained from drill holes and other exploration techniques. Producers use feasibility studies to derive estimates of capital and operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the predicted configuration of the ore body, expected recovery rates of metals from the ore, the costs of comparable facilities, the costs of operating and processing equipment and other factors. Actual operating costs and economic returns on projects may differ significantly from original estimates. Further, it may take many years from the initial phase of exploration before production and, during that time, the economic feasibility of exploiting a discovery may change.
Increased Costs Could Affect Profitability
Costs at any particular mining location frequently are subject to variation due to a number of factors, such as changing ore grade, changing metallurgy and revisions to mine plans in response to the physical shape and location of the ore body. In addition, costs are affected by the price of commodities, such as fuel, electricity and labor. Commodity costs are at times subject to volatile price movements, including increases that could make production at certain operations less profitable. Reported costs may also be affected by changes in accounting standards. A material increase in costs at any significant location could have a significant effect on our profitability and cash flow.
We anticipate significant capital expenditures over the next several years in connection with the development of new projects and sustaining existing operations. Costs associated with capital expenditures have escalated on an industry-wide basis over the last several years, as a result of major factors beyond our control, including the prices of oil, steel and other commodities and labor. Increased costs for capital expenditures may have an adverse effect on the profitability of existing mining operations and returns anticipated from new mining projects.
Shortages of Critical Parts, Equipment and Skilled Labor May Adversely Affect Our Operations and Development Projects
The industry has been impacted by increased demand for critical resources such as input commodities, drilling equipment, tires and skilled labor. These shortages have caused unanticipated cost increases and delays in delivery times, thereby impacting operating costs, capital expenditures and production schedules.
Mining Accidents or Other Adverse Events or Conditions at a Mining Location Could Reduce Our Production Levels
At any of our operations, production may fall below historic or estimated levels as a result of mining accidents such as a pit wall failure in an open pit mine, or cave-ins or flooding at underground mines. In addition, production may be unexpectedly reduced at a location if, during the course of mining, unfavorable ground conditions or seismic activity, extreme or prolonged storm events, or prolonged adverse climate changes are encountered; ore grades are lower than expected; the physical or metallurgical characteristics of the ore are less amenable to mining or treatment than expected; or our equipment, processes or facilities fail to operate properly or as expected. Our Midas operations in Nevada were suspended by order of the Mine Safety and Health Administration (MSHA) after a fatal accident in June 2007. On October 11, 2007, MSHA lifted the restrictive order that had required Midas to halt mining activities. As a result, mining activities have resumed. MSHAs investigation of the accident is continuing.
Mining Companies Are Subject to Extensive Environmental Laws and Regulations
Our exploration, mining and processing operations are regulated in all countries in which we operate under various federal, state, provincial and local laws relating to the protection of the environment, which generally
include air and water quality, hazardous waste management and reclamation. Delays in obtaining, or failure to obtain, government permits and approvals may adversely impact our operations. The regulatory environment in which we operate could change in ways that would substantially increase costs to achieve compliance, or otherwise could have a material adverse effect on our operations or financial position. For a more detailed discussion of potential environmental liabilities, see the discussion in Environmental Matters, Note 32 to the Consolidated Financial Statements.
Our Operations Outside North America and Australia/New Zealand Are Subject to Risks of Doing Business Abroad
Exploration, development and production activities outside of North America and Australia/New Zealand are potentially subject to political and economic risks, including:
Consequently, our exploration, development and production activities outside of North America and Australia/New Zealand may be substantially affected by factors beyond our control, some of which could materially adversely affect our financial position or results of operations. Furthermore, if a dispute arises from such activities, we may be subject to the exclusive jurisdiction of courts outside North America or Australia/New Zealand, which could adversely affect the outcome of a dispute.
We have substantial investments in Indonesia, a nation that since 1997 has undergone financial crises and devaluation of its currency, outbreaks of political and religious violence, changes in national leadership, and the secession of East Timor, one of its former provinces. These factors heighten the risk of abrupt changes in the national policy toward foreign investors, which in turn could result in unilateral modification of concessions or contracts, increased taxation, denial of permits or permit renewals or expropriation of assets. Subsequent to the commencement of operations, the government purported to designate the land surrounding Batu Hijau as a protection forest, which could make operating permits more difficult to obtain. The Company has been in discussions to renew its forest use permit (called a pinjam pakai) for over two years. This permit is a key
requirement to continue to efficiently operate the Batu Hijau mine. The permit renewal has not been received and in the event it is not received by May 2008, it could have an adverse impact on operating and financial results.
Recent violence committed by radical elements in Indonesia and other countries, and the presence of U.S. forces in Iraq and Afghanistan, may increase the risk that operations owned by U.S. companies will be the target of violence. If any of our operations were so targeted it could have an adverse effect on our business.
During the last several years, Yanacocha, in which we own a 51.35% interest, has been the target of numerous local political protests, including ones that blocked the road between the Yanacocha mine complex and the City of Cajamarca in Peru. In 2004, local opposition to the Cerro Quilish project became so pronounced that Yanacocha decided to relinquish its drilling permit for Cerro Quilish and the deposit was reclassified from proven and probable reserves to non-reserve mineralization. In 2006 a road blockade was carried out by members of the Combayo community. This blockade resulted in a brief cessation of mining activities. We cannot predict whether similar or more significant incidents will occur in the future, and the recurrence of significant community opposition or protests could adversely affect Yanacochas assets and operations. In 2007 no material roadblocks or protests occurred involving Yanacocha.
Presidential, congressional and regional elections took place in Peru in 2006, with the new national government taking office in July 2006. In December 2006, Yanacocha, along with other mining companies in Peru, entered into an agreement with the central government to contribute 3.75% of net profits to fund social development projects. Although the current government has generally taken positions promoting private investment, we cannot predict future government positions on foreign investment, mining concessions, land tenure, environmental regulation or taxation. A change in government positions on these issues could adversely affect Yanacochas assets and operations.
Our Interest in the Batu Hijau Operation in Indonesia May Be Reduced Under the Contract of Work
Under the Contract of Work, beginning in 2005 and continuing through 2010, a portion of the shares of P.T. Newmont Nusa Tenggara, the subsidiary that owns Batu Hijau (PTNNT) must be offered for sale, first, to the Indonesian government or, second, to Indonesian nationals, equal to the difference between the following percentages and the percentage of shares already owned by the Indonesian government or Indonesian nationals (if such number is positive): 23% by March 31 2006; 30% by March 31, 2007; 37% by March 31, 2008, 44% by March 31, 2009; and 51% by March 31, 2010. The price at which such interest must be offered for sale to the Indonesian parties is the highest of the then-current replacement cost, the price at which shares would be accepted for listing on the Jakarta Stock Exchange, or the fair market value of such interest as a going concern, as agreed with the Indonesian government. Pursuant to this provision, it is possible that the ownership interest of the Newmont/Sumitomo partnership in PTNNT, owner of Batu Hijau, could be reduced to 49%.
P.T. Pukuafa Indah (PTPI), an unrelated Indonesian company, has owned and continues to own a 20% interest in PTNNT, and therefore the Newmont/Sumitomo partnership was required to offer a 3% interest for sale in 2006 and an additional 7% interest in 2007. A further 7% interest will be offered for sale in March 2008. In accordance with the Contract of Work, an offer to sell a 3% interest was made to the government of Indonesia in 2006 and an offer for an additional 7% interest was made in 2007. While the central government declined to participate in the offer, local governments in the area in which the Batu Hijau mine is located have expressed interest in acquiring shares, as have various Indonesian nationals. In January 2008, the Newmont/Sumitomo partnership agreed to sell, under a carried interest arrangement, 2% of PTNNTs shares to Kabupaten Sumbawa, one of the local governments, subject to satisfaction of closing conditions. On February 11, 2008, PTNNT received notification from the Department of Energy and Mineral Resources (DEMR) alleging that PTNNT is in breach of its divestiture requirements under the Contract of Work and threatening to issue a notice to terminate the Contract of Work if PTNNT does not agree to divest the 2006 and 2007 shares, in accordance with the direction of the DEMR, by February 22, 2008. Newmont and Sumitomo believe there is no basis under the
Contract of Work for this notification and no grounds for terminating the Contract of Work, and are currently evaluating possible responses to the February 11, 2008 default notice, including filing for international arbitration as provided for under the Contract of Work. Newmont and Sumitomo are in discussions with officials of the Government of Indonesia to attempt to clarify or resolve this issue.
Our Success May Depend on Our Social and Environmental Performance
Our ability to operate successfully in communities around the world will likely depend on our ability to develop, operate and close mines in a manner that is consistent with the health and safety of our employees, the protection of the environment, and the creation of long-term economic and social opportunities in the communities in which we operate. We have implemented a management system designed to promote continuous improvement in health and safety, environmental performance and community relations. However, our ability to operate could be adversely impacted by accidents or events detrimental (or perceived to be detrimental) to the health and safety of our employees, the environment or the communities in which we operate.
Remediation Costs for Environmental Liabilities May Exceed the Provisions We Have Made
We have conducted extensive remediation work at two inactive sites in the United States. At one of these sites, remediation requirements have not been finally determined, and, therefore, the final cost cannot be determined. At a third site in the United States, an inactive uranium mine and mill formerly operated by a subsidiary of Newmont, remediation work at the mill is ongoing, but remediation at the mine is subject to dispute and has not yet commenced. The environmental standards that may ultimately be imposed at this site remain uncertain and there is a risk that the costs of remediation may exceed the provision that has been made for such remediation by a material amount. For a more detailed discussion of potential environmental liabilities, see the discussion in Environmental Matters, Note 32 to the Consolidated Financial Statements.
Whenever a previously unrecognized remediation liability becomes known, or a previously estimated reclamation cost is increased, the amount of that liability and additional cost will be recorded at that time and could materially reduce net income in that period.
Currency Fluctuations May Affect Costs
Currency fluctuations may affect the costs that we incur at our operations. Gold is sold throughout the world based principally on the U.S. dollar price, but a portion of our operating expenses are incurred in local currencies. The appreciation of non-U.S. dollar currencies against the U.S. dollar increases the costs of gold production in U.S. dollar terms at mines located outside the United States.
The foreign currency that primarily impacts our results of operations is the Australian dollar. We estimate that every $0.01 increase in U.S. dollar / Australian dollar exchange rate increases the U.S. dollar Costs applicable to sales by approximately $4 or $5 for each ounce of gold produced in Australia. During 2007, the Australian dollar appreciated by approximately $0.09 per U.S. dollar, or approximately 10.8%. In mid-2007, we implemented derivative programs to hedge up to 75% of our future forecasted Australian dollar denominated operating and capital expenditures to reduce the variability in our Australian dollar denominated expenditures. As of December 31, 2007, we have hedged 23%, 18% and 11% of our forecasted Australian denominated operating costs in 2008, 2009 and 2010, respectively. We have also hedged 32% of our forecasted Australian denominated capital expenditures for 2008. Our Australian dollar derivative programs will limit the benefit to the Company of future decreases if any, in the US dollar/Australian dollar exchange rates. For additional information, see Item 7, Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Results of Consolidated Operations, Foreign Currency Exchange Rates, below. For a more detailed description of how currency exchange rates may affect costs, see discussion in Foreign Currency in Item 7A, Quantitative and Qualitative Discussions About Market Risk.
Future Funding Requirements May Affect Our Business
The construction of the Boddington project in Australia, the 200 megawatt coal-fired power plant in Nevada, and the gold mill at Yanacocha in Peru, as well as potential future investments in the Akyem project in Ghana, the Conga project in Peru and the Hope Bay project in Nunavat, Canada, will require significant funds for capital expenditures. At current gold and copper prices, our operating cash flow is insufficient to meet all of these expenditures. As a result, new sources of capital will be needed to meet the funding requirements of these investments, fund our ongoing business activities and pay dividends. Our ability to raise and service significant new sources of capital will be a function of macroeconomic conditions, future gold and copper prices and our operational performance, among other factors; in order to retain our investment grade rating, it may be necessary to issue additional equity or other securities, defer projects or sell assets. In the event of lower gold and copper prices, unanticipated operating or financial challenges, or new funding limitations, our ability to pursue new business opportunities, invest in existing and new projects, fund our ongoing business activities and pay dividends could be significantly constrained.
Costs Estimates and Timing of New Projects Are Uncertain
The capital expenditures and time required to develop new mines or other projects are considerable and changes in costs or construction schedules can affect project economics. There are a number of factors that can affect costs and construction schedules, including, among others:
Our Operations May Be Adversely Affected By Power Shortages
We have experienced power shortages in Ghana resulting from a nationwide drought and insufficient hydroelectric or other generating capacity. Power shortages have caused curtailment of production at our Ahafo operations. As a result of the mining industrys initiative to construct and install a 80 mega-watt power plant during 2007, the Ghanaian government has agreed, if required to curtail power consumption as a result of power shortages, to distribute power proportionately between participating mines and other industrial and commercial users. Alternative sources of power will result in higher than anticipated costs, which will affect operating costs. Continued power shortages and increased costs may adversely affect our results of operations and financial condition.
Occurrence of Events for Which We Are Not Insured May Affect Our Cash Flow and Overall Profitability
We maintain insurance policies that mitigate against certain risks related to our operations. This insurance is maintained in amounts that we believe are reasonable depending upon the circumstances surrounding each identified risk. However, we may elect not to have insurance for certain risks because of the high premiums associated with insuring those risks or for various other reasons; in other cases, insurance may not be available for certain risks. Some concern always exists with respect to investments in parts of the world where civil unrest, war, nationalist movements, political violence or economic crises are possible. These countries may also pose heightened risks of expropriation of assets, business interruption, increased taxation or unilateral modification of concessions and contracts. We do not maintain insurance policies against political risk. Occurrence of events for which we are not insured may affect our cash flow and overall profitability.
Our Business Depends on Good Relations with Our Employees
Due to union activities or other employee actions, we could experience labor disputes, work stoppages or other disruptions in production that could adversely affect us. As of December 31, 2007, unions represented approximately 45% of our worldwide work force. Currently, there are labor agreements in effect for all of these workers. We may be unable to resolve any future disputes without disruption to operations.
Title to Some of Our Properties May Be Defective or Challenged
Although we have conducted title reviews of our properties, title review does not necessarily preclude third parties from challenging our title. While we believe that we have satisfactory title to our properties, some risk exists that some titles may be defective or subject to challenge. In addition, certain of our Australian properties could be subject to native title or traditional landowner claims, but such claims would not deprive us of the properties. For information regarding native title or traditional landowner claims, see the discussion under the Australia/New Zealand section of Item 2, Properties, below.
We Compete With Other Mining Companies
We compete with other mining companies to attract and retain key executives, skilled labor and other employees with technical skills and experience in the mining industry. We also compete with other mining companies for rights to mine properties containing gold and other minerals. We may be unable to continue to attract and retain skilled and experienced employees, or to acquire additional rights to mine properties.
Certain Factors Outside of Our Control May Affect Our Ability to Support the Carrying Value of Goodwill
As of December 31, 2007, the carrying value of goodwill was approximately $186 or 1% of our total assets. Goodwill has been assigned to various mine site reporting units in the Australia/New Zealand Segment. This goodwill primarily arose in connection with our February 2002 acquisition of Normandy and represents the excess of the aggregate purchase price over the fair value of the identifiable net assets acquired. We evaluate, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. This evaluation involves a comparison of the estimated fair value of our reporting units to their carrying values. If the carrying amount of goodwill for any reporting unit exceeds its estimated fair value, a non-cash impairment charge could result. For a more detailed description of the estimates and assumptions involved in assessing the recoverability of the carrying value of goodwill, see Item 7, Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Critical Accounting Policies, below.
Our Ability to Recognize the Benefits of Deferred Tax Assets is Dependent on Future Cash Flows and Taxable Income
We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize the deferred tax assets could be impacted. Additionally, future changes in tax laws could limit our ability to obtain the future tax benefits represented by our deferred tax assets. As of December 31, 2007, the Companys current and long-term deferred tax assets were $112 and $1,036, respectively.
Returns for Investments in Pension Plans Are Uncertain
We maintain pension plans for employees, which provide for specified payments after retirement for certain employees. The ability of the pension plans to provide the specified benefits depends on our funding of the plans and returns on investments made by the plans. Returns, if any, on investments are subject to fluctuations based on investment choices and market conditions. A sustained period of low returns or losses on investments could require us to fund the pension plans to a greater extent than anticipated.
Gold and Copper Processing Methods
Gold is extracted from naturally-oxidized ores by either heap leaching or milling, depending on the amount of gold contained in the ore, the amenability of the ore to treatment and related capital and operating costs. Higher grade oxide ores are generally processed through mills, where the ore is ground into a fine powder and mixed with water in slurry, which then passes through a carbon-in-leach circuit. Lower grade oxide ores are generally processed using heap leaching. Heap leaching consists of stacking crushed or run-of-mine ore on impermeable pads, where a weak cyanide solution is applied to the surface of the heap to dissolve the gold. In both cases, the gold-bearing solution is then collected and pumped to process facilities to remove the gold by collection on carbon or by zinc precipitation.
Gold contained in ores that are not naturally oxidized can be directly milled if the gold is amenable to cyanidization, generally known as free milling sulfide ores. Ores that are not amenable to cyanidization, known as refractory ores, require more costly and complex processing techniques than oxide or free milling ore. Higher-grade refractory ores are processed through either roasters or autoclaves. Roasters heat finely ground ore to a high temperature, burn off the carbon and oxidize the sulfide minerals that prevent efficient leaching. Autoclaves use heat, oxygen and pressure to oxidize sulfide ores.
Some sulfide ores may be processed through a flotation plant or by bio-milling. In flotation, ore is finely ground, turned into slurry, then placed in a tank known as a flotation cell. Chemicals are added to the slurry causing the gold-containing sulfides to float attached to air bubbles to the top of the tank. The sulfides are removed from the cell and converted into a concentrate that can then be processed in an autoclave or roaster to recover the gold. Bio-milling incorporates patented technology that involves inoculation of suitable crushed ore on a leach pad with naturally occurring bacteria strains, which oxidize the sulfides over a period of time. The ore is then processed through an oxide mill.
At Batu Hijau, ore containing copper and gold is crushed to a coarse size at the mine and then transported from the mine via conveyor to a concentrator, where it is finely ground and then treated by successive stages of flotation, resulting in a concentrate containing approximately 30% copper. The concentrate is dewatered and stored for loading onto ships for transport to smelters.
Set forth below is a description of Newmonts significant production properties. Operating statistics for each operation are presented in a table in the next section of Item 2.
We have been mining gold in Nevada since 1965. Nevada operations include Carlin, located west of the city of Elko on the geologic feature known as the Carlin Trend, the Twin Creeks mine, located approximately 15 miles north of Golconda, the Lone Tree Complex near the town of Valmy, and the Midas mine near the town of the same name. We also participate in the Turquoise Ridge joint venture with a subsidiary of Barrick Gold Corp. (Barrick), which utilizes mill capacity at Twin Creeks. The Phoenix mine, located 10 miles south of Battle Mountain, commenced commercial production in the fourth quarter of 2006. The Leeville underground mine, located on the Carlin Trend northwest of the Carlin East underground mine, also commenced commercial production in the fourth quarter of 2006.
Gold sales from Nevada totaled approximately 2.3 million ounces for 2007 with ore mined from nine open pit and five underground mines. At year-end 2007, we reported 29.4 million equity ounces of gold reserves in Nevada, with 84% in open pit mines and 16% in underground mines. Refractory ores require more complex, higher cost processing methods. Refractory ore treatment facilities generated 75% of Nevadas gold production in 2007, compared with 72% in 2006, and 69% in 2005. With respect to remaining reserves, we estimate that 79% are refractory ores and 21% are oxide ores.
The Nevada operations produce gold from a variety of ore types requiring different processing techniques depending on economic and metallurgical characteristics. To ensure the best use of processing capacity, we use a linear programming model to guide the flow of both mining sequence selection and routing of ore streams to various plants. Higher-grade oxide ores are processed by conventional milling and cyanide leaching at Carlin (Mill 5), Twin Creeks (Juniper) and Lone Tree. Lower-grade material with suitable cyanide solubility is treated
on heap leach pads at Carlin, Twin Creeks and Lone Tree. Higher-grade refractory ores are processed through either a roaster at Carlin (Mill 6) or autoclaves at Twin Creeks (Sage) and Lone Tree. Lower-grade refractory ores are processed by a flotation plant at Lone Tree or either bio-oxidation/flotation or direct flotation at Mill 5. Ore from the Midas mine is processed by conventional milling and Merrill-Crowe zinc precipitation. Activated carbon from the various leaching circuits is treated to produce gold ore at Carlin and Twin Creeks. Zinc precipitate at Midas is refined on-site. All milling at Lone Tree was completed in 2007.
We own, or control through long-term mining leases and unpatented mining claims, all of the minerals and surface area within the boundaries of the present Nevada mining operations (except for the Turquoise Ridge joint venture described below). The long-term leases extend for at least the anticipated mine life of those deposits. With respect to a significant portion of the Gold Quarry mine at Carlin, we own a 10% undivided interest in the mineral rights and lease the remaining 90%, on which we pay a royalty equivalent to 18% of the mineral production. We wholly-own or control the remainder of the Gold Quarry mineral rights, in some cases subject to additional royalties. With respect to certain smaller deposits in Western Nevada, we are obligated to pay royalties on production to third parties that vary from 2% to 5% of production.
We have a 25% interest in a joint venture with Barrick to operate the Turquoise Ridge and Getchell mines. Newmont has an agreement to provide up to 2,000 tons per day of milling capacity at Twin Creeks to the joint venture. Barrick is the operator of the joint venture. Gold sales of 62,844 in 2007, 58,300 ounces in 2006 and 52,300 ounces in 2005 were attributable to Newmont, based on our 25% ownership interest.
We have ore sale agreements with Barrick and Yukon-Nevada Gold Corp. (Yukon-Nevada) to process some of the Companys ore. We recognized attributable gold sales, net of treatment charges, of 58,624 ounces in 2007, 99,500 ounces in 2006 and 104,600 ounces in 2005 pursuant to these agreements.
We have sales and refining agreements with Gerald Metals, Peñoles, Yukon-Nevada, Johnson Matthey, Just Refiners and Glencore to process intermediate gold bearing product.
The properties of Minera Yanacocha S.R.L. (Yanacocha) are located approximately 375 miles (604 kilometers) north of Lima and 30 miles (48 kilometers) north of the city of Cajamarca, in Peru. Yanacocha began production in 1993. We hold a 51.35% interest in Yanacocha with the remaining interests held by Compañia de Minas Buenaventura, S.A.A. (43.65%) and the International Finance Corporation (5%).
Yanacocha has mining rights with respect to a large land position. Yanacochas mining rights consist of concessions granted by the Peruvian government to Yanacocha and a related entity. These mining concessions provide for both the right to explore and exploit. However, Yanacocha must first obtain the respective exploration and exploitation permits, which are generally granted in due course. Yanacocha may retain mining concessions indefinitely by paying annual fees and, during exploitation, complying with production obligations or paying assessed fines. Mining concessions are freely assignable or transferable.
Yanacocha currently has three active open pit mines, Cerro Yanacocha, La Quinua and Chaquicocha. In addition, reclamation and/or backfilling activities at Carachugo, San José and Maqui Maqui are currently underway. In addition, Yanacocha has four leach pads and three processing facilities. Yanacochas gold sales for 2007 totaled 1.6 million ounces (0.8 million equity ounces). At year-end 2007, we reported 14.2 million equity ounces of gold reserves at Yanacocha.
The Yanacocha operations contain the Conga deposit, for which a feasibility study was completed in 2004. We continue to evaluate the optimum development plan for Conga.
Yanacocha, along with other mining companies in Peru, agreed with the central government in 2006 to contribute 3.75% of its net profits to fund social development projects for a period of up to five years, contingent upon metal prices remaining high.
In Australia, mineral exploration and mining titles are granted by the individual states or territories. Mineral titles may also be subject to native title legislation or, in the Northern Territory, to Aboriginal freehold title legislation that entitles indigenous persons to compensation calculated by reference to the gross value of production. In 1992, the High Court of Australia held that Aboriginal people who have maintained a continuing connection with their land according to their traditions and customs may hold certain rights in respect of the land, such rights commonly referred to as native title. Since the High Courts decision, Australia has passed legislation providing for the protection of native title and established procedures for Aboriginal people to claim these rights. The fact that native title is claimed with respect to an area, however, does not necessarily mean that native title exists, and disputes may be resolved by the courts.
Generally, under native title legislation, all mining titles granted before January 1, 1994 are valid. Titles granted between January 1, 1994 and December 23, 1996, however, may be subject to invalidation if they were not obtained in compliance with applicable legislative procedures, though subsequent legislation has validated some of these titles. After December 23, 1996, mining titles over areas where native title is claimed to exist became subject to legislative processes that generally give native title claimants the right to negotiate with the title applicant for compensation and other conditions. Native title holders do not have a veto over the granting of mining titles, but if agreement cannot be reached, the matter can be referred to the National Native Title Tribunal for decision.
We do not expect that native title claims will have a material adverse effect on any of our operations in Australia. The High Court of Australia determined in an August 2002 decision, which refined and narrowed the scope of native title, that native title does not subsist in minerals in Western Australia and that the rights granted under a mining title would, to the extent inconsistent with asserted native title rights, operate to extinguish those native title rights. Generally, native title is only an issue for Newmont with respect to obtaining new mineral titles or moving from one form of title to another, for example, from an exploration title to a mining title. In these cases, the requirements for negotiation and the possibility of paying compensation may result in delay and increased costs for mining in the affected areas. Similarly, the process of conducting Aboriginal heritage surveys to identify and locate areas or sites of Aboriginal cultural significance can result in additional costs and delay in gaining access to land for exploration and mining-related activities.
In Australia, various ad valorem royalties are paid to state and territorial governments, typically based on a percentage of gross revenues and earnings.
Tanami. The Tanami operations (100% owned) include The Granites treatment plant and associated mining operations, which are located in the Northern Territory approximately 342 miles (550 kilometers) northwest of Alice Springs, adjacent to the Tanami highway, and the Dead Bullock Soak mining operations, approximately 25 miles (40 kilometers) west of The Granites. The Tanami operations have been wholly-owned since April 2003, when Newmont acquired the minority interests.
The operations are predominantly focused on the Callie underground mine at Dead Bullock Soak, with mill feed supplemented by production stockpiles from the Dead Bullock Soak open pit. Ore from all of these operations is processed through The Granites plant. During 2007, the Tanami operations sold 439,000 ounces of gold. At year-end 2007, we reported 1.7 million equity ounces of gold reserves at Tanami.
Kalgoorlie. The Kalgoorlie operations comprise the Fimiston open pit (commonly referred to as the Super Pit) and Mt. Charlotte underground mine at Kalgoorlie-Boulder, 373 miles (600 kilometers) east of Perth. The mines are managed by Kalgoorlie Consolidated Gold Mines Pty Ltd for the joint venture owners, Newmont and Barrick, each of which holds a 50% interest. The Super Pit is one of Australias largest gold mines in terms of gold production and annual mining volume. During 2007, the Kalgoorlie operations sold 323,400 equity ounces of gold. At year-end 2007, we reported 4.6 million equity ounces of gold reserves at Kalgoorlie.
Jundee. The Jundee operation (100% owned) is situated approximately 435 miles (700 kilometers) northeast of Perth in Western Australia. During 2007 mining was conducted from both the underground and open pit deposits with the open pit operation ceasing production in November 2007. The milling operation was consolidated during the year with the relocation of the Nimary ball mill to the Jundee plant site. Jundee sold 298,200 ounces of gold in 2007. At year-end 2007, we reported 1.5 million equity ounces of gold reserves at Jundee.
Waihi. The Waihi operations (100% owned) are located within the town of Waihi, located approximately 68 miles (110 kilometers) southeast of Auckland, New Zealand and consist of the Favona underground deposit and the Martha open pit. The Waihi operation sold 92,900 ounces of gold during 2007. At year-end 2007, we reported 0.5 million equity ounces of gold reserves at Waihi. The Martha mine does not currently pay royalties. At Favona, Newmont pays a royalty of 1% of gross revenues from gold and silver sales, or 5% of accounting profit, whichever is greater.
Boddington. Boddington is a development project located 81 miles (130 kilometers) southeast of Perth in Western Australia. Boddington is owned by Newmont (66.67%) and AngloGold Ashanti Limited (33.33%). Development of the Boddington project was approximately 62% complete as of December 31, 2007, with mill start-up expected in late 2008 or early 2009. At year-end 2007, we reported 11.1 million equity ounces of gold reserves at Boddington.
Batu Hijau, Indonesia
Batu Hijau is located on the island of Sumbawa, approximately 950 miles (1,529 kilometers) 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 2007, copper sales were 427.5 million pounds (204.2 million equity pounds), while gold sales were 494,300 ounces (233,300 equity ounces). At year-end 2007, we reported 4.1 billion equity pounds of copper reserves and 4.2 million equity ounces of gold reserves at Batu Hijau.
We operate Batu Hijau, a producer of copper/gold concentrates, and have a 45% ownership interest therein, held through a partnership with an affiliate of Sumitomo Corporation. We have a 56.25% interest in the partnership and the Sumitomo affiliate holds the remaining 43.75%. The partnership, in turn, owns 80% of P.T. Newmont Nusa Tenggara (PTNNT), the subsidiary that owns Batu Hijau. The remaining 20% interest in PTNNT is owned by P.T. Pukuafu Indah (PTPI), an unrelated Indonesian company. Because PTPIs interest was a carried interest, and because PTPI had been advanced a loan by the partnership, we reported a 52.875% economic interest in Batu Hijau, which reflected our actual economic interest in the mine until such time as the loan was fully repaid (including accrued interest). On May 25, 2007, PTPI fully repaid the loan (including accrued interest) and as a result, our economic interest was reduced from 52.875% to 45% and we recorded a net charge of $25 (after-tax) against Minority interest expense in the second quarter of 2007.
In Indonesia, rights are granted to foreign investors to explore for and to develop mineral resources within defined areas through Contracts of Work entered into with the Indonesian government. In 1986, PTNNT entered into a Contract of Work with the Indonesian government covering Batu Hijau, under which PTNNT was granted the exclusive right to explore in the contract area, construct any required facilities, extract and process the mineralized materials, and sell and export the minerals produced, subject to certain requirements including Indonesian government approvals and payment of royalties to the government. Under the Contract of Work, PTNNT has the right to continue operating the project for 30 years from operational start-up, or longer if approved by the Indonesian government.
Under the Contract of Work, beginning in 2005 and continuing through 2010, a portion of PTNNTs shares must be offered for sale, first, to the Indonesian government or, second, to Indonesian nationals, equal to the difference between the following percentages and the percentage of shares already owned by the Indonesian
government or Indonesian nationals (if such number is positive): 23% by March 31, 2006; 30% by March 31, 2007; 37% by March 31, 2008, 44% by March 31, 2009; and 51% by March 31, 2010. The price at which such interest must be offered for sale to the Indonesian parties is the highest of the then-current replacement cost, the price at which shares would be accepted for listing on the Jakarta Stock Exchange, or the fair market value of such interest as a going concern, as agreed with the Indonesian government. Pursuant to this provision, it is possible that the ownership interest of the Newmont/Sumitomo partnership in PTNNT, owner of Batu Hijau, could be reduced to 49%.
PTPI has owned and continues to own a 20% interest in PTNNT, and therefore the Newmont/Sumitomo partnership was required to offer a 3% interest for sale in 2006 and an additional 7% interest in 2007. A further 7% interest will be offered for sale in March 2008. In accordance with the Contract of Work, an offer to sell a 3% interest was made to the government of Indonesia in 2006 and an offer for an additional 7% interest was made in 2007. While the central government declined to participate in the offer, local governments in the area in which the Batu Hijau mine is located have expressed interest in acquiring shares, as have various Indonesian nationals. In January 2008, the Newmont/Sumitomo partnership agreed to sell, under a carried interest arrangement, 2% of PTNNTs shares to Kabupaten Sumbawa, one of the local governments, subject to satisfaction of closing conditions. On February 11, 2008, PTNNT received notification from the Department of Energy and Mineral Resources (DEMR) alleging that PTNNT is in breach of its divestiture requirements under the Contract of Work and threatening to issue a notice to terminate the Contract of Work if PTNNT does not agree to divest the 2006 and 2007 shares, in accordance with the direction of the DEMR, by February 22, 2008. Newmont and Sumitomo believe there is no basis under the Contract of Work for this notification and no grounds for terminating the Contract of Work, and are currently evaluating possible responses to the February 11, 2008 default notice, including filing for international arbitration as provided for under the Contract of Work. Newmont and Sumitomo are in discussions with officials of the Government of Indonesia to attempt to clarify or resolve this issue.
The Company has been in discussions to renew its forest use permit (called a pinjam pakai) for over two years. This permit is a key requirement to continue to efficiently operate the Batu Hijau mine. The permit renewal has not been received and in the event it is not received by May 2008, it could have an adverse impact on operating and financial results.
The Ahafo operation (100% owned) is located in the Brong-Ahafo Region of Ghana, approximately 180 miles (290 kilometers) northwest of Accra. Ahafo poured its first gold on July 18, 2006 and commenced commercial production in August 2006. Ahafo sold 445,600 ounces of gold in 2007.
We currently operate two open pits at Ahafo with reserves contained in 17 pits. The process plant consists of a conventional mill and carbon-in-leach circuit. Ahafo reserves as of December 31, 2007, were 9.7 million equity ounces.
In December 2003, Ghanas Parliament unanimously ratified an Investment Agreement between Newmont and the Government of Ghana. The Agreement establishes a fixed fiscal and legal regime, including fixed royalty and tax rates, for the life of any Newmont project in Ghana. Under the Agreement, we will pay corporate income tax at the Ghana statutory tax rate (presently 25%) not to exceed 32.5% and fixed gross royalties on gold production of 3.0% (3.6% for any production from forest reserve areas). The Government of Ghana is also entitled to receive 10% of a projects net cash flow after we have recouped our investment and may acquire up to 20% of a projects equity at fair market value on or after the 15th anniversary of such projects commencement of production. The Investment Agreement also contains commitments with respect to job training for local Ghanaians, community development, purchasing of local goods and services and environmental protection.
We have one development project in Ghana, currently the subject of further optimization studies. The Akyem project (100% owned) is approximately 80 miles (125 kilometers) northwest of Accra. In 2007, the Company continued optimization and engineering on alternative plans for the proposed operation. The Company also initiated environmental and social baseline data collection in preparation for submitting permit documents in 2008.
Bolivia. The Kori Kollo open pit mine is on a high plain in northwestern Bolivia near Oruro, on government mining concessions issued to a Bolivian corporation, Empresa Minera Inti Raymi S.A. (Inti Raymi), in which we have an 88% interest. The remaining 12% is owned by Mrs. Beatriz Rocabado. Inti Raymi owns and operates the mine. The mill was closed in October 2003 and production continued from residual leaching. In 2005, additional material from the stockpiles and Lla Llagua pit were placed on the existing leach pad and ore from the Kori Chaca pit was processed on a new leach pad. In 2007, Inti Raymi sold 76,300 equity ounces of gold. At year-end 2007, we reported 0.4 million equity ounces of gold reserves at Inti Raymi.
Mexico. We have a 44% interest in La Herradura, which is located in Mexicos Sonora desert. La Herradura is operated by Industriales Peñoles (which owns the remaining 56% interest) and comprises an open pit operation with run-of-mine heap leach processing. La Herradura sold 85,700 equity ounces of gold in 2007. At year-end 2007, we reported 1.6 million equity ounces of gold reserves at La Herradura.
Canada. During 2007, our Canadian operations included one underground mine. Golden Giant (100% owned) is located approximately 25 miles (40 kilometers) east of Marathon in Ontario, Canada, and began production in 1985. Mining operations at Golden Giant were completed in December 2005 with remnant sales continuing through the second quarter of 2007. In 2007, Golden Giant sold 12,000 ounces of gold.
Hope Bay. With the successful acquisition of Miramar in December 2007, we now control the Hope Bay project, a large undeveloped gold project in the Nunavut Territory of Canada. Hope Bay is consistent with the Companys strategic focus on exploration and project development and was acquired with the intention of adding higher grade ore reserves and developing a new core gold mining district in a AAA-rated country.
The following tables detail operating statistics related to gold production, sales and production costs.
The following table details operating statistics related to Batu Hijau copper production, sales and production costs.
Proven and Probable Equity Reserves
We had proven and probable equity gold reserves of 86.5 million contained ounces as of December 31, 2007.
Reserves were calculated at a $575, A$750 or NZ$850 per ounce gold price assumption. Our 2007 reserves would decline by approximately 6%, or 5.6 million ounces, if calculated at a $550 per ounce gold price. An increase in the gold price to $600 per ounce would increase reserves by approximately 4%, or 4.0 million ounces, all other assumptions remaining constant.
As of December 31, 2007, our equity gold reserves in Nevada were 29.4 million ounces. Outside of Nevada, year-end equity gold reserves were 57.1 million ounces, including 19.4 million ounces in Australia/New Zealand, 17.4 million ounces in Ghana, 14.2 million ounces in Peru, 4.2 million ounces in Indonesia and 2.0 million ounces at Other Operations.
Our equity copper reserves as of December 31, 2007 were 7.6 billion contained pounds. Reserves were calculated at a price of $1.75 or A$2.00 per pound assumption.
Under our current mining plans, all of our reserves are located on fee property or mining claims or will be depleted during the terms of existing mining licenses or concessions, or where applicable, any assured renewal or extension periods for the licenses or concessions.
Proven and probable equity reserves are based on extensive drilling, sampling, mine modeling and metallurgical testing from which we determined economic feasibility. The price sensitivity of reserves depends upon several factors including grade, metallurgical recovery, operating cost, waste-to-ore ratio and ore type. Metallurgical recovery rates vary depending on the metallurgical properties of each deposit and the production process used. The reserve tables below list the average metallurgical recovery rate for each deposit, which takes into account the several different processing methods that we use. The cut-off grade, or lowest grade of mineralized material considered economic to process, varies with material type, metallurgical recoveries and operating costs.
The proven and probable equity reserve figures presented herein are estimates based on information available at the time of calculation. No assurance can be given that the indicated levels of recovery of gold and copper will be realized. Ounces of gold or pounds of copper in the proven and probable reserves are calculated without regard to any losses during metallurgical treatment. Reserve estimates may require revision based on actual production experience. Market price fluctuations of gold and copper, as well as increased production costs or reduced metallurgical recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves.
We publish reserves annually, and we will recalculate reserves as of December 31, 2008, taking into account metal prices, divestments and depletion as well as any acquisitions and additions to reserves during 2008.
The following tables detail gold proven and probable equity reserves(1) reflecting only those reserves owned by Newmont as of December 31, 2007 and 2006:
The term economically, as used in the definition of reserve, means that profitable extraction or production has been established or analytically demonstrated in a full feasibility study to be viable and justifiable under reasonable investment and market assumptions.
The term legally, as used in the definition of reserve, does not imply that all permits needed for mining and processing have been obtained or that other legal issues have been completely resolved. However, for a reserve to exist, Newmont must have a justifiable expectation, based on applicable laws and regulations, that issuance of permits or resolution of legal issues necessary for mining and processing at a particular deposit will be accomplished in the ordinary course and in a timeframe consistent with Newmonts current mine plans.
The term proven reserves means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and (c) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established.
The term probable reserves means reserves for which quantity and grade are computed from information similar to that used for proven reserves, but the sites for sampling are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
Proven and probable equity reserves were calculated using different cut-off grades. The term cut-off grade means the lowest grade of mineralized material that can be included in the reserves in a given deposit. Cut-off grades vary between deposits depending upon prevailing economic conditions, mineability of the deposit, by-products, amenability of the ore to gold or copper extraction, and type of milling or leaching facilities available.
2007 reserves were calculated at a $575, A$750 or NZ$850 per ounce gold price unless otherwise noted.
2006 reserves were calculated at a $500, A$675 or NZ$750 per ounce gold price unless otherwise noted.
The following tables detail copper proven and probable equity reserves(1) reflecting only those reserves owned by Newmont as of December 31, 2007 and 2006:
The following table reconciles year-end 2007 and 2006 gold proven and probable equity reserves:
ITEM 3. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 32 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2007.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Newmonts executive officers as of February 20, 2008 were:
There are no family relationships by blood, marriage or adoption among any of the above executive officers of Newmont. All executive officers are elected annually by the Board of Directors of Newmont to serve for one year or until his respective successor is elected and qualified. There is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an executive officer.
Mr. OBrien was elected President and Chief Executive Officer as of July 1, 2007, having served as President and Chief Financial Officer from April 2007 to July 2007, Executive Vice President and Chief Financial Officer from September 2006 to April 2007 and Senior Vice President and Chief Financial Officer during 2005 and 2006. Mr. OBrien was Executive Vice President and Chief Financial Officer of AGL Resources from 2001 to 2005.
Mr. Banks was elected Executive Vice President Legal and Public Affairs, in 2006. He previously served as Senior Vice President and General Counsel from 2005 to 2006; Vice President and General Counsel from 2001 to 2005; and Secretary from 2001 to 2004.
Mr. Ball was elected Senior Vice President and Chief Financial Officer in July 2007. Mr. Ball served as Vice President and Controller from 2004 to July 2007. Previously, he served as Group Executive, Investor Relations, from 2002 to 2004.
Mr. Enders was elected Senior Vice President, Worldwide Exploration in 2006. Mr. Enders served as Vice President, Worldwide Exploration from 2003 to 2006. Mr. Enders was President of Phelps Dodge Exploration Corporation before joining Newmont.
Mr. Engel was elected Senior Vice President, Strategy and Corporate Development in July 2007. Mr. Engel served as Vice President, Strategic Planning and Investor relations from 2006 to July 2007; Group Executive, Investor Relations from 2004 to 2006; and Assistant Treasurer from 2001 to 2004.
Mr. Lansdown was elected Senior Vice President, Project Development and Operations Services in July 2007. Mr. Lansdown served as Vice President, Project Engineering from 2006 to July 2007; Project Executive, Boddington, from 2005 to 2006; and Operations Manager, Yanacocha from 2003 to 2005.
Mr. Gutierrez was named Vice President, Tax and Accounting in July 2007, having served as Vice President, Tax, from 2005 to July 2007. Prior to joining Newmont, he was a partner with KPMG LLP from 2002 to 2005, serving as the Denver office Tax Managing Partner from 2003 to 2005.
Mr. Hill was named Vice President, Asia Pacific Operation in January 2008. Mr. Hill previously served as Managing Director and Chief Executive Officer of Norilsk Nickel Australia Pty Ltd in 2007; Managing Director and Chief Executive Officer of Equatorial Mining Ltd from 2004 to 2006; and Managing Director of Falconbridge (Australia) Pty Ltd from 2000 to 2004.
Mr. Hinze was elected Vice President, North American Operations in 2005. He previously served as General Manager of the Minera Yanacocha operations in Peru from 2003 to 2005 and managed the Minahasa project in Indonesia from 2001 to 2002.
Mr. Huspeni was elected Vice President, African Operations in January 2008. Mr. Huspeni previously served as Vice President, Exploration Business Development from 2005 to 2008 and Vice President, Mineral District Exploration, from 2002 to 2005.
Mr. Johnson was elected Vice President and Chief Accounting Officer in February 2008. Mr. Johnson previously served as Controller and Chief Accounting Officer from July 2007 to February 2008; Assistant Controller from 2004 to July 2007; Operations Controller and Regional Controller, Australia from 2003 to 2004. Before joining Newmont, Mr. Johnson served as Senior Vice President, Finance and Administration at Pasminco Zinc, Inc.
Mr. Mahoney was elected Vice President and Treasurer of Newmont in 2002. He served as Treasurer of Newmont from 2001 to 2002. Previously, he served as Assistant Treasurer from 1997 to 2001.
Mr. Nixon was elected Vice President, Technical Services in January 2008. Mr. Nixon previously served as Vice President, African Operations in 2007; Regional Group Executive, Africa and Eurasia, from 2006 to 2007; and Managing Director, Central Asia and Europe, from 2002 to 2006.
Mr. Santa Cruz was named Vice President, South American Operations in 2001. He served as General Manager of Minera Yanacocha S.R.L. from 1997 to 2001.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Newmonts common stock is listed and principally traded on the New York Stock Exchange (under the symbol NEM) and is also listed in the form of CHESS Depositary Interests (CDIs) (under the symbol NEM) on the Australian Stock Exchange (ASX). In Australia, Newmont is referred to as Newmont Mining Corporation ARBN 099 065 997 organized in Delaware with limited liability. Since July 1, 2002, Newmont CDIs have traded on the ASX as a Foreign Exempt Listing granted by the ASX, which provides an ancillary trading facility to Newmonts primary listing on NYSE. Newmont Mining Corporation of Canada Limiteds exchangeable shares (Exchangeable Shares) are listed on the Toronto Stock Exchange (under the symbol NMC). The following table sets forth, for the periods indicated, the closing high and low sales prices per share of Newmonts common stock as reported on the New York Stock Exchange Composite Tape.
On February 14, 2008, there were outstanding 435,838,958 shares of Newmonts common stock (including shares represented by CDIs), which were held by approximately 15,410 stockholders of record. A dividend of $0.10 per share of common stock outstanding was declared in each quarter of 2007 and 2006, for a total of $0.40 during each year.
On February 14, 2008, there were outstanding 17,449,759 Exchangeable Shares, which were held by 46 holders of record. The Exchangeable Shares are exchangeable at the option of the holders into Newmont common stock. Holders of Exchangeable Shares are therefore entitled to receive dividends equivalent to those that Newmont declares on its common stock.
The determination of the amount of future dividends will be made by Newmonts Board of Directors from time to time and will depend on Newmonts future earnings, capital requirements, financial condition and other relevant factors.
Issuer purchase of equity securities:
The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Newmont Mining Corporation and its subsidiaries (collectively, Newmont or the Company). References to A$ refer to Australian currency, CDN$ to Canadian currency, NZD$ to New Zealand currency, IDR to Indonesian currency and $ to United States currency.
This discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three years ended December 31, 2007, as well as our future results. It consists of the following subsections:
This item should be read in conjunction with our consolidated financial statements and the notes thereto included in this annual report.
Newmont is one of the worlds largest gold producers and is the only gold company included in the S&P 500 Index, Fortune 500 and in the Dow Jones Sustainability Index-World. We are also engaged in the exploration for and acquisition of gold properties. We have significant assets or operations in the United States, Australia, Peru, Indonesia, Canada, Bolivia, New Zealand, Ghana and Mexico.
We face key risks associated with our business. One of the most significant risks is fluctuation in the prices of gold and copper, which are affected by numerous factors beyond our control. Other challenges we face include capital and production cost increases and social and environmental issues. Operating costs at our mines are subject to variation due to a number of factors, such as changing ore grades, metallurgy, revisions to mine plans and changes in accounting principles. At foreign locations, such costs are also influenced by currency fluctuations that may affect our U.S. dollar operating costs. In addition, we must continually replace reserves depleted through production by expanding known ore bodies, by acquisition or by locating new deposits in order to maintain production levels over the long term.
Summary of Consolidated Financial and Operating Performance
The table below highlights key financial and operating results:
Consolidated Financial Performance
Gold revenues increased in 2007 from 2006 primarily due to higher gold prices, partially offset by lower gold sales volume. Gold sales decreased to 6.2 million ounces in 2007 from 7.2 million ounces in 2006, primarily due to decreased throughput and lower grade ores processed at Yanacocha and Nevada, partially offset by a full year of operations at Ahafo in 2007. Copper revenues increased in 2007 from 2006 due to an increase in the average realized price as the final deliveries were made under the copper collar contracts in February 2007 (see Results of Consolidated Operations below).
The gold price increases over the last few years were partially offset by higher production costs and fewer gold ounces sold. During the same period, we have seen significant increases in the costs of labor, fuel, power and other bulk consumables.
In addition, our financial and operating results were impacted by the following (pre-tax):
Acquisition of Miramar
On October 9, 2007, the Company announced the proposed acquisition of Miramar Mining Corporation (Miramar) and offered to acquire all of the outstanding common shares of Miramar for C$6.25 in cash. On December 27, 2007, 155 million common shares of Miramar had been validly deposited to Newmonts offer. Newmont took up, accepted and paid for such shares, representing approximately 70% of the common shares of Miramar which, in addition to the 18 million shares previously owned by the Company, brought the Companys interest in Miramar to approximately 78%. Miramar is a Canadian company that controls the Hope Bay project, a large undeveloped gold project in Nunavut, Canada. The Hope Bay Project is consistent with the Companys strategic focus on exploration and project development and was acquired with the intention of adding higher grade ore reserves and developing a new core gold mining district in a AAA-rated country.
In January 2008, Newmont acquired approximately 40 million additional common shares of Miramar at a price of C$6.25 per common share, bringing its interest in Miramar to 96%. This successfully completed the offer to acquire all of the outstanding common shares of Miramar. Newmont has mailed a notice of compulsory acquisition pursuant to the Business Corporations Act (British Columbia) to acquire all the remaining common shares of Miramar that were not acquired pursuant to the offer.
The Companys financial position was as follows:
During 2007 our debt and liquidity positions were affected by the following:
Certain key factors will affect our future financial and operating results. These include, but are not limited to, the following:
The Company operates in numerous countries around the world and accordingly is subject to, and pays, annual income taxes under the various income tax regimes in the countries in which it operates. Some of these tax regimes are defined by contractual agreements with the local government, and others are defined by the general corporate income tax laws of the country. The Company has historically filed, and continues to file, all required income tax returns and to pay the taxes reasonably determined to be due. The tax rules and regulations in many countries are highly complex and subject to interpretation. From time to time the Company is subject to a review of its historic income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Companys business conducted within the country involved.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN48) an interpretation of FASB Statement No. 109, Accounting for Income Taxes on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in the application of the income tax laws to the Companys operations. The interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The cumulative effects of applying this interpretation have been recorded as a decrease in retained earnings of $108, an increase of $5 in goodwill, an increase of $4 in minority interest, a decrease in net deferred tax assets of $37 (primarily, as a result of utilization of foreign tax credits and net
operating losses as part of the FIN 48 measurement process, offset, in part, by the impact of the interaction of the Alternative Minimum Tax rules) and an increase of $72 in the net liability for unrecognized income tax benefits.
As of December 31, 2006, the Company adopted the provisions of FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (FAS 158). FAS 158 required employers that sponsor one or more defined benefit plans to (i) recognize the funded status of a benefit plan in its statement of financial position, (ii) recognize the gains or losses and prior service costs or credits that arise during the period as a component of other comprehensive income, net of tax, (iii) measure the defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of financial position, and (iv) disclose in the notes to the financial statements additional information about certain effects on net periodic cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The impact of adopting FAS 158 on the Consolidated Balance Sheets as of December 31, 2006 was as follows:
Stock Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)). The Company adopted FAS 123(R) using the modified prospective transition method. Under this method, compensation cost recognized in 2006 included: a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, and b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).
As a result of adopting FAS 123(R), the Companys Loss from continuing operations and Net loss for 2007 was $11 ($0.02 per share) higher and Income from continuing operations and Net income for 2006 was $19 ($0.04 per share) lower, respectively, than if we had continued to account for share-based compensation under APB 25 as we did prior to January 1, 2006. Prior to the adoption of FAS 123(R), cash retained as a result of tax deductions relating to stock-based compensation was included in operating cash flows, along with other tax cash flows. FAS 123(R) requires tax benefits relating to the deductibility of increases in the equity instruments issued under share-based compensation arrangements that are not included in Costs applicable to sales (excess tax benefits) to be presented in the Statement of Cash Flows as financing cash inflows. The benefit realized for tax deductions from option exercises totaled $3 and $6 in 2007 and 2006, respectively.
Deferred Stripping Costs
On January 1, 2006 the Company adopted Emerging Issues Task Force Issue No. 04-06 (EITF 04-06), Accounting for Stripping Costs Incurred during Production in the Mining Industry. EITF 04-06 addresses the accounting for stripping costs incurred during the production phase of a mine and refers to these costs as variable production costs that should be included as a component of inventory to be recognized in Costs applicable to
sales in the same period as the revenue from the sale of inventory. As a result, capitalization of post-production stripping costs is appropriate only to the extent product inventory exists at the end of a reporting period. The guidance required the recognition of a cumulative effect adjustment to opening retained earnings in the period of adoption, with no charge to earnings in the period of adoption for prior periods. The cumulative effect adjustment reduced retained earnings by $81 (net of tax and minority interests) and eliminated the $71 net deferred stripping asset from the balance sheet in 2006. Adoption of EITF 04-06 had no impact on the Companys cash position or net cash from operations.
Critical Accounting Policies
Listed below are the accounting policies that the Company believes are critical to its financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.
Carrying Value of Goodwill
As of December 31, 2007, the carrying value of goodwill was approximately $186. Goodwill represents the excess of the aggregate purchase price over the fair value of the identifiable net assets. Goodwill was assigned to various mine site reporting units in the Australia/New Zealand Segment. Our approach to allocating goodwill was to identify those reporting units that we believed had contributed to such excess purchase price. We then performed valuations to measure the incremental increases in the fair values of such reporting units that were attributable to the acquisitions, and that were not already captured in the fair values assigned to such units identifiable net assets.
We evaluate, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, we compare the estimated fair values of the reporting units to their carrying amounts. If the carrying value of a reporting unit exceeds its fair value at the time of the evaluation, we would compare the implied fair value of the reporting units goodwill to its carrying amount and any shortfall would be charged to earnings. Assumptions underlying fair value estimates are subject to risks and uncertainties.
Mine Site Goodwill
The assignment of goodwill to mine site reporting units was based on synergies that have been incorporated into our operations and business plans over time. The amount of goodwill assigned to each segment or reporting unit was based on discounted cash flow analyses that assumed risk-adjusted discount rates over the remaining lives of the applicable mining operations. We believe that triggering events with respect to the goodwill assigned to mine site reporting units could include, but are not limited to: (i) a significant decrease in our long-term gold and copper price assumptions; (ii) a decrease in reserves; (iii) a significant reduction in the estimated fair value of mine site exploration potential; and (iv) any event that might otherwise adversely affect mine site production levels or costs. We performed our annual impairment test of mine site goodwill as of December 31, 2007 and determined that the fair value of each mine site reporting unit was in excess of the relevant carrying value as of December 31, 2007. For more information on the discounted cash flows used to value mine site reporting units, see Carrying Value of Long-Lived Assets, below.
Exploration Segment Goodwill
The Exploration Segment is responsible for all activities, whether near-mine or greenfield, associated with the Companys efforts to discover new mineralized material that could ultimately advance into proven and probable reserves. As discussed in greater detail below, when performing its Exploration Segment goodwill impairment testing, the Company uses historic additions to proven and probable reserves as an indication of the expected future performance of the Exploration Segment.
The Exploration Segments valuation model attributes all cash flows expected to be derived from future greenfield exploration discoveries, to the Exploration Segment. The valuation model includes managements best estimates of future reserve additions from exploration activities and all revenues and costs associated with their discovery, development and production. Historical proven and probable reserve additions, excluding acquisitions, are used as an indicator of the Exploration Segments ability to discover additional reserves in the future. Actual reserve additions may vary significantly from year to year due to the time required to advance a deposit from initial discovery to proven and probable reserves and based on the timing of when proven and probable reserves can be reported under the Securities and Exchange Commission Industry Guide 7.
We performed our annual impairment test of the Exploration Segment goodwill during the fourth quarter of 2007. Based on the Exploration Segments historic additions to proven and probable reserves and managements best estimates of future reserve additions from exploration activities and all revenues and costs associated with their discovery, development and production, the Exploration Segments estimated fair value was negligible. The decreased value attributable to the Exploration Segment resulted primarily from (i) a significantly lower assumed annual reserve growth rate (from 4% to 3%), (ii) a significant change in the financial markets resulting in a significant increase in the discount rate (from 8% to 10%), and (iii) an increase in finding costs due to a combination of increased spending and reduced exploration success.
Based on the negligible valuation, the Exploration Segment goodwill was impaired and the full $1,122 of goodwill was recorded as a non-cash write-down of goodwill as of December 31, 2007.
Merchant Banking Goodwill
During June 2007, Newmonts Board of Directors approved a plan to cease Merchant Banking activities. Merchant Banking previously provided advisory services to assist in managing the Companys portfolio of operating and property interests. Merchant Banking was also engaged in developing value optimization strategies for operating and non-operating assets, business development activities, merger and acquisition analysis and negotiations, monetizing inactive exploration properties, capitalizing on proprietary technology and know-how and acting as an internal resource for other corporate groups to improve and maximize business outcomes. As a result of the Boards approval of managements plan to cease Merchant Banking activities, the Company recorded a $1,665 non-cash charge to impair the goodwill associated with the Merchant Banking Segment during the second quarter of 2007.
Depreciation, Depletion and Amortization
Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated future lives of such facilities or equipment. These lives do not exceed the estimated mine life based on proven and probable reserves as the useful lives of these assets are considered to be limited to the life of the relevant mine. During the second quarter of 2007, the Company revised its estimate of haul truck lives prospectively to ten years based on experience. The impact of the change in estimate was a reduction of Depreciation, depletion and amortization which decreased the Companys Loss from continuing operations and Net loss by $13 ($0.03 per share) in 2007.
Costs incurred to develop new properties are capitalized as incurred, where it has been determined that the property can be economically developed based on the existence of proven and probable reserves. At our surface mines, these costs include costs to further delineate the ore body and remove overburden to initially expose the ore body. At our underground mines, these costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development. All such costs are amortized using the units-of-production (UOP) method over the estimated life of the ore body based on estimated recoverable ounces to be produced from proven and probable reserves.
Major development costs incurred after the commencement of production are amortized using the UOP method based on estimated recoverable ounces to be produced from proven and probable reserves. To the extent that such costs benefit the entire ore body, they are amortized over the estimated recoverable ounces or pounds in proven and probable reserves of the entire ore body. Costs incurred to access specific ore blocks on areas that only provide benefit over the life of that block or area are amortized over the estimated recoverable ounces or pounds in proven and probable reserves of that specific ore block or area.
The calculation of the UOP rate of amortization, and therefore the annual amortization charge to operations, could be materially impacted to the extent that actual production in the future is different from current forecasts of production based on proven and probable reserves. This would generally occur to the extent that there were significant changes in any of the factors or assumptions used in determining reserves. These factors could include: (i) an expansion of proven and probable reserves through exploration activities; (ii) differences between estimated and actual costs of production, due to differences in grade, metal recovery rates and foreign currency exchange rates; and (iii) differences between actual commodity prices and commodity price assumptions used in the estimation of reserves. If reserves decreased significantly, amortization charged to operations would increase; conversely, if reserves increased significantly, amortization charged to operations would decrease. Such changes in reserves could similarly impact the useful lives of assets depreciated on a straight-line basis, where those lives are limited to the life of the mine, which in turn is limited to the life of the proven and probable reserves.
The expected useful lives used in depreciation, depletion and amortization calculations are determined based on applicable facts and circumstances, as described above. Significant judgment is involved in the determination of useful lives, and no assurance can be given that actual useful lives will not differ significantly from the useful lives assumed for the purpose of depreciation, depletion and amortization calculations.
Carrying Value of Stockpiles
Stockpiles represent ore that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile, the number of contained ounces based on assay data, and the estimated recovery percentage based on the expected processing method. Stockpile tonnages are verified by periodic surveys. Stockpiles are valued based on mining costs incurred up to the point of stockpiling the ore, including applicable depreciation, depletion and amortization relating to mining operations. Costs are added to a stockpile based on current mining costs and removed at the average cost per recoverable ounce of gold or pound of copper in the stockpile. Stockpiles are reduced as material is removed and processed further. The adoption of EITF 04-06 resulted in the allocation of deferred and advanced stripping costs to stockpiles and the value of our stockpiles decreased from $532 as of December 31, 2005 to $515 as of January 1, 2006. As of December 31, 2007 and 2006, our stockpiles had a total carrying value of $732 and $742, respectively.
Costs that are incurred in or benefit from the productive process are accumulated as stockpiles. We record stockpiles at the lower of average cost or net realizable value (NRV), and carrying values are evaluated at least quarterly. NRV represents the estimated future sales price of the product based on prevailing and long-term metals prices, less estimated costs to complete production and bring the product to sale. The primary factors that influence the need to record write-downs of stockpiles include short-term and long-term metals prices and costs for production inputs such as labor, fuel and energy, materials and supplies, as well as realized ore grades and actual production levels. If short-term and long-term metals prices decrease, the value of the stockpiles decreases, and it may be necessary to record a write-down of stockpiles to NRV. During 2007, 2006 and 2005, write-downs of stockpiles to NRV totaled $14, $2 and $9, respectively.
Cost allocation to stockpiles and the NRV measurement involves the use of estimates and assumptions unique to each mining operation regarding current and future operating and capital costs, metal recoveries, production levels, commodity prices, proven and probable reserve quantities, engineering data and other factors. A high degree of judgment is involved in determining such assumptions and estimates and no assurance can be given that actual results will not differ significantly from those estimates and assumptions.
Carrying Value of Long-Lived Assets
We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate the related carrying amounts may not be recoverable. An asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on estimated quantities of recoverable minerals, expected gold and other commodity prices (considering current and historical prices, price trends and related factors), production levels and costs of production, capital and reclamation costs, all based on life-of-mine plans. The significant assumptions in determining the future discounted cash flows for each mine site reporting unit as of December 31, 2007, apart from production cost and capitalized expenditure assumptions unique to each operation, included a long-term gold price of $700 per ounce, a long-term copper price of $2.25 per pound and an Australian dollar exchange rate of A$1.25 per $1.00.
Existing proven and probable reserves and value beyond proven and probable reserves, including mineralization other than proven and probable reserves and other material that is not part of the measured, indicated or inferred resource base, are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term recoverable minerals refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable minerals from such exploration stage mineral interests are risk adjusted based on managements relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups.
As discussed above under Depreciation, Depletion and Amortization, various factors could impact our ability to achieve our forecasted production schedules from proven and probable reserves. Additionally, production, capital and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material could ultimately be mined economically. Assets classified as other mine-related exploration potential and greenfields exploration potential have the highest level of risk that the carrying value of the asset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.
With the exception of the Call Spread Transactions (as described below in Note 20), all financial instruments that meet the definition of a derivative are recorded on the balance sheet at fair market value. Changes in the fair market value of derivatives recorded on the balance sheet are recorded in the statements of consolidated (loss) income, except for the effective portion of the change in fair market value of derivatives that are designated as a cash flow hedge and qualify for cash flow hedge accounting. Our portfolio of derivatives includes various complex instruments. Management applies significant judgment in estimating the fair value of instruments that are highly sensitive to assumptions regarding commodity prices, market volatilities, foreign currency exchange rates and interest rates. Variations in these factors could materially affect amounts credited or charged to earnings to reflect the changes in fair market value of derivatives. In addition, certain derivative contracts are accounted for as cash flow hedges, whereby the effective portion of changes in fair market value of these instruments are deferred in Accumulated other comprehensive income and will be recognized in the statements of consolidated operations when the underlying production designated as the hedged item impacts earnings. All derivative contracts qualifying for hedge accounting are designated against the applicable portion of future foreign currency expenditures or future production from proven and probable reserves, where management believes the forecasted transaction is probable of occurring. To the extent that management determines that such future foreign expenditures or production are no longer probable of occurring, gains and losses deferred in
Accumulated other comprehensive income would be reclassified to the statements of consolidated (loss) income immediately.
Reclamation and Remediation Obligations (Asset Retirement Obligations)
Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and remediation costs. The asset retirement obligation is based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the asset retirement obligation at each mine site in accordance with FASB FAS No. 143, Accounting for Asset Retirement Obligations.
Future remediation costs for inactive mines are accrued based on managements best estimate at the end of each period of the costs expected to be incurred. Such cost estimates include, where applicable, ongoing care, water treatment, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised.
Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation and remediation.
Income and Mining Taxes
We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows and the application of existing tax laws in each jurisdiction. Refer above under Carrying Value of Long-Lived Assets for a discussion of the factors that could cause future cash flows to differ from estimates. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize deferred tax assets recorded at the balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which we operate could limit our ability to obtain the future tax benefits represented by our deferred tax assets recorded at the reporting date.
The Companys operation involves dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. As of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48), an interpretation of FASB Statement No. 109, Accounting for Income Taxes, guidance to record these liabilities (refer to Note 8 of the Consolidated Financial Statements for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Companys current estimate of the tax liabilities. If the Companys estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Consolidated Financial Results
Sales - gold, net for 2007 increased $94 compared to 2006 due to a $103 per ounce increase in the average realized price after treatment and refining charges partially offset by 908,000 fewer ounces sold. Salesgold, net for 2006 increased $618 compared to 2005 due to a $157 per ounce increase in the average realized price after treatment and refining charges partially offset by 1,129,000 fewer ounces sold. The following analysis summarizes the change in consolidated gold sales revenue:
The change in consolidated gold sales is due to:
Sales - copper, net increased in 2007 compared to 2006 due to higher realized prices as the final deliveries were made under the copper collar contracts in February 2007, partially offset by lower production. In 2006, copper sales were unchanged compared to 2005 as lower sales volumes were offset by higher realized prices. In addition, in 2006 a loss of $56 was included in Other income, net for the ineffective portion of copper hedges. For a complete discussion regarding variations in copper volumes, see Results of Consolidated Operations below.
The following analysis reflects the changes in consolidated copper sales: