Newmont Mining Corp. (NEM, Financial) closed the third quarter of 2016 generating an adjusted net income of 38 cents, 13.6% lower than its second quarter net income of 44 cents. Newmont’s third quarter earnings per share missed analysts' expectations with a 24% surprise.
Source: Yahoo Finance
The net income attributable to shareholders from continuing operations and under GAAP increased 6.7% year over year, from $159 million, or 30 cents per share, in the third quarter of 2015 to $169 million, or 32 cents per share, in the third quarter of 2016.
The continuing operations results do not take into account the Batu Hijau operations because the Indonesian asset is going to be sold.Ă‚
"It could be into the early part of the fourth quarter. It is just complex going through all the different elements of approvals," Newmont CEO Gary Goldberg said.
The sale of its Indonesian asset is part of Newmont's strategy to enhance the quality of its assets base through the creation of a longer-life, lower-cost asset portfolio over time. The largest U.S. gold producer is mainly pursuing this target through acquisitions, exploration activities and projects development. Newmont is engaged in several high margin projects and acquisitions, of which some have already been completed.
At the beginning of October, Newmont announced it is bringing the Merian Gold project into production. In the first five years of operation at Merian, Suriname, the U.S.'s largest gold miner will add approximately 400,000 to 500,000 ounces of gold to the total production at costs applicable to sales (CAS), ranging between $575 and $675 per ounce and at an all-in sustaining cost ranging between $650 and $750 per ounce. Gold reserves are estimated to be 5.1 million ounces.
In March of 2016, the first production of gold commenced at Cripple Creek and Victor in Colorado. The mine produces between 350,000 and 400,000 ounces of gold at $600 to $650 per ounce.
“Taken together, these projects are expected to add one million ounces of lower cost gold production over the next two years,” Goldberg said.
In the third quarter of 2016, the miner produced 1.25 million ounces of attributable gold production, up 3.3% year over year, at CAS of $706 per ounce, up 9.5% year over year, and at an AISC of $925 per ounce, up 5.2% year over year.
In the third quarter, the miner produced 15,000 tonnes of attributable copper production, flat year over year, at CAS of $2.14 per pound, up 20% year over year, and at an AISC of $2.57 per pound, up 16.3% year over year.
For 2016, attributable gold production is expected to be between 4.8 millon and 5.0 million ounces at CAS between $640 and $690 per ounce and an AISC between $870 and $930 per ounce.
For 2016, attributable copper production is expected to be between 40,000 and 60,000 tonnes at CAS of between $1.90 and $2.10 per pound and AISC of between $2.30 and $2.50 per pound.
Concerning acquisitions, Newmont is determined to become the sole owner of the Kalgoorlie mine in Australia by acquiring the other 50% from Barrick Gold Corp. (ABX, Financial). Kalgoorlie stimulates the interest of several gold mining companies, but Newmont seems to be the most determined bidder in the sales process.
"We understand the asset well. We certainly are in a good position to be able to determine what at least we believe it is worth," Goldberg said.
The two gold mining companies agree on the resource value of the mine, but not on its future value. However, the deal should be completed by the end of the year.
Besides Merian, Cripple Creek and Victor, with the completion of the sale of Batu Hijau and the acquisition of Barrick's 50% interest stake in Kalgoorlie, the miner will bring another contribution to the enhancement of the operating efficiency which is reflected in one ratio in particular: the trailing 12 months average free cash flow per share. According to Newmont, it already has the highest free cash flow in the gold stock industry. It boasts $1.89 versus the 91 cents of its competitors. After the third quarter results, the ratio should be a bit lower when computed on trailing 12 months, as it takes into account the negative free cash flow of $-188 million reported in the fourth quarter of 2015.
In the third quarter of 2015, the free cash flow increased by nearly 51% year over year, from $159 million in the third quarter of 2015 to $240 million in the third quarter of 2016. Due to improvement of cash flow from operations, up 7.2%, as a sign of company's high operating efficiency that allows Newmont to take the best from the increase in the gold price (the average quarterly price increased nearly 19% year over year) and lower capital expenditure ($269 million) used during the third quarter of 2016 (nearly -15% year over year).
“Development capital spending decreased as construction neared completion at Merian and Cripple Creek and Victor. Sustaining capital of $147 million was relatively unchanged from $146 million in the prior year quarter.” (Newmont's NR).
For 2016, the miner lowered guidance on capital expenditure to be between $970 million and $1.2 billion. The amount for sustaining capital expenditure is expected to be between $550 and $600 million.
Earlier than expected production at Cripple Creek and Victor, Merian and Long Canyon, made Newmont review its guidance on depreciation that is expected to be between $1.2 billion and $1.3 billion, about a 9% increase from the prior guidance.
In the third quarter, compared to the same quarter of 2015, the miner reported an increase in the EBITDA by 29.8% (from $513 million to $666 million). With the gold price going higher, I expect that Newmont will further improve both EBITDA and the cash flow from continuing operations thanks to its high quality asset base.
When the balance sheet is under scrutiny, Newmont is a financially healthy miner with cash and cash equivalents totalling $2.1 billion (as of the third quarter), plenty of cash to complete acquisitions, continue explorations and develop projects. This is characterized by a current ratio of 2.80.
In regard to debt, Newmont is neither one of the most indebted gold mining companies in the industry nor a company that shows difficulty in paying interest expenses on outstanding debt.
“The company expects to pay between $260 and $280 million of interest expense in 2016. So far this year, Newmont has reduced consolidated debt by more than $1.1 billion, including $330 million from the PTNNT credit facility. Newmont remains on track to exceed targeted debt repayment of between $800 million and $1.3 billion of debt by 2018.” (Newmont's NR).
Today, Newmont Mining Corp. announced the tender offer “to purchase for cash an aggregate combined principal amount of up to $500,000,000 of its 3.500% Senior Notes due 2022 and 5.125% Senior Notes due 2019.”
Newmont has an interest coverage of 4.30. The long-term debt to equity (mrq) and total debt to equity (mrq) ratios are 47.05 and 48.77 versus 37.98 and 55.34 for the industry.
Its operating efficiency and successful strategy in the debt reduction (11% reduction in net debt from prior year quarter) is reflected in the improvement of Newmont’s net debt to EBITDA ratio, when compared to the competitor average ratio:
Source: Newmont Q3 2016 results, presentation
Newmont's board of directors declared "a quarterly dividend of five cents per share, payable on Dec. 29, 2016, to holders of record at the close of business on Dec. 8, 2016." The miner also announced the 'Enhanced Gold Price-linked Dividend Policy', which bases the determination of the "quarterly payable dividend on the average LBMA P.M. Gold Price for the preceding quarter." More details can be found at businesswire.com.
At the moment, Newmont is trading at $34.28 and gained 92.05% year to date.
Enterprise value/EBITDA is 7.14 and price/book (mrq) is 1.59.
Disclosure: I have no positions in either Newmont Mining Corp. or any other securities mentioned in this article.
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