Newmont Announces Third Quarter 2018 Results

Newmont Mining Corp. (NYSE: NEM) (Newmont or the Company) announced third quarter 2018 results.

• Net income (loss): Delivered GAAP net income (loss) from continuing operations attributable to stockholders of $(161) million or $(0.31) per diluted share; delivered adjusted net income¹ of $175 million or $0.33 per diluted share, down $0.01 compared to the prior year quarter
• EBITDA: Generated $636 million in adjusted EBITDA², down $20 million from the prior year quarter
• Cash flow: Reported consolidated cash flow from continuing operations of $428 million and free cash flow³ of $154 million
• Gold costs applicable to sales (CAS)⁴: Reported CAS of $691 per ounce, lower than the Company’s full year guidance
• Gold all-in sustaining costs (AISC)⁵: Reported AISC of $927 per ounce, lower than the Company’s full year guidance
• Attributable gold production: Produced 1.29 million ounces of gold, in line with the Company’s full year guidance
• Portfolio improvements: Completed the CC&V concentrates project in North America; commissioned the primary crusher at Merian in South America; advanced the Tanami Expansion 2 project to definitive feasibility study in Australia; formed a strategic partnership with Evrim Resources in the Cuale gold project in Mexico; expanded regional exploration activities with an investment in Orosur Mining and an opportunity to participate in Miranda Gold’s Lyra project in Colombia
• Financial strength: Ended the quarter with $3.1 billion cash on hand and net debt of $1.1 billion; an industry-leading balance sheet with investment-grade credit profile; and a quarterly dividend declared of $0.14 per share, an increase of 87 percent over the prior year quarter
• Outlook: Improved 2018 corporate-level AISC per ounce and narrowed production outlook

“Newmont delivered $636 million in adjusted EBITDA and $154 million in free cash flow in the third quarter on the back of ongoing productivity improvements across the portfolio and higher grades in Africa and South America,” said Gary J. Goldberg, President and Chief Executive Officer. “We continued to advance profitable projects as we completed the CC&V concentrates project and commissioned the primary crusher at Merian, safely, on budget and on schedule. And we increased investment in Quecher Main, Subika Underground and the Ahafo Mill expansion during the period while increasing our dividend for the third quarter by 87 percent.”

Third Quarter 2018 Summary Results

Net income (loss) from continuing operations attributable to Newmont stockholders of $(161) million or $(0.31) per diluted share, a decrease of $374 million from the prior year quarter primarily due to the impairment of exploration and long-lived assets in North America and lower metal prices, partially offset by lower income tax expense.

Adjusted net income was $175 million or $0.33 per diluted share, compared to $184 million or $0.34 per diluted share in the prior year quarter resulting from lower metal prices. Primary adjustments to net income include $0.74 per diluted share related to impairments and a write-down in North America, $(0.14) per diluted share related to net tax adjustments and valuation allowances, and $0.04 per diluted share related to the change in fair value of marketable equity securities and a gain on asset and investment sales.

Revenue decreased eight percent to $1,726 million for the quarter primarily due to lower average realized gold prices and lower production at various sites.

Average realized price⁶ for gold was $1,201, a reduction of $75 per ounce over the prior year quarter; average realized price for copper was $2.50 per pound, a reduction of $0.56 over the prior year quarter.

Attributable gold production decreased four percent to 1.29 million ounces primarily due to lower mill throughput at Carlin, lower leach production at CC&V, and lower grades at KCGM. These impacts were partially offset by higher grades at Ahafo, Yanacocha and Tanami.

Gold CAS decreased four percent to $691 per ounce for the quarter due to a lower co-product allocation of costs to gold based on a lower relative gold sales value and a favorable Australian dollar foreign currency exchange rate, partially offset by lower ounces sold.

Gold AISC decreased one percent to $927 per ounce for the quarter as lower CAS was offset by higher sustaining capital spend.

Attributable copper production from Phoenix and Boddington was 12,000 tonnes for the quarter, in line with the prior year period. Copper CAS increased 12 percent to $1.54 per pound for the quarter primarily due to a higher co-product allocation of costs to copper. Copper AISC increased 13 percent to $1.87 per pound for the quarter primarily due to higher CAS.

Capital expenditures⁷ increased by 41 percent from the prior year quarter to $274 million with increased investment in Quecher Main, Subika Underground, and the Ahafo Mill expansion.

Consolidated operating cash flow from continuing operations decreased 12 percent from the prior year quarter to $428 million primarily due to lower metal prices, coupled with unfavorable changes in working capital which were partially offset by higher payments attributable to interest in 2017 related to the repayment of convertible debt. Free cash flow decreased 48 percent from the prior year quarter to $154 million from lower operating cash flow and higher investment in growth projects.

Balance sheet ended the quarter with $3.1 billion cash on hand, a leverage ratio of 0.4x net debt to adjusted EBITDA and one of the best credit ratings in the mining sector. The Company is committed to maintaining an investment-grade credit profile.

Projects update

Newmont’s capital-efficient project pipeline supports stable production with improving margins and mine life. Near-term development capital projects are presented below. Funding for Subika Underground, Ahafo Mill Expansion, Quecher Main and Tanami Power projects has been approved and these projects are in execution. Additional projects represent incremental improvements to production and cost guidance. Internal rates of return (IRR) on these projects are calculated at a $1,200 gold price.

• Subika Underground (Africa) leverages existing infrastructure and an optimized approach to develop Ahafo’s most promising underground resource. First production was achieved in June 2017 with commercial production expected in the fourth quarter of 2018. The project is expected to increase average annual gold production by between 150,000 and 200,000 ounces per year for the first five years beginning in 2019 with an initial mine life of approximately 11 years. Capital costs for the project are estimated between $160 and $200 million with expenditure of between $100 and $110 million in 2018. The project has an IRR of more than 20 percent.
• Ahafo Mill Expansion (Africa) is designed to maximize resource value by improving production margins and accelerating stockpile processing. The project also supports profitable development of Ahafo’s highly prospective underground resources. First production is expected in the second half of 2019 with commercial production also expected in the second half of 2019. The expansion is expected to increase average annual gold production by between 75,000 and 100,000 ounces per year for the first five years beginning in 2020. Capital costs for the project are estimated between $140 and $180 million with expenditure of approximately $75 to $85 million in 2018. The project has an IRR of more than 20 percent.
  
  Together the Ahafo expansion projects (Ahafo Mill Expansion and Subika Underground) improve Ahafo’s production to between 550,000 and 650,000 ounces per year for the first five full years of production (2020 to 2024). During this period Ahafo’s CAS is expected to be between $650 and $750 per ounce and AISC is expected to be between $800 and $900 per ounce. This represents average production improvement of between 200,000 and 300,000 ounces at CAS improvement of between $150 and $250 per ounce and AISC improvement of $250 to $350 per ounce, compared to 2016 actuals.
• Quecher Main (South America) will add oxide production at Yanacocha, leverage existing infrastructure and enable potential future growth at Yanacocha. First production is expected in late 2018 with commercial production in the second half of 2019. Quecher Main extends the life of the Yanacocha operation to 2027 with average annual gold production of approximately 200,000 ounces per year between 2020 and 2025 (100 percent basis). During the same period incremental CAS is expected to be between $750 and $850 per ounce and AISC between $900 and $1,000 per ounce. Capital costs for the project are expected to be between $250 and $300 million with expenditure of $90 to $95 million in 2018. The project IRR is expected to be greater than 10 percent.
• Tanami Power (Australia) will lower Tanami power costs by approximately 20 percent beginning in the first quarter of 2019, mitigate fuel supply risk and reduce carbon emissions by 20 percent. The project includes a 450 kilometer natural gas pipeline to be constructed connecting the Tanami site to the Amadeus Gas Pipeline, and construction and operation of two on-site power stations. The gas supply, gas transmission and power purchase agreements are for a 10 year term with options to extend. The project is expected to result in net cash savings of approximately $34 per ounce beginning in 2019. Capital costs are estimated between $225 and $275 million with annual cash lease payments over a 10 year term beginning in 2019 with approximately $6 million of owner’s costs in 2018. The project IRR is expected to be greater than 50 percent at $0.75 AUD.

Outlook

Newmont’s outlook reflects stable gold production and ongoing investment in its operating assets and most promising growth prospects. Longer term guidance is expected to be updated on December 5, 2018.

Attributable gold production is lowered – Production guidance is narrowed to between 4.9 and 5.2 million ounces in 2018.

• North America production is reduced to between 1.9 and 2.1 million ounces in 2018 due to lower production at Carlin’s surface mines.
• South America production remains between 615,000 and 675,000 ounces in 2018 supported by higher grades at Yanacocha and improving productivity at Merian.
• Australia production remains between 1.4 and 1.6 million ounces in 2018 as improved grade and productivity at Tanami help to offset geotechnical challenges at KCGM.
• Africa production remains between 815,000 and 875,000 ounces in 2018 supported by steady production at Ahafo and Akyem and Subika Underground reaching commercial production in the fourth quarter of 2018.

Total gold cost outlook is improved – CAS in 2018 is unchanged between $700 and $750 per ounce and AISC is narrowed to between $950 and $990 per ounce in 2018.

• North America CAS is now expected to be between $750 and $800 per ounce driven by lower production at Carlin. AISC remains unchanged between $920 and $995 per ounce in 2018.
• South America cost guidance remains unchanged. CAS remains between $675 and $735 per ounce and AISC remains between $925 and $1,025 per ounce in 2018.
• Australia cost guidance remains unchanged. CAS remains between $695 and $745 per ounce and AISC remains between $850 and $910 per ounce.
• Africa cost guidance improves with lower than expected inventory adjustments at Akyem. Africa CAS is now expected to be between $650 and $690 per ounce with AISC of between $820 and $860 per ounce in 2018.

Copper – Attributable production remains unchanged between 40,000 and 60,000 tonnes in 2018. CAS remains unchanged between $1.65 and $1.85 per pound in 2018. AISC remains unchanged between $2.00 and $2.20 per pound in 2018.

Capital – Total capital remains unchanged between $1,200 and $1,300 million for 2018. Primary development capital includes expenditure on the Ahafo Mill and Subika Underground expansions in Africa, Twin Underground in North America and Quecher Main in South America and Tanami Power Project in Australia. Sustaining capital remains unchanged between $600 and $700 million in 2018.

Consolidated expense outlook – Interest expense for 2018 remains unchanged between $175 and $215 million and investment in exploration and advanced projects remains unchanged between $350 and $400 million. 2018 outlook for general & administrative costs remains between $225 and $250 million. Guidance for depreciation and amortization remains unchanged between $1,225 and $1,325 million.

Assumptions and sensitivities – Newmont’s outlook assumes $1,200 per ounce gold price, $2.50 per pound copper price, $0.75 USD/AUD exchange rate and $65 per barrel WTI oil price. A $100 per ounce increase in gold price would deliver an expected $335 million improvement in attributable free cash flow. Similarly, a $10 per barrel reduction in the price of oil and a $0.05 favorable change in the Australian dollar would deliver an expected $25 million and $45 million improvement in attributable free cash flow, respectively. These estimates exclude current hedge programs; please refer to Newmont’s Form 10-Q which was filed with the SEC on October 25, 2018 for further information on hedging positions.

Non-GAAP Financial Measures

Non-GAAP financial measures are intended to provide additional information only and do not have any standard meaning prescribed by U.S. generally accepted accounting principles (“GAAP”). These measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Unless otherwise noted, we present the Non-GAAP financial measures of our continuing operations in the tables below.

Adjusted net income (loss)

Management uses Adjusted net income (loss) to evaluate the Company’s operating performance and for planning and forecasting future business operations. The Company believes the use of Adjusted net income (loss) allows investors and analysts to understand the results of the continuing operations of the Company and its direct and indirect subsidiaries relating to the sale of products, by excluding certain items that have a disproportionate impact on our results for a particular period. Adjustments to continuing operations are presented before tax and net of our partners’ noncontrolling interests, when applicable. The tax effect of adjustments is presented in the Tax effect of adjustments line and is calculated using the applicable regional tax rate. Management’s determination of the components of Adjusted net income (loss) are evaluated periodically and based, in part, on a review of non-GAAP financial measures used by mining industry analysts. Net income (loss) attributable to Newmont stockholders is reconciled to Adjusted net income (loss) as follows:

Earnings before interest, taxes and depreciation and amortization and Adjusted earnings before interest, taxes and depreciation and amortization

Management uses Earnings before interest, taxes and depreciation and amortization (“EBITDA”) and EBITDA adjusted for non-core or certain items that have a disproportionate impact on our results for a particular period (“Adjusted EBITDA”) as non-GAAP measures to evaluate the Company’s operating performance. EBITDA and Adjusted EBITDA do not represent, and should not be considered an alternative to, net income (loss), operating income (loss), or cash flow from operations as those terms are defined by GAAP, and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. Although Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements by other companies, our calculation of Adjusted EBITDA is not necessarily comparable to such other similarly titled captions of other companies. The Company believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. Management’s determination of the components of Adjusted EBITDA are evaluated periodically and based, in part, on a review of non-GAAP financial measures used by mining industry analysts. Net income (loss) attributable to Newmont stockholders is reconciled to EBITDA and Adjusted EBITDA as follows:

Free Cash Flow

Management uses Free Cash Flow as a non-GAAP measure to analyze cash flows generated from operations. Free Cash Flow is Net cash provided by (used in) operating activities less Net cash provided by (used in) operating activities of discontinued operations less Additions to property, plant and mine development as presented on the Condensed Consolidated Statements of Cash Flows. The Company believes Free Cash Flow is also useful as one of the bases for comparing the Company’s performance with its competitors. Although Free Cash Flow and similar measures are frequently used as measures of cash flows generated from operations by other companies, the Company’s calculation of Free Cash Flow is not necessarily comparable to such other similarly titled captions of other companies.

The presentation of non-GAAP Free Cash Flow is not meant to be considered in isolation or as an alternative to net income as an indicator of the Company’s performance, or as an alternative to cash flows from operating activities as a measure of liquidity as those terms are defined by GAAP, and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. The Company’s definition of Free Cash Flow is limited in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, the Company believes it is important to view Free Cash Flow as a measure that provides supplemental information to the Company’s Condensed Consolidated Statements of Cash Flows.

The following table sets forth a reconciliation of Free Cash Flow, a non-GAAP financial measure, to Net cash provided by (used in) operating activities, which the Company believes to be the GAAP financial measure most directly comparable to Free Cash Flow, as well as information regarding Net cash provided by (used in) investing activities and Net cash provided by (used in) financing activities.

Costs applicable to sales per ounce/pound

Costs applicable to sales per ounce/pound are non-GAAP financial measures. These measures are calculated by dividing the costs applicable to sales of gold and copper by gold ounces or copper pounds sold, respectively. These measures are calculated for the periods presented on a consolidated basis. Costs applicable to sales per ounce/pound statistics are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Other companies may calculate these measures differently.

The following tables reconcile these non-GAAP measures to the most directly comparable GAAP measures.

All-In Sustaining Costs

Newmont has worked to develop a metric that expands on GAAP measures, such as cost of goods sold, and non-GAAP measures, such as Costs applicable to sales per ounce, to provide visibility into the economics of our mining operations related to expenditures, operating performance and the ability to generate cash flow from our continuing operations.

Current GAAP measures used in the mining industry, such as cost of goods sold, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that all-in sustaining costs is a non-GAAP measure that provides additional information to management, investors, and analysts that aid in the understanding of the economics of our operations and performance compared to other producers and in the investor’s visibility by better defining the total costs associated with production.

All-in sustaining cost (“AISC”) amounts are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Other companies may calculate these measures differently as a result of differences in the underlying accounting principles, policies applied and in accounting frameworks such as in International Financial Reporting Standards (“IFRS”), or by reflecting the benefit from selling non-gold metals as a reduction to AISC. Differences may also arise related to definitional differences of sustaining versus development capital activities based upon each company’s internal policies.

The following disclosure provides information regarding the adjustments made in determining the all-in sustaining costs measure:

Costs applicable to sales. Includes all direct and indirect costs related to current production incurred to execute the current mine plan. We exclude certain exceptional or unusual amounts from Costs applicable to sales (“CAS”), such as significant revisions to recovery amounts. CAS includes by-product credits from certain metals obtained during the process of extracting and processing the primary ore-body. CAS is accounted for on an accrual basis and excludes Depreciation and amortization and Reclamation and remediation, which is consistent with our presentation of CAS on the Condensed Consolidated Statements of Operations. In determining AISC, only the CAS associated with producing and selling an ounce of gold is included in the measure. Therefore, the amount of gold CAS included in AISC is derived from the CAS presented in the Company’s Condensed Consolidated Statements of Operations less the amount of CAS attributable to the production of copper at our Phoenix and Boddington mines. The copper CAS at those mine sites is disclosed in Note 3 to the Condensed Consolidated Financial Statements. The allocation of CAS between gold and copper at the Phoenix and Boddington mines is based upon the relative sales value of gold and copper produced during the period.

Reclamation costs. Includes accretion expense related to Reclamation liabilities and the amortization of the related Asset Retirement Cost (“ARC”) for the Company’s operating properties. Accretion related to the Reclamation liabilities and the amortization of the ARC assets for reclamation does not reflect annual cash outflows but are calculated in accordance with GAAP. The accretion and amortization reflect the periodic costs of reclamation associated with current production and are therefore included in the measure. The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.

Advanced projects, research and development and exploration. Includes incurred expenses related to projects that are designed to increase or enhance current production and exploration. We note that as current resources are depleted, exploration and advanced projects are necessary for us to replace the depleting reserves or enhance the recovery and processing of the current reserves. As this relates to sustaining our production, and is considered a continuing cost of a mining company, these costs are included in the AISC measure. These costs are derived from the Advanced projects, research and development and Exploration amounts presented in the Condensed Consolidated Statements of Operations less the amount attributable to the production of copper at our Phoenix and Boddington mines. The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.

General and administrative. Includes costs related to administrative tasks not directly related to current production, but rather related to support our corporate structure and fulfill our obligations to operate as a public company. Including these expenses in the AISC metric provides visibility of the impact that general and administrative activities have on current operations and profitability on a per ounce basis.

Other expense, net. We exclude certain exceptional or unusual expenses from Other expense, net, such as restructuring, as these are not indicative to sustaining our current operations. Furthermore, this adjustment to Other expense, net is also consistent with the nature of the adjustments made to Net income (loss) attributable to Newmont stockholders as disclosed in the Company’s non-GAAP financial measure Adjusted net income (loss). The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.

Treatment and refining costs. Includes costs paid to smelters for treatment and refining of our concentrates to produce the salable metal. These costs are presented net as a reduction of Sales on our Condensed Consolidated Statements of Operations.

Sustaining capital. We determined sustaining capital as those capital expenditures that are necessary to maintain current production and execute the current mine plan. Capital expenditures to develop new operations, or related to projects at existing operations where these projects will enhance production or reserves, are generally considered non-sustaining or development capital. We determined the classification of sustaining and development capital projects based on a systematic review of our project portfolio in light of the nature of each project. Sustaining capital costs are relevant to the AISC metric as these are needed to maintain the Company’s current operations and provide improved transparency related to our ability to finance these expenditures from current operations. The allocation of these costs to gold and copper is determined using the same allocation used in the allocation of CAS between gold and copper at the Phoenix and Boddington mines.