Newmont Mining (NEM) is one of the largest pure gold producers in the world and its share price thus depends on the performance of the gold price. Despite the gold producers performing pretty weak lately, Newmont and its competitors are in an increasingly better shape as the current gold price is high enough to continue to strengthen the balance sheet.


A profitable and cash flowing first quarter

Newmont produced a total of 1.23 million ounces of gold in the first quarter, and re-established itself as a major gold producer. On top of these gold sales, the company also produced 13,000 tonnes of copper in the quarter. These 30 million pounds of copper will have contributed in excess of $70M to the top line.
Source: financial statements

The total revenue in the first quarter was $1.66B which allowed Newmont Mining to post a pre-tax income of $193M. That’s lower than the $208M in Q1 2016, and this was caused by the higher production expenses and the higher depreciation charges (as two new projects entered the production phase which means the depreciation/depletion rate starts to kick in as well.

The bottom line showed a net income of $46M which is 10% lower than the 52 cents last year, but it’s important to note the net profit from continuing operations increased from a negative $12M to $69M in Q1 2017.
Source: financial statements

That’s a decent result, especially when you realize the depreciation and depletion rate is substantially higher than the capital expenditures on an ongoing basis. Whereas the total depreciation charge in Q1 was $293M, the capex bill was just $180M. Isolating the changes in Newmont’s working capital as well,  the adjusted free cash flow was approximately $374M. If you’d also deduct the $32M paid to non-controlling interests, the adjusted result would have been $342M, an excellent result and almost 5 times higher than the net income. This definitely shows why you should always read the financial statements as a ‘whole package’ and not solely focus on the income statement.

Newmont Mining is already thinking about the future

At the end of the first quarter, Newmont Mining had approximately $2.92B in cash on its balance sheet and with a total gross debt of just $4.6B, the net debt decreased to less than $1.7B, which is slightly lower than the year-end position. With a working capital position of in excess of $3B, Newmont Mining is ready to continue to invest in future production growth.

Source: press release

One of the recently sanctioned projects is the expansion of the Ahafo mine in Ghana. Newmont plans to increase its mill capacity by 50%, whilst the underground mine at the Subika zone will support the mine life until at least 2029. The incremental gold production at Ahafo will be 200,000-300,000 ounces of gold per year and will reduce the production cost of the gold coming from Ahafo. The capex to build this expansion is estimated at $300-380M, which means that just one quarter of free cash flow will be sufficient to fund the Ahafo expansion plans.

More recently, Newmont announced an US$109M investment in Continental Gold (CNL.TO), which is trying to develop the high-grade Buritica gold project near Medellin, Colombia. This cash injection means Continental Gold is now fully funded to production, although it might have to raise cash to spend it on exploration activities and working capital.

Investment thesis

Will Newmont make a move to acquire Continental Gold? That’s an unknown at this point, but it does show the company isn’t scared to put its money at work.  Fortunately Newmont seems to be dedicated to only spend its cash on projects and/or investments which meet the internal threshold. Buritica is a high-grade mine, whilst the Ahafo expansion will have an IRR of in excess of 20%.

Disclosure: the author has no position in Newmont Mining

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