Newmont Corporation
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning, and welcome to the Q3 2018 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jessica Largent, Vice President of Investor Relations. Please go ahead.

[Jessica Largent:]

Thank you, and good morning, everyone. Welcome to Newmont's third quarter 2018 conference call. Joining us on the call today are Gary Goldberg, President and Chief Executive Officer; Nancy Buese, Chief Financial Officer; and Tom Palmer, Chief Operating Officer. They will be available to answer questions at the end of the call along with other members of our executive team. Turning to slide 2, before we go further, please take a moment to review the cautionary statements shown here and refer to our SEC filings, which can be found on our website at newmont.com. And now, I'll turn it over to Gary on slide 3.

[Gary J. Goldberg:]

Thanks, Jess, and thank you all for joining us this morning. We delivered strong performance for the third quarter and continued to execute our strategy, which includes

[Nancy K. Buese:]

Thanks, Gary. Turning to slide 11 for the highlights, I'm pleased to report good financial results despite gold price decreasing over 7% compared to the prior-year quarter. This quarter, we delivered revenue of more than $1.7 billion, adjusted net income of $175 million or $0.33 per diluted share, and adjusted EBITDA of $636 million. Cash from continuing operations was $428 million compared to $489 million in the prior-year quarter, primarily due to lower metal prices and unfavorable changes in working capital. Turning to slide 12 to review our earnings per share in more detail, for the third quarter, we recorded a loss in our GAAP net income from continuing operations of $0.31 per diluted share, primarily due to the impairment of long-lived assets at exploration properties and Emigrant in North America. As shown on the slide, these impairments were adjusted for a total of $0.74 per diluted share. Other adjustments for the quarter included $0.14 related to valuation allowances and other tax impacts, and $0.04 related to a change in the fair value of our marketable equity securities and gains on asset and investment sales. Taking these adjustments into account, we delivered adjusted net income of $0.33 per diluted share. Turning to capital priorities on slide 13, Newmont continues to have one of the strongest balance sheets in the gold sector with liquidity of $6 billion and a net debt-to-adjusted EBITDA ratio of 0.4 times. And we remain well-positioned to execute on our capital priorities, including

[Tom Palmer:]

Thanks, Nancy. Turning to slide 15, year-to-date, our North American operations have produced more than 1.4 million ounces of gold at all-in sustaining costs under $1,000 per ounce. For the third quarter, Carlin delivered solid performance, as production increased following the planned Mill 6 maintenance shut in Q2, and we started to see higher grades as expected from our underground mines. At our surface mines, we continue to actively monitor and manage geotechnical risks. At Silverstar, our work continues to remediate the 2016 slip, and we still plan to access higher-grade ore in the fourth quarter. However, after experiencing further wall movement during the third quarter, we have stepped out to manage this issue. As a consequence, we are targeting a smaller mining footprint in this pit. In early October, we also experienced a wall slip at our Gold Quarry pit. The detection measures we've put in place identified movement prior to the event, and no one was injured. Mining in this pit is currently suspended, and our teams are working through an assessment of mine plans and next steps to safely restart mining. As a result of these challenges, we lowered Carlin's 2018 production outlook, and now expect the North America region to produce approximately 1.9 million to 2.1 million ounces. As Gary mentioned, at CC&V, we completed the concentrate project. The cleaner flotation circuit is performing to design and we are ramping up concentrate deliveries to Nevada. We expect a strong finish to the year, as we continue to draw down stockpiled concentrates and process them through Carlin's Mill 6. Twin Creeks delivered improved costs and grade following the completion of Twin Underground in July. And at Long Canyon, Phase 2 studies continue to advance as to our new mine exploration programs, assessing the next wave of expansion across the region. Turing to South America on slide 16, as Gary mentioned, earlier this month, after just two years in operation, Merian poured its 1 millionth ounce. I'm tremendously proud of the team for safely achieving this milestone. In the third quarter, Merian delivered solid results through continued mine and mill productivity improvements. We declared the primary crusher ready for intended use in early September. This new crusher will help sustain mill throughput and enable the processing of fresh rock beginning early next year. We also expect productivity at Merian to increase over time with the recent addition of four new haul trucks, combined with the ongoing improvements through our Full Potential Program. At Yanacocha, we reached higher grade ore in the Tapado Oeste pit, and continue to see the benefits from our optimized mill blending strategy. Quecher Main stripping is ramping up, and we placed first ore on an existing leach pad in September as construction of the new leach pad continues. Studies at Chaquicocha Oxides continue to advance with drift development to the north and south completed, serving as a platform for the exploration drilling we have underway. The Yanacocha Sulfides, we plan to extend our feasibility study work by a few months to allow us to optimize our tailings storage strategy and complete the associated engineering. We now expect to complete the feasibility study in the first half of 2019 and make a full funds decision in 2020. Turning to Australia on slide 17, at Tanami, we delivered strong third quarter performance with higher grades and sustained improvements in mill throughput. The Tanami Power project continues on course, construction activities at the power stations are ongoing, and the gas pipeline trenching and welding is progressing ahead of schedule. We expect to deliver this project in the first quarter of 2019. At Boddington, our optimized mill maintenance strategy has helped improve both productivity and costs, and we now expect a lower 2019 all-in sustaining cost of between $880 and $930 per ounce. Our planned stripping campaign will ramp up through the remainder of this year and continue through 2019. At KCGM, we continue to manage the impact from wall slips early this year. Mining rates have been reduced. However, we continue to mine and process ore from the Super Pit and Mt Charlotte underground supplemented with stockpiled ore. During the quarter, we finalized the insurance claim of $25 million for our share of lost profits. Considerable work is also underway to assess the longer-term impacts, and we expect to provide more information in early December. Looking to the future, we recently advanced Tanami Expansion 2 to definitive feasibility study, and anticipate reaching an investment decision in the second half of 2019, followed by a three-year construction period. For an investment of approximately $650 million to $750 million, this project is expected to add an incremental 100,000 ounces of annual production from 2023 through 2027. The project is not included in our current guidance. Turning to Africa on slide 18, Africa again delivered solid results on the back of higher grades and strong mill performance. At Akyem, continued outperformance allowed us to lower our 2018 all-in sustaining costs for the Africa region to $820 to $860 per ounce. Looking ahead at Ahafo, commissioning is underway on the Subika Underground surface infrastructure and the project continues to progress on schedule to reach commercial production in the fourth quarter of this year. The project is expected to add 150,000 to 200,000 ounces of higher grade, low-cost production annually over the next five years. Construction activities at the Ahafo Mill expansion resumed in August, and the team is making good progress on civil works at both the SAG mill and primary crusher. During the fourth quarter, we expect to complete the installation of the new pebble crusher and CIL tanks. We remain on track to achieve commercial production during the second half of 2019. Finally, we continue to advance our regional growth studies focused on developing underground resources at both Ahafo and Akyem, as well as a potential new mine at Ahafo North. Now, I'll hand it back to Gary on slide19.

[Gary J. Goldberg:]

Thank you, Tom. Turning to slide 20, Newmont is anchored in four regions where we have the stability and operating model that we need to create value over the long term. We began transforming our business six years ago, and I remain very proud of the team for the work done to set our business up for success over the long term by

[Operator:]

Thank you. Our first question today will come from John Bridges of JPMorgan. Please go ahead.

[John Bridges:]

Morning, Gary, everybody. Thanks for taking the question. You've been working on Subika for a long time. So I'm guessing that thing is pre-developed. I'm just wondering if you could surprise us in Q4 with a lot of production coming out of there. When do you expect that ore to start coming out, and what are the constraints on pulling that tonnage at this point?

[Gary J. Goldberg:]

Good morning, John. I'm going to hand over to Tom to address that question.

[Tom Palmer:]

Good morning, John. What you're going to see in the fourth quarter is a combination of a couple of things, both associated with Subika. So, we're currently mining in the Subika open pit as well, and we'll move into higher grade ore in the Phase 3 layback at Subika. So you're going to see the contribution of some higher grade ore from Subika open pit coming in our fourth quarter numbers. Then what happens with Subika Underground? We have been mining from there all year, but as we commission the fans, the ventilation fans and the refrigeration plant, it allows more air into that underground mine and allows us to increase our mining rate. So you'll see some more tonnes coming out of the mine and the better grades you get from Subika. So, in the fourth quarter for Ahafo, combination of two things, both surface and underground, both associated with Subika. They're going to contribute to fourth quarter performance.

[John Bridges:]

Are we sort of talking in the third person here? But we're in the fourth quarter already, so is that equipment in place?

[Tom Palmer:]

Well, the equipment is absolutely in place. It's got electricity on it, and we're busily working on getting to a point where we'll reach commercial production this quarter.

[John Bridges:]

Okay. Okay. And then perhaps a bigger picture question, with the pit problems in Carlin, the whole industry is facing mature pits. And you've got Subika coming on and the underground projects in Africa, Tanami, and your share of Turquoise Ridge. So, to what extent are you positioned to switch to a bigger underground, less influenced by mature pit configuration over the next few years?

[Gary J. Goldberg:]

John, I think when you look at our production today, we're roughly 25% of our productions coming from underground. We expect over the next 10 years to see that number rise quite a bit. And I think we've got some really qualified folks running those underground operations, and really ultimately what will be an all-four regions that we operate in at the end of the day. So, I think we're well positioned to continue to make that switch. As you know, at the end of the day, it's still based on the ore bodies and those characteristics. And I think we're well positioned to address both surface and underground opportunities in the future.

[John Bridges:]

Okay. Cool. Okay. Well done, guys. Thanks a lot.

[Gary J. Goldberg:]

Thanks, John.

[Operator:]

Our next question will come from David Haughton of CIBC. Please go ahead.

[David Haughton:]

Good morning, Gary, Tom and Nancy. Maybe my first question is to the newly appointed President looking at Subika again. I got to say that I was pretty surprised at the underground mining rate which is about 1.5 million tonnes per annum that we saw in the last quarter. Just wondering what your expectation is going forward that seemed quite a bit higher than what I'd previously anticipated.

[Tom Palmer:]

Thanks, David. Tom here. Yes. You're going to see – our mine sequencing in the third quarter allowed us to get rates pretty similar to what we'll see when we've got the full ventilation on. So, you'll see roughly those rates going forward that you saw in the third quarter. What you are going to see though as we get the air to different parts of the mine is our ability to access higher grade stopes.

[David Haughton:]

Okay. So...

[Tom Palmer:]

Similar tonnes, better grade.

[David Haughton:]

All right. So, I was previously assuming something like 1.2 million tonnes per annum, but you're feeling comfortable at 1.5 million by the sounds of it. So, I'd just make that little tweak.

[Tom Palmer:]

I'd keep it in that range...

[David Haughton:]

Okay. Not get too aggressive. Okay. You're talking me down.

[Tom Palmer:]

Yeah. Yeah. Well done.

[David Haughton:]

Okay. Over to Merian, also a higher mining rate than what I'd anticipated as well, and wondering what we should be thinking going forward. Were you just in softer ore there and that helped you out, or how should I be thinking about it?

[Tom Palmer:]

We are, you can think about Merian in terms of wet season impact. So as we come into the dry times of the year, which we saw some of it in the third quarter, you will get some higher rates. We are seeing the impact of the four additional trucks coming in. So, you will see some higher mining rates as a result of the additional fleet. But the rate you're seeing in the third quarter is pretty consistent with what you might see going forward. And then, at various times in the Merian mine sequence, we will reach some higher grades, and that's one of our fourth quarter weightings for this year is in the Maraba pit, we will move into some higher grade ore.

[David Haughton:]

Okay. And in the third quarter, there was more mining than processing, so you're adding to the stockpile. Is that part of your strategy? Because previously, you've kind of mined what you milled, are you looking at building a stockpile going forward?

[Tom Palmer:]

You will see – we'll see increased waste movement, and you will see, yeah, us mining more ore and stockpiling it as we keep the mill fed.

[David Haughton:]

Okay. Last one, at Phoenix, there was more production than sales. Will we see a catch-up in the fourth quarter? Is it just a matter of timing of shipments?

[Tom Palmer:]

Exactly right, David. That's timing of concentrate shipments at Phoenix.

[David Haughton:]

Okay. All right. Thank you very much. I'll leave it there.

[Gary J. Goldberg:]

Thank you.

[Operator:]

Our next question will come from Chris Terry of Deutsche Bank. Please go ahead.

[Chris Terry:]

Hi, Gary, Nancy and Tom. Yeah, few questions from me. I just wondered, Tom, if you could go into a little bit more detail on the geotechnical issues at Carlin, maybe step through the timeline on how you're seeing that progressing and when you'll be able to make more decisions going forward on that. That's my first question.

[Tom Palmer:]

Thanks, Chris. Maybe (31

[Chris Terry:]

Okay. Thanks. Thanks, Tom. That's helpful. Just in terms of the overall environment, I think I've asked this question maybe six months or so ago, and just wanted to get an update on it. And maybe it's for you as well, Tom. Just on the consumable side and the general cost environment, how are you seeing that from labor, pressure from diesel, et cetera, just as we head into 2019? Thanks.

[Tom Palmer:]

We're certainly seeing some increase in cost from diesel globally which, I think, everyone's experiencing. With some reasonable production coming out of Australia, we do get some offset from the Australian dollar helping in that space. Other consumables, we're monitoring. We are certainly seeing pressure in those. That's where our Full Potential Program comes into play, and we look to offset those escalations with our Full Potential improvements as a minimum. From a labor perspective, most parts of the world, yeah, we're seeing pretty stable labor costs and attrition rates. Probably in Australia, just starting to see with the market in Western Australia in particular heating up with the iron ore players, a little bit more attrition and an area that we're keeping an eye on that may put some pressure on labor rates into next year. So, that's a particular area we're keeping an eye on.

[Chris Terry:]

Okay. Okay, thanks, Tom. My last one is just for Nancy. In terms of the cash balance, it's still above $3 billion, can you just give us an update there on the ability to reduce the cash rates? I know that there's obviously some restrictions in South America, et cetera, but maybe you can just talk through where you see that trending over time.

[Nancy K. Buese:]

Sure. We think about our cash balance as a real benefit and a differentiator for the company. And as we continue to generate free cash flow, we will use those dollars, both generative and what's on the balance sheet, to fund our business going forward, that will mean investment in the business through CapEx. We've enhanced our exploration dollar spend this year, and we're also providing more cash back to shareholders in the form of the share buyback to cover dilution and enhance dividends. So, all of those kinds of things will allow us to continue to invest in our business and also give us a lot of flexibility for opportunistic M&A à la things like CC&V done in a lower gold price environment. So, we want to continue to have those levers. The other piece, as of today, we have that flexibility to pay back our notes that come due in both 2019 and 2022. And we'll use some of the cash proceeds for those repayments, but another lever we can pull. So, we enjoy that cash to have ultimate financial flexibility for the company as we pave the way for the next few decades.

[Chris Terry:]

Okay. Thanks for the color. Yeah. I mean, I was referring specifically to the size of the cash balances. So, obviously, it's quite a large number for the company just in terms of looking at the net debt I guess overall. I was more meaning around South American and the restrictions on getting some of the cash out and some of the more details around the specifics on the cash balance.

[Tom Palmer:]

Oh, sure. Yeah. We have cash in jurisdictions where we want to continue to invest in our business. So, for example, in South America, as you think about the capital requirements coming up over the next few years for projects like sulfides and some other projects, we want to maintain cash balances in-country. So, we don't have any restrictions today in terms of repatriating cash to the U.S., but have chosen very purposefully to keep the cash in certain jurisdictions. So, we're comfortable with that balance, and we're comfortable with the complement of the countries in which it's allocated today.

[Chris Terry:]

Okay. Thanks. Thanks, Nancy. That's all from me. Thanks.

[Gary J. Goldberg:]

Thanks, Chris.

[Operator:]

Our next question will come from Tanya Jakusconek of Scotiabank. Please go ahead.

[Tanya Jakusconek:]

Yes. Good morning, everybody. I just have a technical question...

[Gary J. Goldberg:]

Good morning, Tanya.

[Tanya Jakusconek:]

Morning, Gary. Of course, can't leave you without a technical question, so coming back to Gold Quarry, I just wanted to have an idea of the – without seeing a photo or looking at the size of the slide, how much ore are we impacting?

[Gary J. Goldberg:]

Tanya, it's Tom.

[Tanya Jakusconek:]

Yeah, Tom. Sorry. Yeah.

[Tom Palmer:]

Sorry, Tanya. Did you have something else you wanted to add?

[Tanya Jakusconek:]

Yeah. I just wanted to know the slide, the pit wall failure at Gold Quarry. How much ore have we impacted with that slide?

[Tom Palmer:]

The impact has been – in terms of an area that we were planning to mine on the opposite side of the pit, that's not affected by the slide. It's more about what we need to do to remediate the slide before we can access that ore on the opposite side of the pit. So, that's part of the remediation step. Then that area that's slipped would be part of a future layback where we'd actually tape that material down to get to ore into a future layback on that side of the mine. So, it's not sitting on top of ore per se. It's more about – in some instances, it's helped in terms of laying itself back, but we need to think about how we safely get through and remediate that area.

[Tanya Jakusconek:]

Okay. So, nothing's been sterilized or anything like that. It's just a matter of having to remove it, and as you said, it's helped you a little bit on the layback that would have otherwise had to be laid back.

[Tom Palmer:]

That's right. Picture the Carlin formation or alluvial material at the very top of mine flowing down into the pit, and it's a matter of cleaning that up now.

[Tanya Jakusconek:]

Okay. Do you know how many tonnes are sitting in the bottom of the pit of this slide just size wise, so...

[Tom Palmer:]

It's sort of a couple of million tonnes of the – sped from the – imagine, it's a mature mine, so it's a deep pit. So, imagine, that's spread over quite a distance.

[Tanya Jakusconek:]

Okay, so it's a couple million tonnes. Okay. Thank you.

[Gary J. Goldberg:]

Thanks, Tanya.

[Operator:]

Our next question will come from Lucas Pipes of B. Riley FBR. Please go ahead.

[Lucas N. Pipes:]

Hey, good morning, everyone, and thank you for taking my question. Most of my questions have been answered. But I wanted to follow up a little bit about the comments regarding the succession planning from the prepared remarks. Gary, if you could maybe elaborate on your thoughts on that, and obviously he's had a great tenure and just wanted to hear kind of what some more background on sharing that language. Thank you.

[Gary J. Goldberg:]

Sure thing, Lucas. I think as were in the prepared remarks, I've known Tom for almost two decades and brought him in. We gave him the challenge of Indonesia right off the bat. So he's been fire tested in terms of some pretty challenging situations as we went through export permit issues and ultimately a divestment there. Tom then moved over to the APAC region and ran that quite well, and the operations there, we ended up divesting Waihi during his term there and also divesting Batu Hijau. And two-and-a-half years ago, Tom was promoted into the COO role. And Tom and his team have really been core to delivering our strategy over the last two-and-a-half years and working with the board on plans for succession and plans for his development, it made sense this stage to take this next step and naming him as President and COO.

[Lucas N. Pipes:]

Got it. Got it. Okay. Well, that's helpful color. I appreciate that, and best of luck.

[Gary J. Goldberg:]

Thanks, Lucas.

[Operator:]

Our next question will come from Michael Dudas of Vertical Research. Please go ahead.

[Michael S. Dudas:]

Good morning, everybody. Gary, as you look out to 2019, I'm sure we're going to go into a lot more details in December. But given where gold prices are and have come down over the past several months and looking at your several opportunities for investment for the pipeline, are you concerned about – what timing and capital outflows and how you want to develop these projects especially given your capacity to develop with your internal team as we look forward to these like medium-term opportunities before we move on to a larger, a more expansive ones like that in Latin America?

[Gary J. Goldberg:]

Michael, it's a great question, and I think – we always have gotten the question, can you move these things faster, and I've stressed the point that we want to make sure we do the study work along the way. We happened to have four projects coming along in the later part of 2019, first part of 2020. In some ways, that gives us leverage depending on where gold price is. Keep in mind, we do our plans at a base of $1,200 an ounce, and we have our hurdle rates. And at this stage, these all look to be good projects that would add value to our shareholders to move forward. But your point in regards to – at least they're going on in different regions, so that's a positive. In terms of how we manage them, when we bring them on, that's one of the things we do consider as we make the decisions to move forward. And we, of course, would want to move forward with the best projects first. But I think we sit in a really good spot and we have flexibility depending on where gold prices go. And as you heard from Nancy, we do have the ability to fund those projects going forward.

[Michael S. Dudas:]

And that's very helpful, Gary. And following up on – you had some prepared remarks about Colombia. Maybe you can share with us – since the issues occurred last month, what Newmont and Continental have done and any changes or thought process relative to getting things a little bit more stable down there before you start moving much more quicker into that relationship?

[Gary J. Goldberg:]

I think two key areas

[Michael S. Dudas:]

Thank you, Gary.

[Gary J. Goldberg:]

Thank you, Mike.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Gary Goldberg for closing remarks.

[Gary J. Goldberg:]

Thank you. And thank you all for joining our call this morning, and we look forward to providing an updated longer-term outlook on our December 5 guidance update. So, stay tuned. Thank you.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.