Newmont Corporation (NEM) Q4 2005 Earnings Report, Transcript and Summary

Thank you operator. Good afternoon to everyone and thank you for joining us on our fourth quarter and year end 2005 earnings call. Please note that this call is being presented and simulcast on our website at www.newmont.com and will be available for playback for a limited time. On today’s call we have Wayne Murdy, Chairman and Chief Executive Officer, Pierre Lassonde, President, Richard O’Brien, Senior. Vice President and Chief Financial Officer, Tom Enos, Senior Vice President of Operations, and Bruce Hansen our Senior Vice President of Operations Services. As we will be discussing forward looking information, you should be aware that there are risks unique to our industry which are described in detail with our filings with the SEC and with that, I’d like to turn the conference over to our Chairman, Wayne Murdy.

Thank you Randy and good afternoon everyone. I’ll review our fourth quarter and year end financial and operating highlights, then Dick will provide the details of our financial results and Tom will cover our operations. Bruce will then give an update on our new projects and Pierre will review the merchant banking, reserves and exploration and give us his thoughts on the gold market I’m sure. I’ll conclude with our 2006 guidance. Newmont had a strong fourth quarter and a solid year in 2005 generating industry leading operating cash flow of some $1.63 billion despite lower earnings from industry wide cross pressures and various non cash accounting items. During the fourth quarter, we had higher margins, selling 2.4 million consolidated ounces or 1.8 million equity ounces at an average realized gold price of $472 per ounce with costs applicable to sales of $230 per ounce. We generated fourth quarter income from continuing operations of $72 million or 16¢ a share, and generated net cash from continuing operations of almost $500 million at $489 million. Dick will cover some of the accounting items, but these have the net effect of reducing the income from continuing operations for the fourth quarter by some $84 million or 19¢ per share after tax. For the full year 2005, we sold our target of 8.6 million in consolidated ounces that translated to 6.5 million equity ounces at an average realized gold price of $441 per ounce and costs applicable to sales of $236 per ounce. We generated full year income from continuing operations of $374 million or 84¢ per share. Again, accounting items had the effect of decreasing income from continuing operations by $34 million or 7¢ a share after tax. At year end, our balance sheet remains strong with cash and cash equivalents short…

Thanks, Dick. For the fourth quarter 2005 consolidated gold sales from continuing operations were approximately 2.4 million ounces at costs applicable to sales of $230 per ounce. For the full year, consolidated gold sales from continuing operations were approximately 8.6 million ounces at costs applicable to sales of $236 per ounce. Looking at Nevada, fourth quarter gold sales declined by 7% from the year ago quarter as an 8% increase in mill through put a 14% in keep leach hall placed were upset by a 14% decrease in mill ore grade. Similar to the third quarter, the adverse mill grades were the continued result of unfavorable ground conditions and labor shortages at our underground operations which impacted production rates from higher grade underground ore zones. Costs applicable to sales for the fourth quarter increased 25% from the year ago quarter, primarily due to lower volumes, increased labor and underground services costs as well as increased diesel and input commodity prices. For the full year 2005, Nevada operations sold approximately 2.4 million ounces on a consolidated basis at costs applicable to sales of $333 per ounce. 2006 we expect Nevada’s consolidated gold sales to be approximately 2.6 million ounces at costs applicable to sales of $383 per ounce. As Wayne discussed, cost control and improving production are major focuses for our Nevada operations in 2006. We have made significant investments in new projects and new mining equipment and we expect these investments to help reduce costs by approximately 5%-10% in 2007. As Wayne mentioned, we have also begun construction on our Nevada power plant which will also contribute to lower costs. Shifting to Peru, Minera Yanaconcha had a record fourth quarter, selling 1.1 million ounces on a consolidated basis at costs applicable to sales of $145 per ounce. Gold sales increased…

Thank you Tom. At the Phoenix glut in Nevada, commissioning of the plant has already begun and we expect initial gold production to show up in April. Eagle project also in Nevada is approximately 86% complete. The production shaft has reached its final depth in November of 2005 and the mine is de-watered below the shaft bottom. The remaining construction work primarily relates to completion of the underground facilities. We see leave knoll ramping up to achieve approximately 2,100 tons per day of production by the end of 2006. Also in Nevada, as previously discussed, we have begun construction of our power plant which was approved by our Board of Directors in January. Project engineering is 50% complete and we’re targeting a mid 2008 completion. This power plant again is a significant part of our cost control initiative and will provide long term reliable energy for projects like Leeville and Phoenix. In Ghana, we are now advancing both of our projects the Ahalo project and the Akyem project. At Ahalo, engineering procurement camp and general infrastructure construction is essentially complete. The process plant and related facilities are now approximately 76% complete and overall construction was 83% at the end of January. We’ve also begun commencing mining and stockpiling of ore which started in January for initial gold production in the second half of this year. In 2006 we expect Ahalo to contribute approximately 260,000 ounces. Annual gold sales from Ahalo are expected to average between 500,000 and 550,000 ounces at a steady production rate. As a result of continued exploration success, we are also already undertaking early studies of expansion opportunities at Ahalo looking at process capacity additions and potential underground development The Akyem project was approved in 2000, in July of 2005. We are awaiting approval of our environmental…

Thanks Bruce. And welcome everyone. As Wayne mentioned earlier, the achievement of our exploration team this year has been to replace reserves and grow reserves for the fourth straight year. Using $400 for price assumption, we grew reserves from 92.4 million to 93.2 million at year end and mostly from Ghana which continues to out perform and while we grew reserve by 17% to 18.7 million equity ounces. In Nevada we’ve also had a great year, Phoenix in particular added 600,000 ounces to now almost 9 million ounces of reserve and in Peru Menos Conga grew reserve by 36% to 6.1 million equity ounces and also notably Australia this year we placed reserve at 1.5 million ounces very notable achievement. And also as Wayne pointed out subsequent to year end we acquired the remaining 15% of the Akyem project in Ghana and as well as signed a letter of agreement to acquire the 22% of Newcrest, increasing our total reserve to something like 98 million ounces. If you look at the reserve sensitivity, at $425 gold, our reserve would increase approximately 5 million ounces to actually 6 million to almost 99 million ounces and our $450 gold by about 11% in line with the gold prices really at 103.7 million ounces. A decrease of $25 would decrease our total reserve by about 8% to 86 million ounces. The further impact of higher gold price is constrained by limited drill veta n the margins of known metallization. What we’re really saying is that we have not drilled our pits at $450 or $500 gold as we just haven’t had the time or the money to do so. We are working on it. It will take a long time for that to get there. As we look at the fourth quarter and…

Thank you Pierre. Again, for 2006 we expect consolidated gold sales of about 8 million ounces of cost applicable to sales of approximately $280 per ounce. We also expect to generate consolidated copper sales of about 565 million pounds at costs of about 45¢ per pound. The guidance breakdown shown on this slide is also provided for your reference. In 2005 we saw a good year but a year that clearly had challenge. Earnings were affected by various non cash charges and asset write-downs. And of course we were not immune to the rising costs facing the industry. However, we generated industry rating operating cash flow for the year and saw margins improve in the fourth quarter. Our leverage to gold prices increased over the last six months of 2005 and we also increased our reserves for the fourth straight year. Looking forward, we see several positive developments that we believe will deliver increased leverage to gold price and value to our shareholders. We will be brining on three new projects this year in Nevada and Ghana and have two more significant projects, Boddington and Akyem in development for completion in 2008. We also remain steadfast in our commitment to cost control and our opposition to hedging. We believe we are in a long term bull market and that these projects are the cornerstone of Newmont’s growth story over the next several years. Thank you very much for your time and with that; let me turn the call over to the operator so that we can take your questions.

And our first question comes from John Hill of Citigroup

Good afternoon everyone. Hello. I was just wondering if you could share a few additional thoughts on Boddington in terms of the flow sheet and some of the equipment selection. There have been a number of variables in air on that one over the years.

Okay John, I’m going to ask Bruce to talk about Boddington. We’re very excited about that.

We are extremely about Boddington, John. And you know, we’re looking at roughly a through pit rate at Boddington at approximately 35 to 38 million tons. The flow sheet will have primary and secondary pressures followed by a series of high pressure grinding rolls, feeding into ball mill, set of ball mills going into flotation followed by CIL. So it will be a big it will be a very robust plant, we’re very confident in terms of capacity of that plant and our ability to deliver it. On the mining side, we’ll have, we’ll be using large loke shovels, electric shovels, and we’ll be loading roughly 230 metric ton trucks, fairly significant fleet and you know fairly conventional in terms of its nature. So, a big project, but not overly complex.

Okay, great. Thanks for that. And then very briefly, on the reserve side, there are some interesting asymmetries I guess. We took the gold price modeling assumption up from $375 to $400 that was worth 2.6 million ounces but in your sensitivities table if we carve 25 bucks on an ounce off today, we go down by 6.9 and I assume that’s lower grades in Nevada but I was just wondering if you could shed some light on that unusual asymmetry there?

I think what you’re talking about there John, is the fact that you know in the actual results for 2005, that also had the net impact of increases in costs. When we look at sensitivities on a go forward basis, we’re essentially freezing costs and we’re adjusting the gold price only.

Very good. Thank you.

Thank you. Our next question comes from John Bridges of JP Morgan.

Hi, John Bridges. I was just wondering with respect to the way the gold prices are moving up, I seem to remember on a visit a year or two ago, there was a lot of low grade material at Kalgoorlie, you know on the face of it, the lower grade there is a negative, but I seem to remember there was a big potential increase to the reserves. What’s the prognosis there?

John, this is Leroy Shoots. At Kalgoorlie there’s a sizeable NRM that fell out of our numbers earlier on because of the pit angle not being able to take it in. We’ve seen, however, that this material has potential with the higher gold price environment to go underground but we’re investigating the engineering capabilities and the other process capabilities as well. So the upside is largely in that setting.

So you’re working on that one?

Yes we are. We’ve got a plan this year to do some additional drilling in that setting.

I wonder also with respect to the Greenfields portion of your exploration project, could you point out or maybe rank the targets that you’re looking at?

John, it’s Pierre. In terms of the Greenfield, you were sticking basically 80% to the countries where we already operate so you look at our budget and that is quite significant. Our budget in Peru also is quite significant. And in Nevada and Australia the other two places and I would say that approximately 80% of our budget would be in those four countries. And then the other 20% of it you know in other places where we see opportunities.

Okay. Great. And for the technically inclined, is there you know a summary of the Boddington feasibility study we could get our hands on?

John, I mean we put out a press release today and you know as things evolve we’ll be providing you with additional information. I don’t know if we have in essence a summary of the feasibility study that we are distributing.

John, we don’t have anything of that nature at this point. We have the release out there at this point.

Okay. Thanks guys.

Also John, just to reemphasize, we talked about asymmetry you know the fact is that today gold price is $550 our reserves are calculated at $150 (inaudible).then today’s gold price, but also the fact is that we just haven’t drilled our pit at $500 gold but are let alone $550. And you know the effort to do so and the money is significant and it will take us literally at least a couple of years to get there. So, there should be a little bit more to come and in terms of you know higher gold prices, but we’re also very mindful of profitless prosperity when you add the reserve ounces that will cost you $500, you know, your margin is only $50, we’d rather spend the money on ounces that will cost you $250 where you have a $200 or $300 margin. That’s the choice that we have to make otherwise we’d end up with the you know $500 million exploration budget.

That was the other John’s question I think but I think we understand that. I was just trying to get a sense as to where the you know the new reserve additions are going to come from.

Okay.

Thank you. And again, if you would like to ask a question, please press star 1 on your telephone touchpad. And star 2 to cancel. And our next question comes from Mike Dudas, Bear Stearns.

Good afternoon gentlemen. Can someone go over the copper realizations for 2006, how long the hedges may run through and when we might see more market based realizations for Batu Hijau?

I’ll ask Russell to do that.

Hey Mike, we’ll be filing a 10K on Wednesday and you will have plenty of detail and suffice to say these hedges are done in the first quarter of next year. There’s very little that rolls over into next year and the last schedule I looked at had about 60% for ’06 hedged. But we’ll check and finalize and if it’s anything different, I’ll let Randy know and he can get back to you. But it’s about 60% at $1.35.

For 2000 – I’m sorry for 2006?

2006. There’s minimal that rolls over into 2007.

Terrific, thank you. And question for Pierre, where do you see the Newmont Capital opportunities going for the next couple of years, given what you have on the plate and some of the things that may not be as visible to the rest of the market?

Well if we told you, you couldn’t trade it. Mike, you know the, where we’ve done of course exceeding well is our position with Canadian Oil Frame, it does represent probably over 80% of our capital gain and we continue to hold that position. We continue to believe the stock is going to go higher and once the dividend reaches approximately $10, $11 a share which we think it’s going to be in the next 18 months, it’s the equivalent of $10 an ounce on the price of gold on energy at you know $55, $60 oil. Anything higher in oil price will have higher dividends, so that means a great deal to us. In terms of our position you know we have made a number of you know fairly public in terms of the Gabriel and the Shore and others and we continue, the great thing about this statement is that you know there are discoveries all the time and we continue to look for opportunities. We have 300 and almost 50 geologists that our eyes and ears on the ground and they feed us opportunities and we continue to believe that there will be new discoveries made by juniors over the next 2-3 years and we want to participate in at least one or two of these five new (inaudible) discoveries. We will be there. We are absolutely totally confident that it will come.

Terrific. One final question for Tom. Could you elaborate a little more on the labor issues, especially on the underground side in Nevada and do you think that could limit some development that you or other companies might have over the next three to five year as some of these horse transition lower given some of the lack of availability not only in Hard Rock but other types of mining from a skill set base?

Well I think we’ve got our arms around it. We put in place a training program. We’re also in the process of building a sub-division in Elko to – it’s been an issue for employees, the underground employees. Just no place to live, so I think we’re in front of that one.

Terrific. Thanks gentlemen.

Thank you. And our next question comes from John Tumasis, Prudential.

Good afternoon. Could you elaborate a little bit on the $300 I believe I heard $380 cost up with the sales force for Nevada this year? Hopefully the leevill ounces will be much lower cost than that. Gas prices have fallen. Last year I thought was an easy comparison at $333 and just give us a little rundown of what’s getting better and what’s getting worse

Hey John. I think maybe let me just cover a couple of things. First of all, part of the increase is in fact accounting changes. It’s the expensing of deferred stripping and in that $333 if you go back to the detail in the press release you’ll see that there was actually a $23 credit for deferred stripping. Next year that will be a expense of $5. So that’s obviously a sizable swing for us. While the gas price drop off is well appreciated, the big factor for us is what’s happened to electric costs out there. But the big item for us, was freight (inaudible) for that kilowatt hour for the majority of our electricity out there and that’s been a big factor and then the third item is on the labor cost we did do an out of cycle 8% across the board increase to our union and non-union people last August. And the impact of that on the full year is about $10. Leeville is coming on slower than we anticipated (inaudible) bring that up to 2,100 tons a day by the end of the year, but it will be well into next year when we get to the full capacity there of about 3,200 tons a day. And that is primarily the result of ground conditions there which have been much more difficult. We’ve run into more water and tougher ground conditions than was anticipated on the surface. So, while we are going through the toughest part of that this year, we look out in 2007, we can see costs coming back up to 10%. I think we have some other moves in place as you are aware we haven’t invested a lot of capital, (inaudible) it has cost with us, we’re putting in a new mining fleet in a large part of Nevada last year and this year and so we’ll see improve maintenance costs so while this is a difficult year to look at, we think we can see the other side (inaudible) much better cost structure.

Thank you for your explanation.

Thank you. Our next question comes from Dave Gagilano, Credit Suisse.

Hi, thanks. In you remarks you commented briefly on the 2007 allocs for Nevada, I was just wondering if you could shed some light on the 2007 operating outlook for Yanaconcha as well?

I think in 2007 will again see production decline and again that’s grade and strip related and then we kind of turn the corner, but again as we’ve said several times of the last couple of years, Yanaconcha you know has gone through those real easy years, it’s becoming a more mature operation and while 2007 has a fair amount of strip, and that will affect the cost structure, longer term you know Yanaconcha is going to settle in to kind of a you know 230, 250 cost structure there. The key thing is in the out years being able to bring production back up a little bit, but we’re in the big decline now with 2006, 2007. We’re building a gold mill down there. We’re looking at the development of the Conga project which again is further out, it’s in a 2010 time period, but this is a wonderful district. It has always performed very well but clearly we’re past its prime date and so it’s a matter of it settling down, but it will be a very good long term producer with very competitive cost for us. Not going to be at $140, $150 an ounce unfortunately.

Okay, and in terms of for modeling purposes in terms of the order of magnitude of the production decline, in ’07 versus ’06?

If you look at the 10Q and that comes out. Pardon me, the 10K, there’s good guidance that we’ve been giving there and will be pretty consistent.

Dave, it’s Randy as well. If you refer back obviously to last quarter’s Q and the previous quarters Q, a 10% to 20% decline in ’06 over ’05 and then we showed another 35% decline in 2007 over 2006.

Perfect. And just a follow question unrelated. Realized gold price in the third quarter noticeably lower than spot, is that just a timing issue? Is there anything we should be looking at there?

Dave, Russ. It was timing and then also we had 150,000 ounces that we delivered at $350.

Okay.

Yeah, price capped.

Any of those price capped out as far as ’06?

No there’s nothing for ’06 or ’07.

Okay.

The only items that we will be delivering at non spot is the prepaid forward which is 161,000 ounces, June ’06 and June ’07 and that has a structure that allows us to participate up to $380 and then we’re capped out.

Okay. Thanks.

Thank you. Our next question comes from Ron Duddy, Gold Stock Analyst.

Gentlemen, great quarter an annual rate of 7.2 million ounces a year equity basis. I’m carrying the most recent public statement that I have for you has a total production for ’07 of around 7.7 million ounces. Is that still in the range of reaching?

No, I’m not sure where you got that from, but we’ve been very consistent in our guidance for this next year. The guidance that we’ve put out is 6.25 equity ounces.

No I mean for ’07, 2007?

We’ve never given specific guidance for ’07.

I think maybe at Denver, but okay. And my other question has to do then with the cash cost. Obviously the fourth quarter of ’05 benefited from higher production to cut the cash cost to $230 and then it’s going to jump up to $283, I’m just taking the mid point for all of ’06. Give us some kind of sense on how it gets to $283? Does it pop right up the first quarter or is it sort of increasing through the year?

A significant portion of it as I pointed out is the accounting changes. We used to be able to capitalize deferred stripping and amortize that, so there’s a fairly significant swing there that take place and that will take place right from the beginning. Again, we give annual guidance and we’ve stayed away from quarterly guidance. It’s like you’re 2.4 million comment for the fourth quarter. We typically do better at the end of the year, but you can’t take our guidance and divide it by four, it just doesn’t work that way.

Okay, so the first quarter is going to be fairly close to the $283 number?

It will be what it is. I mean we give guidance for the year.

Okay, great. Thank you very much.

Thank you. And our next question comes from Mark Smith, Dundee Securities.

Just have a couple of really quick questions. With regard to Boddington, when – are you guys going to consolidate that or equity account that? Richard O’Brien: The legal structure is actually an undivided interest so we will probably be equity accounting for it. I say probably because proportional accounting. I say probably because the accounting profession continues to look at this. It’s not clear that by 2008 when we get into production what the rules will be.

Okay. No, that’s fine. Okay, so when you said $900 to $1 billion capital that was entirely Newmont’s portion of val on an equity basis..

That’s correct.

Okay. And this year your capital guidance for 2006 does that include any capital for Boddington?

Yes it does.

It includes our original share, Mark, which was 49, but that’s stepping up with the Newcrest acquisition it will be about another 47 million a year. So there will be a delta for a change in scope.

So what is the exact number now for 2006 for Boddington?

It’s an additional 47 million, again depending on how the project develops and how the expenditures go.

We’re looking in aggregate at about $200 million to Newmont’s account for Boddington in 2006.

Okay, that’s cool. That’s good. Just another quick question. Just on the same note because we’re switching back from consolidated to equity accounting. When you give your guidance for capital expenditures for 2006 over all, does that include the 100% of Yanaconcha and Batu Hijau or is that just your equity portion of Batu Hijau and Yanaconcha?

That’s consistent with the financial statement so it is the consolidated total. So it’s 100% of Batu and 100% of Yanaconcha.

All of those numbers in the release look at our financial guidance for ’06 are on a consolidated basis. So the same logic would apply for the exploration.

Yeah, but you don’t to that much exploration on Batu Hijau right now, right? It’s hard to break that out. Okay. Thanks Russ, thanks guys.

Thank you. There are no further questions at this time. I will return the meeting back over to Randy Engel for any closing statements.

Okay. We want to thank everybody for joining us on the call today. Again, reminding you if you have follow up questions you’d like to report to us, you can reach either the Investor Relations Group or the Media Group on the numbers posted at the end of the Release. Thank you very much for joining us.

Thank you for participating in today’s teleconference and have a great day. You may disconnect at this time.