Newmont Corporation (NEM) Q1 2006 Earnings Report, Transcript and Summary

Welcome to the Newmont First Quarter Earnings Release Conference Call and thank you for standing by. At this time, all participants will be on a listen-only mode until the question-and-answer segment of today's conference. Operator's Instructions Today's conference is being recorded. If you have any objections, you may disconnect. I would now like to turn the meeting over to Mr. Randy Engel, Head of Investor Relations. Thank you sir, you may begin.

Thank you, operator. Good afternoon, and welcome to Newmont's First Quarter 2006 Earnings Conference Call. Please note this call and presentation are being 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, our Chairman and Chief Executive Officer, Pierre Lassonde, our President and Dick O'Brien, our Senior Vice President and Chief Financial Officer. Today, Wayne will review our first quarter operating highlights, and Dick will provide the details on our financial and operating results. We'll also cover our new project pipeline. Pierre will review merchant banking, and give us his thoughts on the gold market, and Wayne will conclude with a few remarks about our outlook for the remainder of the year, and about the market in general. Also available for questions on the call today are Bruce Hansen, our Senior Vice President of Operations, Services and Development, Tom Enos, our Senior Vice President of Operations, and Russell Ball, our Vice President and Controller. 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 in our filings with the SEC. So with that, let me turn it over to Wayne to begin the call.

Thank you, Randy. With income from continuing operations of $213 million or $0.48 a share, and net income of $209 million, Newmont had a good first quarter. Consolidated gold sales of 1.8 million ounces and costs applicable to sales of $275 per ounce, were right on target and an average realized price for the quarter was $555 per ounce. These results reflect strong margin and earnings growth, as we've benefited from the higher realized gold price and are focused on cost-containment. The gold price is currently over $600 per ounce. We expect to see our margins continue to expand. During the first quarter, we also continued to grow our project pipeline, adding about 3.6 million ounces to reserves, through our acquisitions of additional interests in our Akyem project in Ghana, and the Boddington project in Australia. Our balance sheet remains very strong. Very strong, with cash and cash equivalents, short-term marketable securities and other short-term investments of $1.5 billion. Let me now turn it over to Richard for details on our financial and operating results.

Thanks Wayne. Revenues for the first quarter were 1.15 billion on consolidated gold sales of 1.84 million ounces with, as Wayne said, an average realized gold price of $555 per ounce. This compares to revenues for the prior year quarter of 945 million, on consolidated gold sales of 1.87 million ounces at an average realized gold price of $425 per ounce. Income from continuing operations for the quarter was 213 million or $0.48 a share, compared with 85 million or $0.19 per share for the year ago quarter. Wayne said costs applicable to sales for the first quarter of 2006 were within our target of $275 per ounce, up 16% from the year ago quarter when costs applicable to sales were $237 an ounce. The increase is due to lower volumes, higher commodity and energy costs, higher royalties and production taxes, and changes in accounting. However, with gold prices rising more quickly in this quarter than energy prices, our gross margin realized price minus cost applicable to sales is $280 per ounce, and approximately 50% improvement over the $188 gross margin per ounce in the first quarter of last year. Looking at the next slide, we can see that two items in the first quarter had the effect of increasing income from continuing operations by $46 million or $0.11 per share. Tax estimate revisions in Australia, reflected on this slide, relate to the company's election in the first quarter to utilize the U.S. dollar functional currency for our Australian tax purposes. The translation of the Australian property, plant and equipment for booked tax purposes increased the deferred tax assets by $48 million in the quarter, resulting in a deferred tax benefit. We also generated net cash from continuing operations in the quarter of 240 million, and that's after a $164…

Thanks, Richard and good afternoon, everyone. We will start with the merchant banking -- the royalty portfolio did extremely well in the first quarter. Royalty and dividend income were up at 29 million for the quarter, up 62% from a year ago quarter. The equity portfolio itself grew by 260 million to 1.2 billion from our year-end value of 940 million. We currently have an unrealized pretax capital gains in the portfolio of close to ¾ of the billion dollars. Most of that, as you probably know comes from our interest in the Canadian Oil Sands Trust, and the value of that trust has more than quadrupled since we have made our initial investment, not 2 years ago. The dividend is going to ramp up rapidly going into this year, and will greatly offset future oil price increases. In our own portfolio, our Black Gold property in Alberta, we concluded our third season of drilling last month, and we have also initiated a baseline Environmental Impact Statement that we will be completing this year. To fully realize the value of that asset, which has grown quite a bit since we last talked to you, mostly because the infill season -- infill drilling has been very good to us. We've engaged advisors to review the value realization alternatives for this asset, and we will keep you appraised as we have more news on that. I will turn now over to the gold market, because with prices where they are today, I know that quite a few of you wonder if this is the top. And I'm here to tell you that it's not. And I think that what we see here is a -- we've seen in the past three months almost an exponential increase in the gold price, and you…

Thank you, Pierre. In closing, we recognize that gold markets expect gold equities to provide leveraged exposure to the rising gold prices. And if you look on page 8 of the press release you see our guidance for the year 2006. To provide gold price leverage, we must control costs. The slide up on the website now, it shows the difference, if you will, between last year's costs applicable to sales $239, and kind of the midpoint of our -- the range that we've provided for 2006 guidance. As this slide shows, over half of our expected costs increases this year result from higher labor, energy and consumable prices, with the remainder coming from accounting changes and planned lower grades in our mine plants. The same pressures drove the 2005 industry median costs up $274 per ounce, which was just released in the gold field study, well above our $205 actual operating cost per ounce. As we mentioned earlier on the call, we've undertaken a number of measures focused on cost control, including the development of our lower-cost project pipeline, our investments in a new mining fleet in Nevada which translates to lower maintenance costs and of course as was mentioned earlier, the construction of a new power plant -- coal-fired power plant in Nevada that we expect will generate electricity at $0.03 to $0.035 per kilowatt-hour. The majority of electricity that we are currently purchasing in Nevada is costing us about $0.10 a kilowatt-hour. So you can see there's tremendous savings and tremendous economics driving that project. We don't know what the market rate for electricity will be in 2008, we expect to bring this plant on in about the middle of 2008. But based on today's numbers that would translate to $20 to $25 per ounce reduction in…

Thank you. At this time we are ready to begin the question-and-answer segment. Operator instructions Thank you, our first question comes from Michael Dudas with Bear Stearns.

Good afternoon, gentlemen.

Well, Michael.

My first question is regarding -- you mentioned lower ore grades this quarter; could you give us a sense -- Wayne or someone about how that might plan out in your mine plants going into 2007, and taking into effect the ramp up you are projecting at Leeville, Phoenix and in Ghana? How much of an impact that might have on realized costs?

Well, I think as we look forward -- and that's what makes the project pipeline so attractive to us is we're getting into projects that have much better grades than where we stand right now. So, Phoenix coming up the second half of this year and Ghana -- Ghana we're looking at average grades approaching 5 grams a ton. A: I think it's closer to about 2 grams in Ghana and about 1.3 grams at Phoenix but these are new facilities, brand-new mills, high-throughput facilities and that will help us from a cost perspective.

My second question is regarding your thoughts about what's happening with some of the politics in Latin America, primarily Peru and how Newmont view that relative to further investment going forward. A: I think, Michael, we've got to see how that the election in Peru plays out. Of course, we are in that season of the -- and that portion of the process where there's a lot of rhetoric. I think we are seeing in a number of parts of the world where you see government asking for or populist governments asking for a bigger piece of the pie, whether it's the oil industry or copper, base metals or any of the commodities. And I think that's something that we've tended to see over the years. But I think that, you know, when you look at Peru, they've got a long history of strong mining legislation and while there is a lot -- there has been some Populist rhetoric, I think we need to see how that plays out. So, we have no strong views at this time that change our investment outlook.

I have two more questions. First, looking at capital expenditures, your budget this year and what you might plan going forward, how much can you attribute higher commodity throughput prices, contractor lead-time issues, has impacted your capital budgets, say maybe in '05, '06, and possibly in '07? Can you give me a ballpark percentage someone?

Mike, this is Bruce. It's hard to estimate, because I mean you know we are starting projects at different phases as we go through time here. You know, so we can do some research and maybe get back to you, but we don't have any clear number on that.

Mike, just one thing to remember in the guidance we put out this morning, there is about 200 million of that is capital expenditure related to the power plant in Nevada that we discussed earlier, and 50 million of the increase over the previous guidance was related to our step up in interest for the additional 2 mines in Boddington, so keep that in mind.

Duly noted, Russell. Thank you. My final question is for Pierre. Pierre, how much do you think in the recent gold price movement is geopolitical factors involved?

Mike, that's a very difficult question. But certainly, some of it -- whether it's $20 or $40, I don't know, it's hard to say. What we do see, though, is -- we do see more gold flowing into Iran. Obviously, the wealthy people there are worried themselves, because we see a very good flow of physical bullion into Dubai and then out to Iran. But how that affects the broader market, I don't know. I still think that in the 80/20 world that the currency, and particularly, the worry about the U.S. dollar and the current account deficit plays a much, much bigger role in the gold price than Iran at this point.

Thank you gentlemen for your time.

Thank you, our next question comes from Patrick Chidley with BJM.

Hi gentlemen, just a couple of questions on really what's new projects you're developing that might be the next step in terms of progress at Conga and at Martabe and Elang and particularly in relation to some of the political problems there in those two countries in Indonesia and Peru. A: In regard to Martabe, I mean we are going through a process at the current time, looking to sell that asset. And we've got a significant degree of interest in the asset. It's just an asset that is a bit too small and really doesn't fit our portfolio. In regard to Elang, we are evaluating the resource there. It is a large, low-grade copper/gold resource, about 70 kilometers away from Batu Hijau. We're doing quite a bit of work looking at different kinds of mining and processing scenarios, but it's still early days in regard to Elang. Conga is more advanced. You know, we're basically in an updated feasibility study stage there. Clearly, also looking at the political environment in Peru and continuing to work with the local communities and politicians in the area, feel comfortable about the investment over time.

And then, are there other projects in the Newmont portfolio, maybe in the mineralized material that you think might at least kind of (multiple speakers) margins --?

Quite frankly, we have a very interesting and exciting pipeline of early-stage projects that we are evaluating. Again, they are relatively early-stage. We're looking at, does it make sense to expand our production and/or look underground at Ahafo. We are looking at oxide copper leach project in conjunction with the Phoenix development, and a number of other projects that are moving along, but they are relatively early stages.

All right, thanks guys.

Thank you, our next question comes from John Tumazos with Prudential.

Congratulations on all the great performance. It's amazing how much the gold price has gone up without your stock going up as much, and --

With that, we agree with you, John.

The Contango, I guess is running over $3.0 an ounce a month now, and I actually ran numbers wondering whether a private capital firm like Kohlberg or someone like that could hedge 4 or 5 million ounces of your output and that will be of Newmont. And I excuse me for mentioning that evil, obscene word 'hedge'. And you know, there are people in the world who love to hedge and some of them still have public companies and could average up their hedge books from 300 to 600 if they did the LBO on Newmont. Do you think -- do you think it's necessary to protect your publicly traded status by locking in 7, 8, $900 in the out years with Contango for a little bit of your output?

John, 7, $800 a year in the out years is going to look very --

It could be $1,500 if you want to do 20-20 with this Contango.

John, Pierre. I think $700 is going to look like some change in terms of gold price in a few years time. I think anybody who does that today will look very foolish, just like the central banks today, who sold gold at 250 and 300 look very foolish.

But doesn't it feel frustrating that gold has gone up $200 in the last nine quarters and your stock has gone up 10%?

John, I think when you look at that, that's why -- if you want to see a close correlation, look at our margin expansion and look at the stock price performance, and you'll see a very close correlation. And that's why we spent time talking about margin. Clearly, in the period 2002, 3 and 4 up until the fourth quarter, we had very strong growth in our margin and very strong stock performance. Then we went through an extended period of time, now over a year -- five quarters where the margin did not grow at as faster rate as the gold price increased, and our performance clearly lagged. And I think our view now is, with the increasing margin I would say this is the right time to get in and take advantage of that lagged period, but I think I'm hate to say things like that.

John, its Randy. We've taken a look at that on the wider market index, the XAU and you find the same correlation there, that Wayne just mentioned, between wider share prices and the margin. So, that's really where our messaging is obviously focused.

Do you think the market is penalizing you for spending almost 200 million on exploration?

I don't think -- I think the market penalized us because we missed our production estimates last year, more than anything else.

Thank you.

Thank you, our next question will come from John Hill with Citigroup.

Great, good afternoon everyone and congratulations on all the hard work. A little bit more project-focused question; I was just wondering if you could fill us in on some of the particulars on Phoenix. That's a project that has been around a long time, it certainly frustrated companies with less mettle, so to speak, than your own, in different points in time. Can you tell us a little bit about recoveries, reconciliations, and copper separation?

Well, I mean John, it started up in March and again it's ahead of its ramp up curve from a throughput perspective. You know, it's had a fairly decent commissioning but it has ups and downs. And we really haven't got into enough of a history to really reconcile and do the mass balances and the metal balances to really have a good sense there. You know, it's going to take some tweaking from a recovery throughput standpoint. As you are aware, it's a mill that has a gravity circuit, followed by floatation and CIL, and so you have three different kinds of recovery processes there, and it's going to continue to have to be tweaked and line balanced. Our basic plan is, you know, for it to run at about a rate of 35,000 tons per day. Recoveries, because of those circuits are anticipated to be in the kind of 80 to 85% range, rather than your typical 90% straight CIL-type circuit. But, we've got a hell of a good team there and a lot of good metallurgists, and we have a lot of confidence in the process and a lot of confidence in the mill and the ore body.

Great, thanks for that Bruce. And then just very quickly, Pierre, I was interested in your comments on fabrication demand. We saw that come in pretty hard about 18% in Q4, and there are certainly those out there that believe that fabrication has taken a further pretty heavy dent from the escalating gold price. You guys are obviously very close to the market from your fabricating work and your travel -- I'm sorry, your refinery work and your travels. I'm just curious, it sounds like you have confidence in fabrication. And I was wondering if you could share your thoughts on that in a 600 world.

Yes, certainly John. In terms of fabrication, the market that is being the most impacted is the Italian market. The manufacturers in Italy are actually short gold since about $400, and they are hurting. And they could have some major difficulty going forward. But the market in the Middle East and India in particular, and China, continues to roar along at anywhere from 12% to 15% growth. And that's because their currencies are doing better, their inflation rates are higher, so from the standpoint of buying the gold today, they look at it as an investment. And the fact that the gold price has crested over 600 makes it even more appealing than ever before. So, those are the markets that are continuing to motoring along. But, in part, you know, the fabrication market will shrink, I think, this year compared to the bullion market. The bullion market is taking a bigger piece of the market, mostly because of all the new financial instruments that are being developed and used by the pension funds and by the family offices and what not.

Great, thanks for that.

Thank you, our next question comes from Victor Flores with HSBC.

Yes, thanks, good afternoon. I was hoping you could give us a bit of color on how you see the year involving at Yanacocha. You had a really good first quarter, but the guidance for the year is still stuck at about 2.6 million ounces, which means that either we're going to have three much lower quarters the rest of the year or perhaps some kind of ramp down. I was hoping you could give us a bit of sense of how production will evolve this year.

Go-ahead.

Victor, Russ here. As you saw, we did have a strong quarter at Yanacocha. What we see is the grade declining over the year, and the strip ratio increasing. We have added some capital in addition to the fleet. But we will see production come down towards the second half of the year. We won't see that spike that we had traditionally seen at Yanacocha, with new leach pad and new ounces coming out in the third -- early into the fourth quarter. So, don't look to history as an indication of the Yanacocha for this year. We're comfortable with the guidance we put out, which is essentially flat -- I think it was up 13,000 equity ounces, so Yanacocha will not do what you have historically seen and you shouldn't be forecasting that in your models.

Great, thanks. And second question goes to Batu Hijau. Could you give us an update on some of the geotechnical work that you've done there, revisions to the mine plant and what implications that might have?

Sure, this is Tom Enos. Basically, Batu Hijau is a mine that is being mined in phases. The current phase that we're mining is Phase 4. Late last year, we identified a geotechnical issue in the east wall, and we have rescheduled the mine and moved a shovel up, and we are now unloading the bottom of Phase 4, if you will -- we are actually mining into Phase 5, and with that it did change the mine plan and the production plan for this year. But again, it's material that we were going to mine anyway, it's just rephasing, rescheduling the mine.

Okay, great; thank you very much.

Thank you, our next question comes from John Bridges with JP Morgan.

Good afternoon, everybody. I was just trying to dig into the costs here. Your costs have gone up. You did give us some indication as to how much of that relates to the mining of subgrade material, and I just wonder if you could break it about 50% you spoke of into accounting changes and how much was related to, effectively, the creation of ounces from nothing, from rock that wouldn't have produced reserves in the first place.

I think, John, if we could go back to the -- we had that chart that really broke that down, on the webcast. And I don't know if you saw that.

Sorry, I've not got the webcast up.

Okay, if you could just pull that up a minute.

So, what percentages is related to those subgrade ounces? I suppose you could really think of that cost as being related to the creation of reserves from nothing.

The lower grade and the -- accounted for about a $12 change, year-over-year.

John, it's Randy. You've got about $12 out of $49, if you take our actual three -- probably 239 costs applicable to sales per ounce from last year, up to the midpoint of our guidance for this year.

So it's about a quarter of the costs increase is related to (Multiple Speakers) --

It's about a quarter, exactly. You've got about $5 in accounting change, and then the rest is made up of labor, electricity and consumables, which is going to be over 60%.

Okay, okay. Great. And on Kalgoorlie, you mentioned the underground there. Presumably at these sort of Ausi dollar gold prices, then that stuff is now economic.

It's starting to look interesting, and it warrants study, and so you are exactly right. Again, that's not going to happen overnight. But it is -- in this environment, we're looking at a lot of -- a lot of the kind of resource potential that we have around the company. And there's suddenly lots of opportunities that we've known about for a long time, but couldn't clearly justify.

And you can keep Charlotte chugging along for some time, presumably, at these levels.

Yes. I mean, we have a project in Nevada, very large project, that we've known about for 25 years -- the Midas deposit that suddenly is getting some renewed interest plus enable to go in and look at it with today's technology. I know, we hadn't put a hole on that for probably 15 years -- going back in today and using today's assay techniques and technology. Things like that are very attractive. And that's the value of the land position that Newmont has. It's always hard to put your finger on it until you get into times like this, because we know there's real value there.

I was also intrigued by the oxide copper idea at Phoenix. What do you think the probability of getting something on that up is?

Well again, John, it's early days. But you know we're doing a lot of metallurgical test work, the whole Phoenix area, if you remember, it was an old Duvall copper district; there's a lot of oxide copper resource there, a lot of it above the sulfide resource, and you know we are taking a very hard look at it. And we will keep you posted on it.

Well presumably, you've got everything there, but this SXEW plant, so you ought to go to make it happen quickly if --

Yeah.

Okay, great. Okay, thanks, guys.

Operator instructions Our next question will come from Michael Fowler with Desjardins Securities.

Yes, good afternoon. A couple of quick questions. Perhaps you can give us some idea of the ground conditions that you have seen at Leeville, and perhaps also could you comment on the Deep Post ground conditions?

The ground conditions at Deep Post and Leeville are very similar. What we have discovered over time is that there is a way to mine these deposits underground and do them very effectively, and it's by having very experienced and trained miners and that are experienced with the ground conditions that exist in those two mines. And we are currently in the process of moving our very experienced underground miners into Leeville from the other Carlin East deposit that it is just about mined out. So really, things are going along as anticipated. They are not good ground conditions from, you know, an underground mining perspective. But we do have a good, trained work force there that are now proceeding and getting it done smoothly.

Okay, thanks. Just on another question, is there any update on the SEC review that you're -- they are having?

Mike, Russ. We disclosed, as you've probably seen in the K and you will in this Q again, we are in a comment letter process with them. We received a third comment letter on April 5th; we are busy responding to that. Essentially issue is expiration accounting related to the purchase price acquisition from February '02. We do not believe that the issues are significant. Obviously, there is a large balance on the balance sheet. We are very comfortable with our accounting and are working through the process of explaining that to the staff at the SEC. So again, we are trying to expedite it from our end and respond as quickly as we can. We have been receiving assistance from our auditors, PriceWaterhouseCoopers and also our independent valuation expert, on this one. So we are very comfortable with our accounting and are helping the staff understand our logic and rationale behind that assigns fair value to those different segments.

Russ, just to follow-up on that, do you think that you would have to sort of reallocate some of the goodwill I guess, into property, plant and equipment, on your balance sheet?

No, Mike, at this stage we're comfortable with our accounting. Where this is going to end up we don't know. Again, we have Waters' opinions, we have our evaluation experts that are also comfortable with our accounting, and it's really incumbent on us to work through our models and our logic and our rationale. Because, we believe that each company is different, and some of the recent like what you've seen may not necessarily be applicable to Newmont. Again, we are comfortable that the facts and circumstances in our particular situation are different from what the SEC staff may have seen recently, and really what we're going through, Mike, is trying to explain to them where we are and why we think our accounting is appropriate.

Okay, many thanks for that, Russ.

Thank you, our final question today comes from Chantal Gosselin with Haywood Securities.

Good afternoon. A quick question regarding -- what's your philosophy on acquisitions, if you can give us some sense of it as well, what are your thoughts on the current market evaluation?

Well, it's a question we often get. And clearly now, Newmont has a history that when it seize an opportunity that ties in with our strategy, we're not afraid to step up and take that opportunity. By the same token, we try to be very selective. As we look at the market today, this industry is small enough that we can pretty much be updating our views on a continuous basis, and to the extent that they would -- we are in a period where we think that there may be some strategic fits out there. There's always a pricing side of that equation. So, if something is attractive that fits in with our strategy, and strategically a direction that we're going, we attempt to do that, to grow the company. But we are very cognizant of the dilutive effect of many peoples acquisitions, and so we want to see something that has upside potential and has the ability to be accretive on a per-share basis.

Are you open to any stage of a mine life, like a development or exploration to already producing?

Yes. Now, when you are into production though, again as I said, we're looking for things that have upside. So, you know, I think we have executed on transactions in all three of those phases.

Okay, thank you very much.

Thank you, sir. That does conclude our Q&A session for today.