VANCOUVER — Denver- based Newmont Mining (NYSE: NEM) has been on the lookout for low-cost gold mines in favourable jurisdictions, and there likely isn’t a friendlier place for the company than its home state of Colorado. On June 8 Newmont announced a deal with AngloGold Ashanti (NYSE: AU; ASX: AGG) that would see it pick up the long-standing Cripple Creek & Victor mine, located 160 km southwest of Denver.
Newmont will buy the producing operation for US$820 million in cash and a 2.5% net smelter return royalty for gold production from all future underground ore. The acquisition will be funded with proceeds of an equity issuance and supplemented with cash from the company’s balance sheet.
The Cripple Creek gold district extends over 18 sq. km and has produced more than 25 million oz. gold since mining began there in the early 1890s. Today, Cripple Creek & Victor is the only major gold mine operating in Colorado and employs a non-union workforce of 550 people.
“We look at all investments through the same lens and pursue those that create value, improve mine life and costs, and represent technical and social risks that we’re well equipped to manage. Cripple Creek & Victor meets each of these criteria while adding meaningful free cash flow to [our] portfolio,” commented president and CEO Gary Goldberg during a conference call.
“We also see additional cost and efficiency improvement potential — based on what we’ve achieved at other operations in the last two years — and [the operation] is similar to our existing open-pit and heap-leach operations and located in a historic Colorado mining district, so we understand how it works and we know the neighbourhood,” he added.
The current operation includes a surface heap-leach mine, though AngloGold was in the process of a US$585-million expansion that is two-thirds complete. Newmont expects to fund the rest of the development capital with Cripple Creek & Victor’s operating cash flow.
The expansion includes a carbon-in-pulp mill to expand production, improve recovery in higher-grade ore and add capacity for an underground operation. The mill is up and running and could hit full capacity later this year, and the investment could extend mine life through 2026.
According to AngloGold’s year-end report, Cripple Creek & Victor have total proven and probable reserves of 166 million tonnes grading 0.74 gram gold per tonne for nearly 4 million contained oz. Measured, indicated and inferred resources total 429 million tonnes of 0.73 gram gold for 10 million contained oz. All calculations were done under Australasian Joint Ore Reserves Committee standards.
Newmont says the acquisition could tack on between 350,000 and 400,000 oz. gold per year to its production profile in 2016 and 2017, with all-in sustaining costs ranging from US$825 to US$875 per oz.
AngloGold reported that Cripple Creek & Victor cranked out 41,000 oz. gold during the first quarter at all-in sustaining costs of US$1,059 per oz.
“Clearly, we see opportunities to improve elements of the mine plan that can reduce mining costs, and then just getting involved in the project, and what’s remaining to be done … particularly the heap leach and ramping up the mill, and leveraging our capabilities,” Goldberg said.
He added that the company has implemented “full potential” at operations, and says that “this is process where we can come in with different ideas to help improve and deliver sustainable costs and efficiency improvements.”
The deal contrasts with Newmont’s recent portfolio manoeuvres, as the company had focused on vending non-core assets to stabilize its balance sheet and lower all-in sustaining costs. Newmont has generated nearly US$1.5 billion through asset sales over the past two years to drop its net debt by US$1.4 billion in the first quarter.
During the first quarter Newmont produced 1.2 million oz. gold and 37,000 tonnes copper at all-in sustaining costs of US$849 per oz. gold and US$1.73 per lb. copper. The company reported free cash flow of US$344 million and net income of US$175 million, or US35¢ per share. Newmont expects to produce between 4.6 million and 4.9 million oz. in 2015 at all-in sustaining costs ranging from US$960 to US$1,020 per oz.
On June 10 the company announced an underwritten stock sale to fund the deal, wherein it will issue 29 million shares for gross proceeds of US$682 million. The company reported cash and equivalents of US$2.6 billion to end the first quarter, and had nearly 500 million shares outstanding at press time for a US$12.2-billion market capitalization.
“As we look at issuing shares, we went with a little below what the total amount would be needed to acquire the asset, to give the message that we do believe in the asset. The issuing of shares is earnings and cash-flow accretive to shareholders, and I think that’s an important message to convey,” Goldberg said.
Newmont has traded within a 52-week window of US$17.60 to US$27.90 per share. The company has jumped 25%, or $4.78 since January, en route to a $23.68-per-share close at press time.
I am not sure I would characterize Colorado as a friendly place for mining. There is a reason that Cripple Creek is the only major operating gold mine in the state. It is friendlier than some other jurisdictions to be sure, but metal mining in Colorado is considered a wonderful piece of history and not a vital or desirable industry.