The larger the gold company, the tougher the challenge of replacing mined ounces and expanding overall reserves and resources. A few years ago,
What a difference a few years make.
Gold prices are up, Newmont’s debt is down, its share price has doubled, and its reserves and balance sheet are stronger than they’ve been in years. The company still hasn’t embraced hedging, but at current spot prices, that’s perceived as a good thing. And, as a topper, the company has embraced exploration as a tool to boost reserves with a fervor that comes only from enjoying a flurry of success in the field.
Newmont Chairman Wayne Murdy views the ability to replace and expand reserves as crucial to creating long-term value. “We made reserve replacement a company-wide responsibility when we acquired Franco-Nevada and Normandy Mining two years ago, and, as a result, have been successful not only at replacing depletion but at growing reserves from the drill-bit.”
Last year, the company completed a record 3 million ft., or 575 miles, of drilling. It spent US$115.2 million on exploration, research and development — a 30% increase over the previous year. This focus on exploration allowed the company to report record equity gold reserves of 91.3 million oz. at year-end.
Exploration generated more than 12 million new ounces last year, or 84% of the total 14.6 million equity ounces added to reserves. The bulk of the remainder came from increased interests in projects, with 2.8 million oz. derived from a higher gold-price assumption of US$325 per oz.
“It’s a tremendous accomplishment,” says President Pierre Lassonde, who notes that the largest reserve additions in 2003 were from the company’s newest region, Ghana, and its oldest region, Nevada. “This illustrates the strength of our portfolio and the value of our unrivaled land position in some of the world’s best gold districts.”
Exploration highlights include the following:
— Ghana — Positive exploration results were reported at the Subenso, Yamfo Central and Kenyase deposits, as well as at Akyem. Ahafo and Akyem exceeded expectations, with combined reserves increasing 143%, to 11.9 million equity ounces, from 4.9 million oz. a year earlier. Mineralization at both projects is still open along strike and downdip.
— Nevada — About 6 million oz. were added to the company’s core operations, which have been in production since 1965. Reserves were developed mostly on the edges of the Gold Quarry and Twin Creek pits, adding nearly 2 million oz. in each pit. At year-end, reserves net of depletion grew by 10% to 33.7 million equity ounces.
— Peru — The Quecher and Antonio oxide deposits, at the Yanacocha mine, were advanced to reserve status, maintaining the record of a new discovery every year since production began in 1993.
— Australia — Kalgoorlie reported equity reserves of 5.9 million oz., 6% higher than 2002, net of depletion.
— Indonesia — Batu Hijau reported about 3% more equity gold reserves and a 1% increase in equity copper reserves, despite depletion and a reduction in its overall interest to 52.8% from 56.2% a year earlier.
“This year the reserve replacement numbers look attractive once more,” Lassonde says.
On the development front, Newmont plans to spend 29% of its US$700-750 million Capex budget on new projects this year, with about half of that reserved for Ghana.
The company views Ahafo as its cornerstone project in Ghana. Exploration there has boosted reserves to 7.6 million oz. from 4.3 million oz., and the deposit is still open along strike and downdip. A contract to build a US$350-million mine at Ahafo was awarded earlier this year. The mine is targeted to produce 500,000 oz. annually, with higher production in the early years.
Production at the Phoenix mine in Nevada was accelerated one year to 2006. The mine is expected to produce 400,000-500,000 oz. gold annually, along with 18-20 million lbs. copper, over the anticipated mine life of 15 years. Capital costs are estimated at US$250 million.
Stephen Enders, vice-president of worldwide exploration, says aggressive exploration programs are planned at the same areas explored last year, with an emphasis on projects near existing mines.
“In addition to that, we have regional programs at the Antonio and Quecher deposits in Peru, and a small program in Turkey,” says Enders, “and we are looking at aggressively exploring in Mexico.”
Bottom line triples
After a string of lean mean years, Newmont Mining is reaping the benefits of a gold price that averaged US$366 per oz. last year, up US$69 per oz. from 2002.
The stronger price helped the world’s largest gold miner triple its bottom-line earnings to US$476 million, on sales of 7.4 million oz. produced at a total cash cost of US$203 per oz. In 2002, the company reported net income of US$154.3 million on sales of 7.6 million oz. produced at total cash cost of US$189 per oz.
The most dramatic boost occurred in the fourth quarter, when the average realized price was US$394 per oz., a 21% increase over the final quarter of 2002. Net income was US$153.1 million, up from US$75.1 million in the last three months of 2002. Gold sales were 1.7 million oz., 3% lower than a year earlier.
At year-end, Newmont’s debt stood at US$1.08 billion, down US$739 million (or 41%) from the previous year. Cash in excess of debt was US$237 million. Through deliveries and buybacks totaling about US$176 million, it eliminated more than 5 million committed oz. from its (primarily Australian) hedge-book. The company remains “unequivocal” about its non-hedging philosophy so as to provide shareholders with maximum exposure to the gold price.
“It was a tremendous year for the company,” says Lassonde. “The balance sheet is in the best shape it’s been.”
North American operations were the largest producers, at 731,900 oz. in the fourth quarter. Some 625,700 oz. came from Nevada operations, which reported a 21% drop in production owing to lower-grade refractory ores, reduced mill throughput and higher labour, power and mine maintenance costs.
Nevada still has a bright future, says Chief Financial Officer Bruce Hansen. “It’s undergoing what we would call a renaissance in regard to new developments,” he says, citing development of the Phoenix project, the Leeville underground mine, the Twin Creek layback — “not to mention our win-win agreement with Placer Dome for a 25% interest in the Turquoise Ridge and Getchell mines.” Newmont is also building a bio-flotation circuit for Mill 5 at Carlin to boost recoveries for the bio-milling process.
In Canada, production was lower at the Golden Giant mine in Ontario, which sold 67,900 oz. in the quarter at total cash costs of US$181 per oz. While still a respectable performance, production was down 15% from a year earlier. Golden Giant is moving toward closure and is expected to end its life in 2006.
This year, Newmont expects to produce 7-7.2 million oz. gold at a total cash cost of US$220-230 per oz. The projected jump in cash costs this year is attributed to higher energy-related costs and foreign exchange rates.
Volatile market
Lassonde recently told analysts that he expects gold prices to remain volatile over the short term. But like many other industry pundits, he views the longer-term outlook as positive, because important economic factors — and not just anti-paper sentiment — are influencing the gold market.
The Newmont president notes that U.S. dollar devaluation has improved gold’s prospects of late, and negatively affected the euro in the process. “What hasn’t happened is devaluation against Asian currencies, and they are fighting it to the hilt.”
Last year, Japan spent a reported US$187 billion to buy dollars in order to keep the dollar higher against the yen. Japan’s ostensible motivation is to maintain a lower yen to keep its exports competitive, but this massive dollar-buying spree has also put a lid on gold prices by keeping the dollar higher than what it otherwise might be.
In recent months, Japan spent a further US$40 billion or more to defend its currency, a fight Lassonde does not believe the nation can continue for much longer.
“If there is a contest between Japan buying the currency and the Fed printing the money, I’ll vote for the Fed,” he says. “I think they can print it faster than the Japanese can buy it.”
As for the global economy, Lassonde is bullish over the short term because of the strength of the Chinese economy and the recovery in the U.S economy. “In the U.S., we are seeing the best recovery money can buy, and that is a function of the deficit that we are looking at.”
The growing American deficit — forecast by the Congressional Budget Office to surpass the US$15-trillion mark within a decade — is another factor influencing gold’s long-term prospects. Lassonde points out that the deficit is being funded “by the kindness of strangers,” in this case, Asian Central Banks.
“In the past five years, the Asian central banks have been the dominant buyer of our debt, and I would like to say, ‘we consumed, they produced, we spend, they save.’ And by doing so, we are digging ourselves a hole to China. That, too, cannot last forever.”
Lassonde also voiced concern about the growing mountain of U.S. debt (household, corporate and governmental), which is currently close to 295% of gross domestic product.
Raising interest rates beyond 1% or 2% to support the dollar is not an option either, Lassonde argues, as this would put a damper on the U.S. economic recovery. Moreover, he doubts that any rate increases will happen in an election year, as the Fed is “sensitive to the president-elect and not about to mess up his chance of re-election.”
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