Newmont Mining (NEM) Gary J. Goldberg on Q1 2016 Results - Earnings Call Transcript

| About: Newmont Mining (NEM)

Newmont Mining Corp. (NYSE:NEM)

Q1 2016 Earnings Call

April 21, 2016 10:00 am ET

Executives

Meredith H. Bandy - Vice President-Investor Relations

Gary J. Goldberg - President, Chief Executive Officer & Director

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Christopher J. Robison - Chief Operating Officer & Executive Vice President

Analysts

John D. Bridges - JPMorgan Securities LLC

Andrew Kaip - BMO Capital Markets (Canada)

David Haughton - CIBC World Markets, Inc.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

Chris Terry - Deutsche Bank AG (Australia)

Robert Reynolds - Credit Suisse Securities (Canada), Inc

Karl Blunden - Goldman Sachs & Co.

Eliot Glazer - Wm Smith Securities, Inc.

Operator

Good morning, and welcome to the Newmont Mining 2016 First Quarter Earnings Conference Call. Today's conference is being recorded. If anyone has any objections, please disconnect at this time.

I'd now like to turn the call over to Meredith Bandy, Vice President, Investor Relations. You may begin.

Meredith H. Bandy - Vice President-Investor Relations

All right. Thank you. Good morning, everyone. Welcome to Newmont's first quarter earnings call. Joining us on the call today are Gary Goldberg, President and Chief Executive Officer; and Laurie Brlas, Chief Financial Officer. They and other members of our executive team will be available to answer questions at the end of the call.

Turning to slide two. Please take a moment to review the cautionary statements shown here or refer to our SEC filings, which can be found on our website at newmont.com.

And now, I will turn it over to Gary on slide three.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thank you for joining us this morning. I'm pleased to report another strong quarter at Newmont. We continued to improve our performance and our prospects by lowering injury rates and costs at our operations, bringing proceeds from non-core asset sales to nearly $2 billion, building four profitable growth projects on time and at or below budget and strengthening our balance sheet and earnings and earning the best credit rating in the gold sector. Finally, we added two highly experienced miners to the Newmont roster to lead our business in Africa and Asia-Pacific.

Turning to specifics on slide four. Our underlying business improvements for the quarter included reducing total injury rates by 37% compared to last year, lowering our all-in sustaining costs to $828 per ounce and dropping our 2016 cost outlook by another $20 per ounce and increasing gold production by 4% to 1.2 million ounces and copper production by 3% to 38,000 tonnes on an attributable basis.

Our portfolio improvements for the quarter included reaching commercial production ahead of schedule at the new valley leach facility at Cripple Creek & Victor, selling our stake in Regis for $184 million and advancing our growth projects. Merian is 80% complete, Long Canyon is 65% complete and our second decline at Tanami is nearly finished.

Value creation for the quarter included delivering adjusted EBITDA of $803 million on the back of higher grades and production at lower cost and sustaining capital, generating free cash flow of $227 million while continuing to self fund for growth projects, reducing net debt by 16% and completing a $500-million bond tender which will lower our cash interest payment by about $28 million annually. Long-term value creation requires exceptional safety and sustainability performance.

Turning into slide five. Our team worked without any injuries at Twin Creeks, Ahafo and Akyem in the first quarter of 2016. We've lowered our total injury rates by 58% since 2012, and we continue to work toward our ultimate goal which is to send all of our people home safely every day.

In 2015, our sustainability performance was rated best among mining companies by the Dow Jones Sustainability Index and best in the areas of climate strategy, labor practices, human rights, corporate citizenship and environmental management. Newmont is also ranked as the top mining company in the S&P 500 for environmental, social and governance performance and in the top 10 overall according to Bloomberg's ESG disclosure score. The score is intended to measure a company's capacity to anticipate and manage risks and help investors weigh this competency on a consistent basis. You can read more about our performance on our website, where we recently published our 2015 sustainability report beyond the mine. We're also continuing to improve our operational efficiency.

Turning to slide six. We brought our all-in sustaining cost down to $828 per ounce in the first quarter of 2016. This represents a 2.5% improvement versus the prior-year quarter and a 30% improvement since 2012. About half of these savings were realized through sustainable cost and efficiency improvements at all of our operations and higher production at our lower cost operations. Running our operations more efficiently starts with solid technical fundamentals.

For example, better resource modeling, which has improved ore body reliability at Boddington, Twin Creeks and Yanacocha, an advanced process modeling technology, which we're using to improve recoveries at Boddington, Phoenix, Yanacocha and Ahafo; and to bring the Cripple Creek & Victor Mill to full design capacity.

Finally, we're raising our technical game in underground mining and using improved techniques to manage ground control issues at Leeville, which includes some of our most prospective underground resources. Our costs also benefited from favorable oil prices and exchange rates and lowering capital spending. Sustaining capital was lower primarily due to timing, but we also expect some savings as the year progresses.

Turning to production on slide seven. We're on track to meet production guidance of 4.8 million ounces to 5.3 million ounces of gold in 2016. Factors contributing to this performance include drier-than-expected weather in Indonesia, which allowed us to continue mining higher-grade Phase 6 ore and improve productivity at KCGM and Boddington in our Asia-Pacific region; new production from Cripple Creek & Victor, which increased our North America production by 13% versus the prior-year quarter; and strong performance at Akyem and Ahafo in Ghana. These increases more than offset declines in South America, as we reached lower grade and transitional ores at Yanacocha.

Looking forward, we expect higher second half production at Cripple Creek & Victor and our Leeville underground mines, which will offset lower production due to planned maintenance shutdown at Carlin's Mill 6 in the second quarter. In Indonesia, we applied for our export permit ahead of schedule to facilitate a timely renewal. Our discussions with certain parties who are interested in acquiring our stake in PTNNT continue, but financing and deal terms have not yet been finalized. In the meantime, we remain focused on operating Batu Hijau safely and efficiently. The work we do to improve the value of our operations also applies to our portfolio.

Turning to slide eight. Our overarching goal is to build a portfolio of long-life, low-cost assets with technical and sociopolitical risks we're well equipped to manage. We've realized $1.9 billion from the sale of non-core assets since 2013, most recently selling our equity stake in Regis for $184 million. And we've deployed capital to self fund our most profitable growth projects, pay down debt and return cash to shareholders.

Comparing what we divested to what we reinvested in, we have increased mine life by about 2/3, lowered costs by nearly 20% and improved our technical and social risk profile. The expansion at our newest portfolio addition, Cripple Creek & Victor is progressing ahead of schedule.

Turning you slide nine. This is a photo of the new valley leach facility which began first production in March, a month ahead of schedule. The recovery plant is also on track for completion by the end of the year.

Finally, we finished modifications at the Cripple Creek & Victor mill which accounts for about 25% of the operation's production. This expansion, along with new mines at Merian and Long Canyon and the expansion at Tanami, will add up to 1 million ounces of production at competitive costs as these projects come online.

We're also adding capacity in our leadership ranks, starting with our board of directors. Noreen Doyle succeeded Vince Calarco as Chair of Newmont's Board earlier this week. Noreen has been a director since 2005 and has served as Vice-Chair and Head of our Audit Committee. Her background includes executive leadership at the European Bank for Reconstruction and Development and board leadership at Credit Suisse. Last year, she was appointed Chair of the British Banking Association. Vince will continue as a Newmont Director and will work closely with Noreen to ensure a smooth transition.

Turning to management. Tom Palmer steps in as Chief Operating Officer on May 1. Tom brings 22 years of mining experience to this role, the last two of which had been at Newmont strengthening our performance in the Asia-Pacific region. Tom will pick up where Chris Robison left off, driving the next wave of safety and operational performance improvement across the portfolio.

Steve Dumble takes Tom's place as Head of the Asia-Pacific region. He's a 34-year mining veteran, whose background includes leadership roles in a range of commodities for BHP Billiton, Rio Tinto, and Alcoa. And Alwyn Pretorius joins Newmont as our Head of our Africa Region bringing 20 years of gold mining experience to the role. Both Stephen and Alwyn have track records of delivering successful projects and transformative change in the areas of safety, productivity, sustainability and leadership development. We are pleased to have them on the team.

And with that, I'll hand it over to Laurie for an update on our financial results.

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Thanks, Gary, and good morning, everyone. I'm pleased to report that Newmont delivered a great quarter again with solid financial results.

Turning to slide 11. We reported first quarter GAAP net income from continuing operations of $0.15 per share. Excluding $0.38 per share of non-cash tax valuation allowances and $0.20 per share for the gain we achieved on the sale of our stake in Regis, we reported first quarter adjusted net income of $0.34 per share. The valuation allowances are related to a tax restructuring of a foreign subsidiary acquired back in 2002 as part of the Normandy acquisition. Below, you can see a similar outcome in adjusted EBITDA of $803 million, also excluding the gain on the Regis sale.

Turning to slide 12 for a look at our first quarter operational performance. On top line results, gold and copper pricing were down a bit from the prior-year quarter. Attributable gold and copper production volumes held relatively steady year-over-year. You will note that copper sales volumes were up 13% from last year as we were able to catch up on some of the delayed shipments from Batu Hijau in Q1 as we had expected.

Gold CAS was up 4% from the prior-year quarter predominantly because Yanacocha is now producing more deep transitional ore. This is in line with our expectations. But you'll also see that overall gold CAS is down significantly from Q4 2015, as expected.

Gold AISC improved versus the prior-year quarter in part due to timing of explorations and advanced project spending. As Gary mentioned, we expect to see cost improvements in the second half of 2016 as CC&V and Leeville ramp up and Merian comes online. However, the second quarter will be impacted by scheduled maintenance at Carlin's Mill 6.

Turning to slide 13 for a summary of first quarter financials. Higher volumes allowed us to deliver higher revenue despite slightly lower gold and copper prices. We delivered strong Q1 adjusted EBITDA of $803 million, essentially in line with the prior year, reflecting continued strong operational performance across the portfolio.

During the quarter, we also generated positive free cash flow of $227 million. As I have mentioned, we expected lower free cash flow in the first half of this year, but strong operational performance, commodity tailwinds and a bit of timing came together to help us deliver an outstanding start to the year.

The only real difference compared to last year's first quarter was working capital movement. For example, an increase in accounts receivable was in line with the stronger sales volumes during the quarter. We also maintained our dividend of $0.025 per quarter or $0.10 per year.

Now, turning to slide 14. On this slide, you can see the primary sources and uses of cash in the first quarter and how we've applied them to deliver on our capital priorities. Cash from core operation, where operating cash was sustaining capital from our operating site, generated over $400 million this quarter, plus we received $184 million in cash proceeds from the sale of Regis. A primary use of cash in the quarter was the $186 million of development capital spent to support our future. This was primarily spent at Merian, Long Canyon, CC&V and Tanami.

We also completed the debt tender, which I will talk more about in a minute, and paid our quarterly dividend. In addition, given our comfort level with the local cash position and our overall liquidity, Yanacocha paid a dividend. Part of that was paid to our partners and part to Newmont in the U.S. The restricted cash and other is primarily movement out of cash and into restricted cash to cover the scheduled payment on the PTNNT revolver next quarter.

Net-net, at quarter end, we have about $2.5 billion of cash and equivalent to repay debt, fund growth – profitable growth and return cash to shareholders, in other words, to continue delivering on our capital priorities.

Turning to slide 15 to discuss the balance sheet. Newmont has lowered net debt by 37% since 2013. Our net debt to EBITDA ratio of roughly 1.2 times remains among the lowest in the industry, and our strong cash flow and balance sheet continue to differentiate Newmont from the competition. We are committed to maintaining an investment-grade balance sheet across the gold cycle. To do that, we target net debt to EBITDA of 1 time at $1,200 gold and seek to lower our absolute level of gross debt.

Turning to slide 16 to talk more about our debt schedule. In the first quarter, we completed a $500-million debt tender, targeting near-term maturities and highest interest rate debt. On this slide, you can see we paid down $274 million of the 5-1/8 notes due in 2019 and $226 million of the 6-1/4 notes due in 2039. This action had an NPV of $133 million and will lower our cash interest by about $28 million per year going forward. We continue to target between $800 million and $1.3 billion of debt reduction through 2018.

And now, I'll turn the call back over to Gary.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thanks, Laurie. Turning to the future on slide 18. Over the next few years, we expect our cost to benefit from higher margin ounces at our new mines and expansions, higher grade ore at Batu Hijau and Carlin underground mines and ongoing productivity, cost and capital improvements. Upside that is not reflected in our current outlook includes more Full Potential savings, which we have netted more than $1 billion in improvements to-date and lower cost ounces from projects that have not yet been through the board approval process.

We expect steady gold production of between 4.8 million ounces and 5.3 million ounces in 2016, rising to between 5.2 million ounces and 5.7 million ounces in 2017, as new projects come online. In South America, higher margin ounces for Merian are expected to offset declining volumes at Yanacocha. Similarly, in North America, lower cost production from Cripple Creek & Victor, Long Canyon and Carlin underground mines is forecast to offset stripping phases at Carlin surface mines and at Twin Creeks. Development of Northwest Exodus represents further upside not represented in our guidance. The team in Ghana is optimizing projects to address harder ore and lower grades in Ahafo surface mines and to develop the highly prospective Subika Underground resource. Finally, in the Asia-Pacific region, we will leverage the Tanami expansion to counter lower grades and higher stripping at Boddington. Strong operating performance translates to strong financial performance.

Turning to slide 19. We reduced our all-in sustaining costs by $279 per ounce or 24% between 2012 and 2015, an improvement that was more than double the competitive average. We also reduced net debt by $1.7 billion over the last two years for a total reduction of 33%, which compares favorably to an average net debt reduction of 1% among our competitors. Our return on capital employed was about 80% higher than the gold sector average, and our 2015 free cash flow yield was also higher than the average.

Turning into projects on slide 20. Merian is 80% complete, about $100 million below budget and on track to reach commercial production later this year. Long Canyon is now 65% complete and remains on track to begin production in the first half of 2017. And the Tanami expansion is on budget and ahead of schedule with additional production expected in the second half of 2017.

Finally, Our Cripple Creek & Victor expansion is progressing ahead of schedule and on budget. Together, these projects will add up to $1 million ounces at average all-in sustaining costs of around $700 per ounce. Our next tranche of projects is not included in our long-term outlook. These could add 250,000 ounces of annual production and reduce all-in sustaining costs by another $30 per ounce.

Projects that will be considered for full funding in 2016 include the Ahafo mill expansion, which would leverage existing infrastructure to build capacity and improve costs; the Subika Underground mine, which will deliver higher grade ore to the Ahafo mill and create a platform to explore the region's highly prospective underground resource; and incremental expansions at Northwest Exodus and Twin Creeks underground.

Turning to exploration on slide 21. Exploration is one of our core competencies and it's key to long-term value creation. Our team discovered 70% of the ounces we'll produce this year and has added more than 115 million ounces of gold reserves by the drill bit over the last 15 years.

Our competitive advantage rests on our proprietary technologies, which are deployed by an expert team of nearly 200 geoscientists around the world and our land position which includes 52,000 square kilometers in prospective districts, 75% of which are in North America and Australia. In 2015, we added 5 million ounces to our gold reserves by the drill bit and 4 million ounces by acquiring Cripple Creek & Victor. These additions more than offset depletion of 6.5 million ounces. We also maintained the highest reserve ounces per share in the gold sector.

Our annual exploration budget is just under $200 million, and we'll spend about 75% of that amount adding higher margin ounces just in time to support our operations. The remaining 25% will be spent on new discoveries mainly in brownfields around our existing mines with some optionality in greenfields in each of our regions.

Turning to slide 22 for a closer look at North America. The Rita K – Pete Bajo area located Southeast of Leeville is an exciting exploration story with significant upside potential. We've identified new trends using this proprietary deep sensing geochemistry technology and, in 2015, increased our resources by about 130% with 16% higher grades.

You can see the layout of the 3-kilometer mineralized corridor in this plan view. Less than 1/3 of the mineral inventory has been converted to reserves and resources and a significant percentage is yet to be drill tested. Mineralization also remains open in all directions.

Turning to slide 23. These long sections shows more detail. Drilling at the Fence/Full House trend has delivered 250,000 ounces of reserves and 450,000 ounces of resource at exceptional grades. We plan to drill another 10,000 meters in 2016 to further define this deposit. Rita K is a new host discovery, contiguous with our Pete Bajo mine. We expect to declare first resource in 2018 and to drill another 9,500 meters in 2016.

Now, turning you to our view on gold fundamentals on slide 24. In the near term, we anticipate that a relatively strong U.S. dollar and subdued global economic growth will continue to constrain metal prices. That said, we've seen some notable improvements in the first quarter of 2016. Gold price increased by about 16%, the strongest upward trend since 1980. And electronically-traded fund holdings increased by 20%, reversing significant declines since 2011. In the medium term, we expect prices to rise on improved fundamentals.

On the supply side, three-year average gold discoveries have dropped by more than 75% between 2007 and 2012, and mining supply is expected to decrease by more than 5% from 2015 to 2020 due to aging ore bodies and slower project development.

On the demand side, we expect demographic trends in China and India to drive steady growth. Taken together, the two countries represent more than 50% of current consumer gold demand. China's middle class is expected to grow to 500 million by 2020, and India's middle class is also expected to double and surpass 500 million by 2025. In the meantime, we're prepared for all scenarios.

Turning to slide 25. Our planning process builds from a gold price of $900 per ounce, which informs our contingency plans. At today's metal prices, we can afford to advance our best projects and exploration prospects, reduce debt and maintain our dividend.

At lower prices, we would expect to finish existing projects, potentially delay new projects, stripping campaigns and sustaining capital and further reduce overhead and exploration costs. As gold prices improve, we'll continue to optimize cost and capital, fund projects and exploration that offer strong returns, accelerate debt reduction and increase dividends in line with our policy.

Summing it all up on slide 26. We're proud of what we've accomplished over the last three years, and we're continuing that trajectory in the first quarter of 2016. Going forward, our sights remain set on raising our performance to the next level.

You can count on us to continue improving safety and efficiency at our operations, maintaining leading environmental, social and governance practices; building a stronger portfolio of longer life, lower cost mines and generate the financial flexibility we need to fund our best projects; reduce debt; and return cash to shareholders.

Thank you for your time. I'll now turn it over to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. Our first question is coming from John Bridges from JPMorgan. Sir, you have an open line.

John D. Bridges - JPMorgan Securities LLC

Good morning, Gary, everybody. Congratulations on the results. Just wondered if there are any sort of catalysts with respect to the Batu deal. You said it's not finalized yet, but you sounded quite optimistic. Just wondered if there are any catalysts. And then, maybe just a follow-on. The Subika-Ahafo project, just wondered if, after the cost cutting you managed to achieve at Merian, whether there was some hope to bring those costs down as well. Thank you.

Gary J. Goldberg - President, Chief Executive Officer & Director

Okay. Thank you. On Batu, really, nothing has changed in terms of – we continue to work with those potential parties to finalize deal terms and to make – get the financing put together. So, no other catalysts that I would point to other than those two key areas. In regards to Subika and Ahafo, we continue to go through the final steps. It's permitting. It's probably one of the bigger things at Subika to bring through, and the timing of that still is looking for both Subika Underground and the Ahafo Mill to bring those forward in the third quarter, late – well, actually, early fourth quarter for approval by the board. There are synergies between the two. We're carrying them separately, so we understand what each one is individually. But there are synergies of bringing those two together, John.

John D. Bridges - JPMorgan Securities LLC

Okay. Thank you.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thanks, John.

Operator

Our next question is coming from Andrew Kaip from BMO. Sir, you have an open line.

Andrew Kaip - BMO Capital Markets (Canada)

Thanks very much, Gary, and congratulations to you and your team on a solid Q1. My question is regarding Merian. Can you provide us a bit more detail on how you're preparing to enter into commissioning? You're in a tropical environment. If it's – if I'm not mistaken, the rainy – the second rainy season begins in the fourth quarter. And I'm just wondering how you're preparing to enter that operation into commercial production through the remainder of 2016.

Gary J. Goldberg - President, Chief Executive Officer & Director

Good question, Andrew, and we're looking still here in the second half of this year to enter into commercial production. We will have a little closer view of when that may start when we do our second quarter results in July. We do stockpile material, and we'll be stockpiling. We currently have, like, 1.2 million tonnes, 1.3 million tonnes of ore stockpiled right next to where the mill is. So, we're in good shape. That's a little over a month' supply of ore that's there to be able to handle, and that's part of the design we have. And we based it off how they did the design at Rosebel as well, where they had the same concerns as they work through the rainy season and the dry season and how we operate in other places around the world.

So, I think, with the stockpile, that puts us in a good position to be able to work through the rainy season as we go through startup, and that's progressing really well. As I say, the construction is looking very good. Chris was just down there about a month ago reviewing progress, and we're pretty pleased with how that whole project continues to progress and progress at lower cost of capital than what we expected to begin with.

Andrew Kaip - BMO Capital Markets (Canada)

All right. And then, just given the guidance that you started off with at the beginning of the year that you felt the first two quarters would be free cash flow neutral to consuming cash, Laurie, I'm just wondering what your view or your outlook in the second quarter is. Are you still of the view that the capital programs will consume operating cash flow in the second quarter?

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Yeah, I would expect that the – we would spend more capital. We did have a good tailwind with gold price in Q1. And as you remember, our oil price assumptions are somewhat on the conservative side, perhaps, so we could benefit from those. Well, we did see some timing of capital happened in the first quarter that probably will be made up in the second quarter. So, it was a good quarter, but we do see the second quarter being a little bit of a dip. And as Gary and I both mentioned, Carlin's Mill 6 will go down for maintenance, so that will impact the quarter as well.

Gary J. Goldberg - President, Chief Executive Officer & Director

And then, we'll see the stronger second half as these projects start up.

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Right, exactly.

Andrew Kaip - BMO Capital Markets (Canada)

Okay. Thank you very much.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thanks, Andrew.

Operator

Our next question is coming from David Haughton from CIBC. Sir, you have an open line.

David Haughton - CIBC World Markets, Inc.

Good morning, Gary and Laurie, and the rest of the team. Thank you for hosting the call. First question is looking at CC&V. You've had this asset now for nearly three full quarters. Just wondering if anything could have surprised you on the upside or downside since you have taken ownership.

Gary J. Goldberg - President, Chief Executive Officer & Director

Yeah. I'm going to have Chris Robison, who is down there most recently, to walk through some of the work as we – especially as we begun Full Potential.

Christopher J. Robison - Chief Operating Officer & Executive Vice President

Yeah. David, I think I'd look at it in two pieces. Obviously, the leach, we've been able to bring the new valley leach online sooner than expected. So, certainly, an upside there and that will continue through the year as we complete that project.

The mill performance – so, if I shift gears over to mill performance, we continue to improve that performance and are very pleased with the progress that we've made there. And as you may recall, the next phase of the mill, which, again, is obviously something that we've talked about before, but taking concentrate to Nevada potentially starting next year.

So, first phase was getting the mill up to full performance. Phase two is really simplifying the flow sheet and taking concentrate to Nevada, which is a good excellent synergy with the demand for heat value in the roaster and the autoclave.

Gary J. Goldberg - President, Chief Executive Officer & Director

So, overall, we're still very comfortable, David, with the 10% mining cost improvement that we built into our acquisition plans and feel comfortable we'll be able to do better than that. But I'd just say we just started our Full Potential project, and we'll go through that and have more updates through – well later in the year.

David Haughton - CIBC World Markets, Inc.

Just to follow on from Chris' comments there about the mill. The recovery at the mill was a touch lower than what we would have expected. My recollection was that you're kind of targeting the high-70% and then you could probably get a little bit more out if you put the tiles onto the leach pads. Where are you kind of expecting the recoveries to go for the balance of the year?

Gary J. Goldberg - President, Chief Executive Officer & Director

Well, fair question. Those recoveries are pretty much in line with what we had expected, David, I think high 60s. And then, that's through the mill and then – as you may recall. Then, when you put it out on the leach pad, you pick up another roughly something 12%, 15% over time as you would from the leach.

David Haughton - CIBC World Markets, Inc.

Okay. If I could just switch over on an operational question for Batu. So, you've had some reasonably good weather based on your introductory comments there, Gary. Ordinarily, we would have expected the better grades to come through in the second and third quarter. Just wondering what we should we be thinking about as far as where that grade may go given the kind of changes in the weather patterns that you're seeing.

Gary J. Goldberg - President, Chief Executive Officer & Director

Yeah. Basically, we had drier weather in the quarter, so it allowed us to stay in the bottom of the pit in the higher grade part of the ore body for a longer period of time. So, what we've done is accelerated production and moved it forward from later this year and even from 2017, we'd expect, if we have a normal sort of a rainy season pattern.

I think the only piece that I'd flag is we looked and we've got our export permit that we've – we've filed our application to move forward is making sure we get that on time. That could be something that could affect our second quarter shipments if that doesn't come through in a timely manner. But basically, I'd see our overall production up slightly from what we had forecast overall, and it's pulled forward.

David Haughton - CIBC World Markets, Inc.

And with those permits, Gary, are they now becoming a little bit more systematic in getting the granting of it or is it a case-by-case basis?

Gary J. Goldberg - President, Chief Executive Officer & Director

I think it's been case by case. It's still tied to, obviously, the requirements we have with our mine plan, and that part works pretty well. I think the other pieces are work to support Freeport as they look at the smelter, and we continue to work with them in those plans. But that sits within the bigger picture of how overall smelting development and the changes that I know that they're looking at for their contract to work and how that all fits in.

David Haughton - CIBC World Markets, Inc.

With a bit of luck, it will be someone else's problem by the time the year ends.

Gary J. Goldberg - President, Chief Executive Officer & Director

No, I wouldn't quite go there, but we will continue to operate it as if it's ours and going to continue to operate it that way.

David Haughton - CIBC World Markets, Inc.

Thank you, Gary.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thanks, David.

Operator

Our next question is coming from Tanya Jakusconek from Deutsche Bank. Ma'am, you have an open line.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

Yes. Good morning. I think it's Scotiabank. I just wanted to ask two questions, if I could. The first one is on Leeville. Gary, can we get an update on how the costs are doing at Leeville? I think, last quarter, we were in some difficult ground conditions that needed additional support and I think we were supposed to get through that in the first half of the year. Can we just get an update on where we are on that and whether that's still the plan?

Gary J. Goldberg - President, Chief Executive Officer & Director

I think that still fits very well, Tanya, in terms of what we're doing. We're actually using a different type of rock bolt, a longer cable bolt in the process. We're seeing very good results out of that, but we're having to go through and re-bolt in a number of areas using this new type of bolt and that will take through the second quarter. So, we'll see the higher costs, as we said earlier, in the first half versus the second half of this year.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

Okay. Thank you for that. And then, my second question is on Batu Hijau. Sorry to come back to Batu. I just wanted to make sure that I understood. Is it safe to assume, Gary, that all of the technical due diligence from the interested parties has been completed? Is that a safe assumption?

Gary J. Goldberg - President, Chief Executive Officer & Director

I think that's a safe assumption. We're looking at financial – or the deal terms as well as making sure they have the financing now.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

And my second question on that is, are the deal terms something that still need to be negotiated? Or have those come to sort of an agreement and we're only really waiting for the finances – the financial to be put in place in order to complete this deal? I'm just trying to understand what the outstanding issues are.

Gary J. Goldberg - President, Chief Executive Officer & Director

Yes. It's really elements of the deal terms and the financing that remain. So, both of those areas still remain outstanding.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

Okay. Thank you for that. And sorry, if I could, ask one last question on Ahafo. I know that you mentioned that – and John asked the questions on the synergies of the expansion and Subika Underground. I understand perhaps you don't have the financial implications. But maybe just qualitatively, what would synergies of putting those together be?

Gary J. Goldberg - President, Chief Executive Officer & Director

It's synergies and a bit infrastructure, power – and really, where you bring ore in into the sequence, it's a mine plan element and you're able to shift some of the lower grade out and have more capacity. So, it's grade related. We'll have more details on that when we get to the point of actually having approval, and we'll share that information with you and the rest of the market.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

And so, you mentioned it is grade related. So, obviously, that could help the cash cost in the earlier years. But if you mention infrastructure, could that also happen to help the capital?

Gary J. Goldberg - President, Chief Executive Officer & Director

It helps a little bit, but I wouldn't say it's more on the operating cost side than on the capital cost side.

Tanya Jakusconek - Scotia Capital, Inc. (Broker)

Okay. That's helpful. Thank you very much.

Gary J. Goldberg - President, Chief Executive Officer & Director

Great. Thank you.

Operator

Our next question is coming from Chris Terry from Deutsche Bank. Sir, you have an open line.

Chris Terry - Deutsche Bank AG (Australia)

Good morning, guys. Perhaps a question for Laurie. I think Andrew Kaip touched on this a bit earlier, but just digging into the cash flows a little bit further. In that quarter, there was the accounts receivable increase and also the Yanacocha dividend, but you offset some of these by having lower CapEx, from what I understand, in the first quarter and you'd expect the CapEx to go up in the second quarter.

Do – can we expect some of that accounts receivable to come down again in the second quarter that might offset the CapEx? Just trying to think through the next couple of quarters a bit more on the cash side.

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Yeah. Thanks, Terry, for that question. We do – I would expect that accounts receivable to come down. We had unusually high sales compared to production in the first quarter. We had mentioned at the end of last year we had some Batu shipments that did not make it through to sales. And so, we had that come through in the first quarter. But we will be expecting to ramp up some of the capital costs in this quarter. And the Yanacocha dividend, we don't factor that into free cash flow. That was more of a financing activity of moving that through similarly to Regis.

Chris Terry - Deutsche Bank AG (Australia)

Okay. So, is there any update on how we should think about that Yanacocha dividend going forward?

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

No, I don't think that we would be doing that on a regular basis. It's something we want to make sure that we leave enough cash at Yanacocha to fund the upcoming activities in what might be happening. But we felt that there was enough cash there, and we felt it was appropriate to dividend it out to all the partners including to us at corporate, which allows us to use some of that for debt pay-down and things like that.

Chris Terry - Deutsche Bank AG (Australia)

Okay. Sure. And just on the interest expense, so I think your guidance is down $10 million for the 2016 year, but I think you might have mentioned a $28 million saving from the payback of the debt. Is that just because it's been done partially through the year or what's the – how do I square that?

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Yeah. Thanks, Terry. Two things. One, it is partially through the year, but also perhaps the bigger factor is as we've spent – we're spending a little bit less on capital, so our capitalized interest goes down. Our guidance is expensed. So, we have some that moves to capitalized interest, and that number has gone down so more of it stays in expense.

Chris Terry - Deutsche Bank AG (Australia)

Okay. And one final one. If Batu was to be sold, what does that mean for cash release, i.e. how much of the current cash balance is set aside for Indonesia at the moment?

Gary J. Goldberg - President, Chief Executive Officer & Director

That's really part of the deal terms that we'd be working through, so I think it's best to hold that question if we're – for another time.

Chris Terry - Deutsche Bank AG (Australia)

Okay. Thanks very much.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question is coming from Robert Reynolds from Credit Suisse. Sir, you have an open line.

Robert Reynolds - Credit Suisse Securities (Canada), Inc

Hi. Good morning, guys. Going back to Batu Hijau again. My question relates to the 17% effective economic interest that Newmont gets through, I believe it was a loan it made to PTPI. And I'm curious how that 17% would be treated in the event of a sale of Batu Hijau. Would Newmont receive proceeds for the 17%, or is there a loan that PTPI would repay to Newmont? Any color there would be helpful.

Gary J. Goldberg - President, Chief Executive Officer & Director

Yeah. Good question, but that fits all within the overall elements of the deal terms that we're working through. So, nothing more I can share at this stage.

Robert Reynolds - Credit Suisse Securities (Canada), Inc

Are you able to provide any color on the size of the loan that was made to PTPI?

Gary J. Goldberg - President, Chief Executive Officer & Director

I believe that you should be able to find what you need in the disclosure note. Let me get back to you on that. Just – I'm familiar with the loan balances. I'm just not sure what – where to point you to, to point that out. So, we'll come back to you on that.

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

And I don't think it's specifically disclosed in our Q.

Gary J. Goldberg - President, Chief Executive Officer & Director

Okay.

Robert Reynolds - Credit Suisse Securities (Canada), Inc

Okay. That's it for me.

Gary J. Goldberg - President, Chief Executive Officer & Director

Okay.

Operator

Our next question is coming from Karl Blunden from Goldman Sachs. Sir, you have an open line.

Karl Blunden - Goldman Sachs & Co.

Hi. Good morning. Thanks for taking the question. I just also – another question here on Batu. I know you can't disclose much about the expected size of the proceeds. But I mean, I think it's fair to assume there would be some cash proceeds from the sale if it were to happen. If that happened, how should we think about the use of those proceeds, potentially a mix in your corporate priorities between debt reduction and investing for future production.

And then, I think a follow-up there is, if you were to target debt, do you have a sense of – you've been balanced between near-term and longer-term debt. I guess, giving some – giving us a sense that you're focused on the cost of debt take-out, but is there – would there be any changes in your prioritization of near term versus long term based on your view of the market and liquidity?

Gary J. Goldberg - President, Chief Executive Officer & Director

I'll take the first part of that, and then I'll have Laurie cover the second part in terms of what debt we would target. If we are successful, the cash proceeds we would see being used both to continue to pay down debt as we work towards our net debt to EBITDA ratio of 1 time at a $1,200 gold price and then use proceeds to continue to fund our own organic growth projects. We see we have the best organic growth pipeline in the industry. I wouldn't see accelerating, but use the cash to invest in those projects where they make sense, where they're profitable. In regards to what debt we'd target, I'm going to hand it over to Laurie to cover that.

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Thanks, Gary, and thanks, Karl, for the question. I think we will definitely continue to target a mix. But as we get closer to some of the near-term debt, we might prioritize that a bit more than what you saw in the tender that we just executed.

Karl Blunden - Goldman Sachs & Co.

That's very, very helpful. Just in terms of the size. Obviously, you can't disclose the size but is it feasible to think that you may be able to achieve your full target debt repayment for the 2016-to-2018 period much sooner than the net window then?

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Well, our targeted debt reduction payment does not rely on these proceeds. That's what we believe we can do from our operating performance. So, obviously, if we did get these proceeds and did use that to pay down debt, we would exceed that number.

Gary J. Goldberg - President, Chief Executive Officer & Director

And what we've achieved already here in the first quarter has put us on pace to...

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Exactly.

Gary J. Goldberg - President, Chief Executive Officer & Director

Not only meet, but likely exceed that target that we've put out there for the next three years.

Karl Blunden - Goldman Sachs & Co.

Fantastic. Thanks for the disclosures, and congrats on a good performance.

Mary Lauren Brlas - Chief Financial Officer & Executive Vice President

Thank you.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thanks, Karl.

Operator

We have a question coming from Eliot Glazer from Wm Smith. You have an open line.

Eliot Glazer - Wm Smith Securities, Inc.

Well, thank you, Gary, for a very thorough report. My question is, in your gold ounces predicted for 2017, 2018 and thereafter, do you include Batu Hijau?

Gary J. Goldberg - President, Chief Executive Officer & Director

What we have is the Batu Hijau production is in there in 2016, 2017, also 2018, 2019 and 2020. But then, we're processing off the stockpiles. What we've not included is the Phase 7 investment, so that's not in the capital guidance and it's not showing up in the cost. It's primarily capital and the capital range we'd expect is $1.7 billion, $1.8 billion that would begin in 2017, if we are to move forward.

But to do that, just as a reminder, we would need to have our Contract of Work changes defined and agreed, and we would need to have – as we've done with Phase 6, we need to have third-party financing – non-recourse project financing that would be set up to do it. And of course, it would have to make economic sense and have the returns to fit in that area. So, those would be the three things.

But back to your key question on guidance, we've not included Phase 7, but it does show Phase 6 through 2016, 2017 and then the processing of – it's as if it would have been back if you go back and take a look at 2014 and the first part of 2015 in terms of production levels.

Eliot Glazer - Wm Smith Securities, Inc.

I'm sorry, sir, but I still have a follow-up. According to bloomberg.com, it's likely that you're going to have to sell more than you said so far in exchange for about $2 billion in cash. Are they right? Are they wrong?

Gary J. Goldberg - President, Chief Executive Officer & Director

I didn't follow the question. Say that again, Eliot?

Eliot Glazer - Wm Smith Securities, Inc.

According to a number of articles that ran on bloomberg.com, there's an investor group trying to raise $2 billion to buy a larger portion of Batu Hijau than you said in your previous explanation.

Gary J. Goldberg - President, Chief Executive Officer & Director

Yeah. Those numbers – I can't comment really on what's in the press. I think, when we look at the value, there's a value for Phase 6 and there's a value for Phase 7 out there and beyond. Those would be the pieces that we would be looking at. So, when I talk of the development cost for Phase 7, that doesn't include the revenues and the value we get from Phase 7. And of course, it didn't pick up the value we get for Phase 6 in the equation.

Eliot Glazer - Wm Smith Securities, Inc.

It was not very thorough. The last question is, are you going to be forced to sell a significant portion at some point by the government of Indonesia?

Gary J. Goldberg - President, Chief Executive Officer & Director

No. The only requirement that we have under our Contract of Work is a further 7% divestment. That has been on the table with an agreement to sell, and the government hasn't progressed that in almost five years that we've had that agreement. So – but I don't see – divestment has never been an issue in our discussions with them on the Contract of Work. We've divested already 44% of our interest there, and that has not been an issue with the government.

Eliot Glazer - Wm Smith Securities, Inc.

Thank you very much.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thanks, Eliot.

Operator

That is the last question on queue. Speakers, you may continue.

Gary J. Goldberg - President, Chief Executive Officer & Director

Thank you very much. Thank you for joining our call this morning. Our team continues to deliver strong results as we did here in the first quarter of 2016 by driving safer and more efficient operations; a portfolio of longer life, lower cost assets; an experienced and successful exploration team; an exceptional project pipeline and success rate; and a stronger balance sheet and credit rating. We'll continue to build on these foundations as we work to make Newmont the world's most profitable and responsible gold business. Thank you again, and have a safe day.

Operator

That concludes today's conference call. Thank you, all, for participating. You may now disconnect.

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