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Newmont Mining (NYSE:NEM)

Q3 2012 Earnings Call

November 02, 2012 10:00 am ET

Executives

John Seaberg - Vice President of Investor Relations

Richard T. O'Brien - Chief Executive Officer and Executive Director

Russell D. Ball - Chief Financial Officer and Executive Vice President

Gary J. Goldberg - President and Chief Operating Officer

Analysts

John D. Bridges - JP Morgan Chase & Co, Research Division

Jorge M. Beristain - Deutsche Bank AG, Research Division

David Haughton - BMO Capital Markets Canada

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

Paretosh Misra - Morgan Stanley, Research Division

Operator

Good morning, and welcome to the Newmont Mining Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded. If anyone has any objection, please disconnect at this time. I would now like to turn the call over to Mr. John Seaberg, Vice President of Investor Relations for Newmont Mining Corporation. Sir, you may begin.

John Seaberg

Thank you, operator, and good morning, everyone. Welcome to Newmont's Third Quarter 2012 Earnings Conference Call. Joining us on the call today are Richard O'Brien, Chief Executive Officer; Gary Goldberg, President and Chief Operating Officer; Russell Ball, Executive Vice President and Chief Financial Officer; and other members of our executive leadership team.

Turning to Slide 2. Before we get into the quarterly results, I'd like to refer you to our cautionary statement as we will be discussing forward-looking information, which is subject to a number of risks, as further described in our SEC filings, which can be found on our website at newmont.com.

Now I'll turn the call over to Richard O'Brien.

Richard T. O'Brien

Thanks, John. Good morning, everyone. Thank you for joining us on the call. We'll begin our discussion on Slide 3. Q3 was another solid quarter of delivering balanced performance from our operating portfolio. For the quarter, we reported positive results in 2 regions: in Nevada, resulting from higher grades and higher leach tonnage; and at Yanacocha, where recoveries and grades were higher than expected. These positives were partially offset, as announced in October with our production and sales results, with some challenges in our APAC region, primarily at the Tanami mine and Boddington in Australia. Gary will discuss our operating results in greater detail a bit later.

We remain on-track to meet full year production guidance for 2012, although likely at the low end of the 5 million to 5.1 million ounce range. Primarily due to the slightly lower estimated production levels, we've also narrowed our CAS outlook range for the year to between $650 and $675 per ounce, and it's likely we'll end up towards the higher end of that range.

We continue to make progress on reducing our total cost, as we spoke with you about at our Investor Day in May. The value enhancement program is designed to identify and eliminate redundancies and efficiencies -- and inefficiencies, sorry, throughout our company to provide increased financial returns. We continue to focus not only on reducing the upward trend in our operating cost, but in all other areas of the business as well. While this focus is not new for us, we have several new and/or growing capabilities in this area. Recent advances in consolidating our existing ERP platforms into one platform will, over time, eliminate some of the current duplication we have in regional and corporate functional overheads.

That consolidation will also allow us to move into a shared service environment for many of those functions, providing a highly leverage-able model that will increase how efficiently we can support our operating team. Gary Goldberg, our President and COO, has already brought a renewed effort into more effectively and efficiently delivering the substantial technical capabilities that reside in Newmont, while also demanding stronger technical foundations so that we can deliver more predictable mine planning models and more closely connect those models to expected cash flow from our business models.

In our exploration area, we will continue to target annual reserve additions to offset depletion while spending less than we did in 2011 and improving our returns from that portion of the business. And finally, in our projects area, our value assurance group, under Russell Ball and Tom McCulley's leadership, is delivering new capabilities to evaluating our project portfolio, allowing us to cut out earlier projects that don't make economic sense, and to more fully evaluate the potential risks and opportunities of those projects where we continue to invest. Russell can talk some more about the progress we're making on reducing costs in a moment.

While it's clearly a step in the right direction to reduce our capital spending, G&A, exploration and advanced project costs in 2012, as we're doing, we acknowledge this is just a start, and we will come out with additional cost savings targets next year.

On to Slide 4. Earlier this week, we announced a quarterly dividend of $0.35 per share based on last quarter's average P.M. Gold Fix of $1,652 per ounce. At our current share price, this equates to a yield of roughly 2.5%. So far this year, we've paid out approximately $520 million, which is 62% more than we did for the same period last year. So we are focused on profitable production, disciplined returns and returning capital to shareholders. And from a return of capital standpoint, our gold price-linked dividend provides leverage without the cost of holding physical gold or ETFs. And the payout structure benefits shareholders as the price of gold rises, providing additional leverage to the gold price without the cost of owning physical gold or ETFs. And we believe that the price of gold can and will go higher, which will lead to a greater payout for our shareholders. And on that note, I'll turn it over to Russell Ball.

Russell D. Ball

Thanks, Richard, and good morning, everyone. Before jumping into the third quarter details, I wanted to step back and take a couple minutes to give you our perspective on the gold market and how our thinking in that regard has shaped our view on the capital structure of the company and the related return of capital to shareholders.

In early 2011, when we outlined our growth plan, we knew that 2012 and 2013 going to require significant CapEx, and that with the gold price-linked dividend, debt service obligations and the significantly lower cash flow out of Batu Hijau in 2012 and 2013, we fully expected to be in a negative free cash flow position for these years. A number of analysts have picked up on this and have commented on the sustainability of the dividend in light of this negative free cash flow in the short term. However, we have to manage this capital-intensive business for the long term. As we looked out beyond 2013, we saw significant free cash flow generation as production ramped up and CapEx decreased even at our conservative $1,500 an ounce gold price assumption. With now moderated growth plans due to the issues in Peru, reduced CapEx, an ongoing focus on total cost-reduction and a substantially higher than budgeted gold price, we're almost $1 billion ahead of where we expected to be on a free cash flow basis when compared to the 2012 budget.

So in short, the strength of the balance sheet and our ability to sustain the current dividend is a function of the gold price, and we remain bullish for a number of reasons, a couple of which I want to touch on briefly.

The chart on Slide 5 puts the current 10-year-old gold bull market in perspective and compares it to the last bull market in the '70s. I would submit that gold's run over the past decade, as represented by the red hash line on the chart, has been relatively pedestrian versus the last gold bull market represented by the gray line, especially in light of the broader macroeconomic challenges that we face in today's global economy. A classic bubble this bull is not. We think the gold price has a long way to run, especially if you take this analysis and look at it in real terms instead of nominal prices. Today's spot price of around $1,700 an ounce remains approximately 30% below the inflation-adjusted average, depending on which index you use as a measure of inflation, seen in 1980, the peak year of the previous bull market.

Turning to Slide 6. We'll see the impact of just one of the broader macroeconomic factors, namely the collective monetary policy response to the global financial crisis that commenced in '08. The chart shows the rapid growth in central bank balance sheets as a percent of GDP in purple on the left-hand axis with the gold price in gray on the right-hand axis. The major central banks responded to crisis after crisis by providing essentially unlimited liquidity and almost 0 cost in nominal terms or significantly negative rates in real terms. Not surprisingly, we have seen asset prices from housing to farm land in Iowa to global equities to gold react in the way they have despite a very challenging global macro environment. That the price of gold, in particular, has responded by tracking global liquidity, shouldn't be a surprise since it is the one currency whose supply is limited and can't be created by electronic printing presses. For this and a number of other reasons we don't have the time to discuss on this call, but which include the inherent primary supply deficit of 1,800 tons a year, central banks returning as net buyers in size, the establishment of the gold ETF market and producers no longer selling forward, we are bullish on gold prices. It's our job as management to do a better job at delivering this gold price leverage to the bottom line, and we are focused on that.

Shifting to the third quarter and year-to-date operating results on Slide 7. Attributable gold and copper production was down from the prior year quarter, largely due to the ongoing Phase 6 stripping campaign at Batu Hijau and ongoing challenges at Tanami. The quarter production was also below budget as we did expect to mine high-grade Phase 5 ore from the bottom of the pits at Batu Hijau this quarter. However, due to the wall failure in April, we weren't able to access this material.

We realized $1,659 an ounce with operating costs up 11% from the year-ago quarter to $693 an ounce, resulting in an operating margin of $967 an ounce or approximately $107 lower than the prior year quarter. We'll touch on the increase in operating costs shortly. In regards to copper, you see the clear impact of the reduced production from Batu Hijau, CAS more than doubling from the year-ago quarter. The Phase 6 stripping and processing of low-grade stockpiles will continue through the end of 2013.

Moving to the waterfall chart on Slide 8. You'll see an 11% increase in operating costs on a per ounce basis made up of the following: Approximately $40 an ounce in lower volumes driven by the low-grade stockpile processing at Batu; lower mining in mill strip with the Tanami; lower ore grades at Ahafo. Approximately $26 an ounce in higher spending, largely due to high underground mining and backfill costs at Leeville in Nevada and at Tanami in Australia, a $4 million write-down of inventory at Tanami and higher mill maintenance costs at Boddington. Gary will provide more color on the regional performance shortly.

And finally, about $8 an ounce due to lower by-product credits. We do expect some of this to reverse in the fourth quarter as we delay the mining and processing of some high-grade copper ore at Phoenix and Nevada until we completed the floatation planned expansion.

Turning to Slide 9. Financial results for the quarter included revenue of $2.5 billion; net income from continuing operations of $400 million, about $0.81 a share; adjusted net income of $426 million or $0.86 a share, some 33% lower than the prior year quarter; and cash flow from continuing operations of $578 million, slightly less than half the prior year quarter. I'll provide some additional color on the latter 2.

Slide 10 provides a reconciliation of the non-GAAP adjusted net income of $426 million for the quarter to the GAAP reported net income attributable to Newmont stockholders of $367 million. The loss from discontinued operations relates to a noncash mark-to-market increase on the accrual -- accrued royalty obligation related to St. Andrew's Goldfields, driven by a higher gold price assumption. The restructuring and other of $20 million represents the after-tax and minority interest share of severance-related costs, the majority of which were incurred again at Yanacocha in Peru. The expected 2012 savings related to the ongoing cost-reduction effort is now expected to be about $120 million, up from $120 million -- up from the $100 million, sorry, we communicated in July. Our focus is now on the cost-reduction efforts related to 2013 and beyond, which we will discuss with you during our year-end earnings call in February.

The $142 million from the year-ago quarter was related to the noncash write-down of our investment in Paladin Resources, a uranium producer acquired through the Fronteer acquisition in the first half of 2011.

And finally, on Slide 11, some more detail on quarterly operating cash flow. With the decrease mentioned previously largely attributable to increased tax payments with higher provisional payments in Australia accounting for the vast majority of this increase, along with a small increase in Peru, due to the recently enacted mining taxes that weren't payable in 2011. Lower gold and copper volumes, as previously discussed, increased operating costs as previously discussed, and finally, about $117 million in working capital increases spread evenly between accounts payable and inventory, which tend to be a timing issue. I'll now turn the call over to Gary to discuss the regional operating performance in more detail.

Gary J. Goldberg

Thanks, Russell, and good morning. Before we begin discussing the operating results for the quarter, I want to take a moment to acknowledge Allen Campbell, who was fatally injured at our Exodus underground mine in Nevada on August 31. Allen was 49 years old and had worked at Newmont for 24 years. Our hearts and prayers go out to his wife, Julie, and their 2 children, Levi and Jacob.

We emphasize safety in everything we do at Newmont, at all of our operations every day. This was an unfortunate accident that we are learning from and we are taking the steps to help prevent similar events from happening again. Our goal at Newmont is to create a 0-harm workplace. We are not there yet, but remain committed to that goal every day.

Now turning to Slide 12. As Richard mentioned, you'll see that the lower year-over-year production from our Asia Pacific and Africa regions were offset by increases in North and South America. Those production impacts were also reflected in our CAS, with the Australia Pacific region incurring the largest increase in CAS year-over-year as we spread higher Phase 6 stripping costs at Batu Hijau across a lower production base. Our third quarter gold production and CAS were also impacted by unplanned maintenance at Boddington and lower tons mined at Tanami in Australia. While our third quarter CAS of $693 per ounce was above the upper end of the 2012 outlook, our year-to-date CAS of $664 per ounce is within the revised range of $650 million to $675 per ounce. As Richard mentioned, we expect to end the year at the high end of that range.

Looking forward to the fourth quarter, we expect slightly higher production from North America and Asia Pacific to offset slightly lower production from South America and relatively flat production from Africa. As a result, we plan to end the year at the low end of our 2012 outlook of 5 million to 5.1 million ounces of production. I want to emphasize that this is not an effort to boost quarter 4 at the expense of early 2013 results. Rather, it reflects where we are today in the various mine plans.

Turning to Slide 13. You'll see that our North American region continues to be a cornerstone for our company and a remarkable story of longevity, contributing approximately 41% of our production in the third quarter. The repairs that took place at the Leeville vent shaft in the second quarter had a slight impact to production and CAS in the third quarter as it took a little time to get caught up but at the end of the quarter, it was back at normal run rates. Q3 CAS also reflected some lower grades at Midas in Nevada, as well as at La Herradura in Mexico. We are pleased to announce that our Emigrant mine achieved commercial production in September. This new leach operation is expected to contribute between 80,000 and 90,000 ounces annually to North America's production. We've also been successful in reporting record throughput in Mill 6 for 3 consecutive months, achieving levels exceeding 10,500 tons per day. This was the result of a business excellence program where folks looked at alternatives to the grind of the ore feed that allowed them to increase throughput without sacrificing recovery. Our Nevada team deserves a lot of credit for this achievement and this is a good example of the benefits from combining the technical and business improvement talent on the opportunities in the business.

We continue to have some good exploration and development outcomes in Nevada. For example, construction is on schedule at the Phoenix copper leach project and in October, work began on the first freeze ring as we prepare to sink our third vent shaft at Leeville.

We're still receiving good news out of Long Canyon as the exploration team is reporting good drill results, and we continue to expect to declare first NRM when we report our year-end results next February. We are still evaluating various processing options as we continue to improve our knowledge of the ore body.

Turning to our South America region on Slide 14. Q3 attributable production was 196,000 ounces, representing about 16% of our total for the quarter. Production results were higher than a year ago as higher mill throughput and leach pad recoveries partially offset lower leach placement. The higher production and recoveries favorably impacted CAS relative to the prior year quarter. As some of you may have read, as part of our cost-reduction efforts and to align our staffing levels with Yanacocha's mine plan, we recently engaged in a reduction in force of approximately 800 employees. We're consolidating several of our functions previously located in Lima to Cajamarca to support future development in the region. There are also some leadership changes under way in South America.

Carlos Santa Cruz, who joined Newmont 20 years ago and has led our business in South America since 2001 has been appointed Senior Vice President for Australia Pacific region effective February 1, 2013. His experience and steady hand in leading our regional operations through a variety of complex business situations, political and social challenges has also earned him the respect of his employees and peers at Newmont. Carlos is transitioning to our APAC region as Jeff Huspeni, Senior Vice President in Asia Pacific, has announced that he will retire in March 2013 after 30 years with Newmont. Jeff has been an outstanding leader in the areas of safety, integrity and driving continuous improvement in our operations in both Asia Pacific and Africa.

Todd White is being promoted to Senior Vice President, South America effective November 5. Todd will be based in Cajamarca with responsibility for our business in Yanacocha and developing strategy to support future development in the region. Todd has been with Newmont for 18 years, most recently leading our global business improvement efforts, and led our ESR and operations teams in Peru in the past. Javier Velarde, Associate General Counsel, has been appointed as the Interim General Manager for Corporate Affairs also effective November 5 and reporting to me. Javier will be based in Lima with the responsibility for strengthening relationships with the government and community stakeholders. Javier joined Newmont in 2001 and led our legal efforts in the region from 2001 to 2011. Javier's government relations capabilities and knowledge of Peru's complex political and social landscape will help build the support necessary for Newmont's future developments in the region. Both Todd and Javier will work closely together as we make the changes to reflect and support our evolving needs, while maintaining our strong commitment to operating safely, profitably and creating a foundation for future growth.

Note that our full year outlook for Yanacocha remains unchanged. Thus, we still expect about 685,000 ounces of attributable gold production for 2012. This means that the fourth quarter production at Yanacocha will likely be closer to 100,000 ounces rather than the nearly 200,000-ounce run rate we've see in the first 3 quarters of the year, as this year's mine plan calls for less mill ore and more leach material in the fourth quarter. With respect to Conga, we are moving ahead with the "Water First" approach, constructing reservoirs before building production facilities or beginning mining. At the same time, we're making efforts to enhance our credibility in the urban and rural community in order to contribute to the improvement of social conditions necessary to move forward with the project.

Moving to Slide 15. Our Asia Pacific region, which contributed about 32% of our production this quarter, was impacted by the previously mentioned lower tons mined at Tanami, lower grades at Batu as we process stockpiles and a longer-than-expected mill time at Boddington. Continued issues at Tanami are related to a shortfall of backfilling in the mine that limited access to planned higher-grade stopes. These issues are being partially mitigated through rescheduling mining into new mining areas and ramping up paced backfilling to higher levels. That is -- I talked about last quarter, these issues will take some time to address. While the team is working through the backfill issues, we have decided to defer further development work on the Tanami shaft project, as we focus on improving the execution and delivery at the existing operation and to better understand the impact of the near-surface, underground Auron discovery on the overall life of mine plan. This provides flexibility related to the timing of the shaft development. We expect to reassess the restart date of the Tanami shaft project in 2015.

The unplanned mill downtime at Boddington was primarily due to conveyor pulley bearing failures with the primary feed conveyors, and this issue is being addressed. We acknowledge that Boddington will have to operate safely and without interruption this quarter to deliver on its revised production guidance of 725,000 to 750,000 ounces. That said, with the 72,000-ounce month in October, we are tracking in line with this guidance for the year.

Batu Hijau production was impacted by processing lower-grade stockpile material, throughput and recovery due to delayed access of higher-grade ore in the bottom of the pit due to an April high wall failure. The lower production rates at Batu Hijau were already reflected in our production outlook that was revised in Q2.

APAC CAS was impacted by lower production levels I just discussed and higher mill maintenance costs at Boddington, as well as waste stripping costs at Batu Hijau.

Just a quick update regarding the divestiture process at Batu Hijau. Our current economic interest is 48.5% and efforts continue to divest the final 7%. The fourth extension of the closing deadline was signed in October, extending the deadline now to January 31, 2013. Our effective economic interest will be 44.56% once the divestment is complete. We will keep you informed as we advance on this revised schedule. We also begin negotiations with the unions at Batu Hijau for a new collective labor bargaining agreement in November. This week, there was a 3-day illegal strike at Batu Hijau involving our haulage truck drivers. This action was not sanctioned by their union, and the employees returned to work on Thursday. Processing continued uninterrupted during this time. We've committed to continue our dialogue with this group's representatives regarding their concerns, and also like to thank our employees for remaining focused on performing their jobs safely over the last few days whilst this activity has been occurring at the mine.

On Slide 16, we've summarized third quarter performance at Ahafo in Ghana, which contributed about 11% of our Q3 production. Ahafo's production of 131,000 ounces in the third quarter was down 10% from last year's quarter due to expected lower ore grade. The higher-grade Apensu pit, which contributed significantly to 2011 production, is now mined out, but we are seeing encouraging exploration results from Apensu South. Our full year production outlook for the region remains unchanged. CAS was $561 per ounce, up from a year ago due to the lower production, longer hauls and higher labor costs. Africa production is expected to grow over the next few years, primarily through the development of Akyem, which is progressing very well. With respect to the development of the Subika underground mine, we've slowed down the development schedule as we work to obtain the necessary permits and to optimize the overall Ahafo water balance and to most importantly, determine the most economic sequence for the development of the greater Ahafo district.

Looking at Slide 17, the Akyem project is approximately 65% complete, tracking on schedule and on budget, with first production expected in late 2013, followed by a 3- to 6-month ramp-up to full production. In terms of the progress made, 11 carbon and leach tank shells have been completed and are shown in the lower right picture. The tanks commenced water filling in early September for hydro testing, which has just recently been completed. The primary crusher is 85% complete, and we continue with the commissioning and testing of the water treatment plant. Akyem is really taking shape. The grinding mill shells, both sag and ball mill have both been erected, and you can see those in the upper right-hand picture, and the mine maintenance workshop is nearly complete. If you recall, we shared first mining pictures at Akyem with you back at the Denver Gold Show, and I'm happy to report mining continues at Akyem and is slightly ahead of schedule. I'd now like to turn the call back over to Richard.

Richard T. O'Brien

Thanks, Gary and Russell. Turning to the final slide, our operating team remains focused on the safety of our people, delivering operational performance within our 2012 outlook and on improving the efficiency of our mines. At the same time, we're continuing to optimize and refine our project development efforts and plans to ensure that we're building profitable mines that generate real returns and free cash flow. As Gary mentioned earlier, our Akyem project in Ghana is an excellent example of the kind of project execution and quality we're striving for throughout our portfolio. Akyem continues to progress well and is expected to be a cornerstone in our growing business presence in Ghana.

We also remain focused on leading the industry in generating returns and returning capital back to where it belongs, with our shareholders, backed by one of the strongest balance sheets in the industry. Our leadership in these areas is a testament to the quality of our people, and I'd like to thank each one of them for their tireless commitment to our business.

With that, I'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Bridges.

John D. Bridges - JP Morgan Chase & Co, Research Division

I'm pleased to see you've got a new mine in Nevada. I just wondered if you could give us a very broad outline as to what to expect from Nevada. It remains very much a black box, and I just wanted to get a sense as to what sort of production level we could expect from there and for how long? I recognize it's a very broad brush thing, but if you could give us a bit of guidance, I would appreciate it.

Richard T. O'Brien

Maybe I'll ask Gary to start out and see if anybody else wants to add to that. Gary?

Gary J. Goldberg

Thanks, John. I think Nevada, as I said in the presentation, has been really the cornerstone for our business. We continue to make investments. We've got the development of the shaft at Leeville, which will allow us -- basically it's a ventilation shaft that allows us to extend access into different parts of the ore body and to slightly increase production over time. We're making the investment in the Phoenix copper leach. And then I mentioned also, Long Canyon and the future that, that represents. That's out a bit in time as we've presented in the past in different meetings, but still see Nevada as a major part of our overall portfolio going forward.

John D. Bridges - JP Morgan Chase & Co, Research Division

At current -- holding current production levels or improving?

Gary J. Goldberg

I see, at this stage and we'll run through details, obviously, early next year as we look at outlook for '13 and then talk further beyond that. But in the 1.5 million to 2 million ounce range going forward out through 2020.

John D. Bridges - JP Morgan Chase & Co, Research Division

Okay. And there's a lot of difference in the way that cash costs are reported throughout the industry at the moment. Because you guys don't use, aren't allowed to use deferred stripping but a lot of your competition are. I just wondered how your costs would compare if you were on an apples-to-apples basis.

Richard T. O'Brien

Russell, do you want to take that one?

Russell D. Ball

Yes, sure, Richard. John, it's an interesting question, and when we -- we do tend to look at, you're right, we can't adopt IFRS and that makes, I guess, us and Freeport a little different to some of our peers in the business. We do look at it, and it depends where you are in the mine, so it's very difficult to put one number. But think somewhere around $30 to $50 an ounce from a CAS perspective. And if we just look at Batu Hijau for this quarter, we would've seen about a $140 million to $150 million increase in operating cash flow. That would have obviously been offset against higher capital as we move it over from the income statement essentially to the -- or from working capital, up into capital. So at the end of the day, there is no free lunch and the accounting does create some noise, certainly from an income statement perspective and that's why we or at least I tend to focus a little bit more maybe on the cash flow than the income statement. But at the end of the day, it's in the total costs of production. And as we talked about with you all in May, the focus for us is really on total cost of production. So whether it shows up in CAS or deferred stripping or sustaining capital, it gets in the total cost of production. So you're right, there is some noise on an income statement. Think about it as $30 to $50 an ounce higher than where we would be under an IFRS environment. But that does move depending on the type of ore bodies here and obviously, a bigger issue for open pits. So yes, $30 and $50 and for this quarter at Batu Hijau alone, $140-odd million have ended up higher operating cash flow under that reporting.

Operator

Our next question comes from Jorge Beristain with Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

My question is for Richard and just how should we kind of conceptualize the big spending buckets that you have in your control for 2013, namely, maintenance CapEx. We've already heard some of your competitors talk about paring back the maintenance a little bit. So if you could talk about that. Do you feel that your maintenance capital could come down? Your growth CapEx, broad brush, could you give us an idea of what you're generally expecting for 2013? And then your exploration expense has grown quite a bit in the past few years and I'm wondering if in this environment where you're managing more for cash flow, is exploration a bit more of a discretionary expense right now?

Richard T. O'Brien

What I would say is a couple things. First, we are, as Russell has already said and as we said in our May Investor Day, we are managing towards total cost. We've already announced, Jorge, that we're going to take this year alone, out of our exploration budget, probably $30 million. I think taking that for really, half a year and thinking about next year, I think you could anticipate a further reduction in exploration spending. But as I said, Grigore is our exploration head. He's really focused on continuing to offset depletion through additional discoveries near mine and then looking still long term for other development properties through greenfield. So we're still going to be in the exploration business, but we're going to be able to do it with less money. In particular, eliminating some of our higher cost opportunities, both higher cost for exploration, as well as higher total cost. So I would say we will see a cutback in exploration in 2013 and probably in the order of $50 million to $75 million just depending on where we end up with the cash flow estimates for the entire business.

On sustaining capital, I can put that one over to Gary and Randy in a minute, but it is something that we actually started focusing on about 2 years ago, when we saw a significant increase in our own estimates of sustaining capital in our business plan. And I can tell you each one of our regions is focused on their sustaining capital and on bringing it down. So this year, for example, our sustaining capital has been probably in the order of $250 or $225 an ounce just depending on where you are in the portfolio. With that, we continue to look at the balance for next year between wanting to sustain the productive capacity but also focusing more on returns. I would say there's going to be the capability to reduce sustaining capital some next year but I know Gary is really trying to tear into this, and I would say when we get to 2013 numbers, Gary will have more detail for you on those areas where we are spending sustaining capital that we feel can be cut in the next few years and where we're going to continue to reinvest in the business. On development capital, obviously, when we talk about our gold-linked dividend and in 2011 Investor Day, we talked about 2 years, 2012 and '13, which were going to be cash flow negative, as Russell talked about upfront, and a large piece of that was related to develop to capital to actually, develop new business. And for this year, for example, we probably will look at development capital of probably $300 million to $500 million less than where we started the year. And that's really coming from the reductions at Conga, as well as some reductions at Tanami, as Gary mentioned. Tanami now being slipped out 'til 2015 for a re-evaluation, Conga being further reduced. We're actually, as Russ said, going to be substantially more free cash flow generating than we thought. I think the same is going to happen in 2014, while we continue to look at the portfolio. So while I can't give you precise numbers for '13 and '14, what I can tell you is, I think, less exploration, less overhead, less in advanced projects, as we are able to move projects along, I think, with less overhead, as well as cutting those projects that don't make sense and I think sustaining and development capital are going through a continued, focused reductions, while at the same time, allowing us to invest. So we are going to finish Akyem next year. It will come into commercial production. I think Ghana does represent a great place for us to invest additional capital and we will expand our opportunities there. And then as we mentioned in Suriname and other places where we have opportunities, we will put capital to work. So we're not afraid to put capital to work. We just want to make sure it has the right returns. I don't know, Gary or Randy, do you want to add to that on sustaining capital or any other area?

Gary J. Goldberg

No, I think, Richard, you've covered the overall picture quite well. I think the focus that we're taking out in the operations is to look at total cost, a little bit what Russell said before and re-emphasize the points that we made from our May Investor Day. It's not just looking at CAS or looking at sustaining capital, you've got to look at the whole picture and you got to look at getting effective and efficient returns from that capital. So we're going through that process in detail with each of the regions going through what their plans are, understanding what's in there. There is an -- you can make some cuts today and that will hurt you tomorrow if you don't make sure you do the right investments. So I think it's important, I mean, not just randomly cut, that we go through in detail in the process that we're going through to make sure we're making the right investments.

Operator

Next question comes from David Haughton with BMO.

David Haughton - BMO Capital Markets Canada

Having a look at your guidance for this year, very strong quarter required here. I know that Gary gave some indications that at least at Boddington, October is looking very good, but still quite a big requirement off Nevada. Can you just explain why you're confident of meeting that strong fourth quarter?

Richard T. O'Brien

Gary?

Gary J. Goldberg

Sure thing. The team and I have been through this with Tom Kerr and the team as they put their plans together. Some of it is related to grade and timing of when the grade is and some of the throughput. I mentioned the additional throughput that we're getting, the business excellence program that, that's delivered, and that's looking very sustainable. So while they know it's a stretch, they also are committed to achieving those targets. And they've explained to me where they see that they can achieve that.

David Haughton - BMO Capital Markets Canada

Just specifically on where that throughput would be. Are we talking here about roaster throughput or heap leach, or can you just give us a little bit more of an idea where?

Gary J. Goldberg

It's really out of both. I could -- without going into all the specifics of the plant sites, I think Russell mentioned even some of the higher-grade ores that we held back at Phoenix that will be coming through as we've got that copper circuit online there. So it's really in all the places. Midas would be probably the one place we'd probably see a little bit of a downturn, but in the overall scheme of things, it's not a large contributor.

David Haughton - BMO Capital Markets Canada

And Emigrant coming online, is that going to be an incremental 80,000 to 90,000 ounces to the heap leach?

Gary J. Goldberg

That's correct. As we -- and that will be in 2013.

Russell D. Ball

So Dave, it's Russ. If you think about it, we still had some of the spillover impact from the vent shaft repairs this quarter and we just had the Emigrant go into commercial production at the end of August, if memory serves. So you're going to see that run out. And as I mentioned, we do see some good grades sitting ahead of the crusher at Phoenix. So Nevada has historically delivered on their portfolio and we have no reason to believe that the numbers we put in front of you are not going to deliver on this quarter.

David Haughton - BMO Capital Markets Canada

All right. And just going to Boddington, you gave us an idea that October looked pretty good at over 70,000 ounces. Are you suggesting that we should be thinking 200,000 ounces plus out of Boddington for fourth quarter?

Gary J. Goldberg

Yes, that's what we're targeting, and that's a combination, sustained mill throughput, obviously, through the quarter. But we're seeing higher grades as we expected to come into higher grades here in the fourth quarter. So both of those will contribute to achieving that.

David Haughton - BMO Capital Markets Canada

All right. And also Gary, on your run through, you spoke about the sell-down of that last tranche I think it is of Batu. Can you just explain what's the next step there?

Russell D. Ball

Dave, it's Russell. Maybe I'll take that one. We have been in negotiations for a protracted time on the 7% with an agency of the government. We have a price agreed, I think $245 million-odd. We continue to work through that. I don't see that closing anytime soon for a number of reasons. So I suspect we will be at the 48.5% for most of 2013, quite frankly. We continue to have ongoing discussions with the government of Indonesia, but there hasn't been a lot of progress. And as you've seen, we've extended it for the fourth time, if memory serves, and I suspect there'll be a fifth.

David Haughton - BMO Capital Markets Canada

All right. So you're the willing seller, but you haven't got a willing buyer yet? Or a capable buyer?

Russell D. Ball

That may be an oversimplification, but we haven't been able to conclude the transaction, yes, Dave.

Richard T. O'Brien

I would just add to that, we had a constitutional court case where the Minister of Finance who was trying to secure the right through, as Russell mentioned, a government agency under the finance group to buy this for the central government. And that constitutional case went against the Minister of Finance and the President, suggesting that he needed to get approval from Parliament to allow that purchase. So we were waiting patiently for that constitutional court to take place. It did. And now, the Minister of Finance and his team have asked for an extension to consider their next steps, which could include seeking approval from Parliament or some other agency making the purchase or some other way. And as Russ said, we're just going to continue to work through it.

David Haughton - BMO Capital Markets Canada

All right. Just last question, if I may. Subika underground, you mentioned that there might be some timing delays there. Can you just explain what the situation is and when do you think it may come online?

Gary J. Goldberg

Sure thing. I'll take that one, David. Subika underground, we had a couple things there. One is making sure we get the appropriate exploration permits. That hasn't been an issue, we've got those permits now, but also understanding the water balance. And as we develop an underground mine that draws down more of the water resource and just understanding completely what the effects are in the region and how we're going to process and handle that water is a critical piece in this stage. So those are some things we're working on. More importantly though is how does it fit into the overall regional expansion. We've got the Ahafo 2x plus mill expansion. Basically putting in an additional 1 or 2 sag mills. We're still going through accessing what's the right sequence to bring that on. But that looks to be like the next most attractive way of expanding our production at Ahafo. So it's really making sure we've got the right sequence. The other piece, and I didn't really talk about it, is how Ahafo North fits into that and whether we fit that in and process it through our existing mill facilities or the facilities there at Ahafo or whether we develop facilities right near the deposit at Ahafo North. So a lot of options that we're looking at, we want to make sure that we've really gone through, done the exercise and work to bring it forward. And then when is the right time to bring Subika underground in? Clearly, higher grade but also higher cost when you go underground. So we want to make sure we get the balance right as we bring that into the portfolio.

Operator

The next question comes from Paul Gallo [ph] with Calvert Investment.

Unknown Analyst

I have a quick regulatory question. And it's about the tax and royalty payment disclosure part of the Dodd-Frank law. I think, Russell, when the law was originally passed, you mentioned that Newmont had welcomed it and felt like the costs were pretty de minimis. And this past week, or actually, I think it was a couple weeks ago, the American Petroleum Institute and the Chamber of Commerce filed a challenge to the law. And I'm curious to -- I'm wondering if Newmont supports that challenge or do you still sort of see the implementation of this as pretty easy?

Richard T. O'Brien

Let me take that and Russ, you can jump in. So Newmont has been and will continue to be responsive to EITI, as well as the GRI. So we are a company which already reports our royalties and taxes. And so we just didn't have a big issue with this one. And I don't know, I can't speak for those people that do, but we are committed to being fully transparent in disclosing our tax and royalty payments to governments around the world, something that we've done without the insistence of Dodd-Frank and something we'll continue to do. Russ, you want to add?

Russell D. Ball

Yes. The suit -- and we're not a party to the suit. I've read some of the documentation around it. We aren't caught up in some of the more onerous provisions that this group is objecting to. We have a small, very small part of our business that is impacted by that regulation or requirements and we feel, to the discussion we had the last time this issue came up, it's really a de minimis requirement for us. We intend to comply. It's not a big onerous requirement and we will be reporting, as Richard said, based on the new regulations, which come into effect, I think, for the year ended '13.

Operator

Our next question from Adam Graf with Dahlman Rose.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

I guess, an overarching question maybe for Russell is on a global basis, what are you guys seeing on a forward-looking for capital and labor costs, especially in Australia, given the falloff in the coal market there and potentially the availability for additional labor or pressure on labor costs?

Russell D. Ball

Yes, Adam, I'll take a stab at that. Clearly, we've seen a pullback there and I think, Western Australia, in particularly, was probably the hardest region around the world so they have maybe, the most opportunity to come back to where the rest of the field is. We have not seen this slowdown impact, for example, commodity spend yet. And I say yet and there is a big question mark, whether it's on China or on Europe, what the global macro picture is going to be. But our biggest commodity cost outside of labor is diesel fuel. We'll spend about $700 million a year on diesel and you can see that picture pretty readily. The labor component for us is around 50%, depending on which region you're in. And I'll say that the pressure is still upward, and maybe at slightly lower rates than we have seen over the last 4, 5 years. I don't believe that you'll see labor rates stay flat or come down, quite frankly, in this environment. So I think our planning assumption across the portfolio is around 5% to 7%. That will give you an indication of how we think about that labor cost pressure, certainly less than it was 1 year or 2 years ago, but still challenged in a number of regions where we operate.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And are you guys -- what would you estimate the labor inflation rate is that you guys are seeing in Nevada?

Russell D. Ball

Nevada is actually one of the more benign locations, and I think that's a function of the U.S. economy in general and the particular situation in Nevada, but somewhere around 3% to 4%.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And then on the capital cost side, are you seeing any stabilization there from major equipment?

Russell D. Ball

We just had some discussions with some of our larger vendors and I'll say their perspective is still in the 5% to 10% range.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

On a global basis, would you say that's pretty consistent?

Russell D. Ball

It varies certainly by region but for the portfolio, somewhere between 5% and 10%. Again, you have to get into some of the details around which pieces of equipment. You're talking about tires, for example, so we're seeing a lot of pressure through the price of rubber. Cyanide, another example where it's a derivative of the ag industry. So when corn prices are up, we tend to pay more for some of those inputs. So you really have to dig into the granularity, but 5% to 7% is a reasonable number.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And then if you don't mind, maybe some more specific questions. I noticed on Yanacocha, in the third quarter, the tonnage for leach ore was sharply down. Was that -- what was behind that? And I apologize if I missed the answer before.

Gary J. Goldberg

That's fine, Adam. It's just really more a matter of timing. We had more mill ore and less leach ore during the quarter and we're going to see that reverse here in the fourth quarter.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And then maybe again, a question for Russell is, I know there's this carbon tax in Australia that seems to have kicked in for everybody. Can maybe you guys tell us a bit more about that?

Russell D. Ball

Yes. And if you look at our operations in Australia, the biggest impact of that is felt at Boddington, just given the nature of some of the smaller underground mines. Somewhere around $40 an ounce increase in CAS for this year as a result of that carbon tax. So we do feel it, like the other competitors in Australia. Boddington is really the 800-pound gorilla from our perspective when you look at our assets down there, somewhere around $40 an ounce at current pricing.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And that's something that's just going to stay flat on a per ounce basis?

Gary J. Goldberg

It basically stays flat, Adam, through the next 3 years. There's some other mechanisms that kick in. We also have to keep an eye on what happens with the Australian political situation because the opposition party there has a different view on that. So that's another one to keep an eye on.

Operator

Our next question comes from Paretosh Misra with Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

A couple of questions. First on Suriname, any thoughts on how your discussions with the government are progressing? What's been the focus recently?

Richard T. O'Brien

Yes, I would say discussions with the government are progressing and the focus is continuing to be on trying to finalize the terms and conditions around the mineral agreement and the amount of property that goes -- that, that mineral agreement covers. And I would say that the discussions are proceeding. That's really where we are right now.

Paretosh Misra - Morgan Stanley, Research Division

Got it. Is there any chance that those may finalize by fourth quarter?

Richard T. O'Brien

We'll have to see. I think that the government is focused on this, as are we. But as you can imagine, there's any number of things that the government has to face in their daily lives as do we, so we'll just see how it goes and how terms and conditions work out.

Paretosh Misra - Morgan Stanley, Research Division

Sounds good. Then on Long Canyon, what are your most recent thoughts on the scale of the project? Is 200,000 to 300,000 ounces per year still sound like the right target?

Richard T. O'Brien

Gary, do you want to take that?

Gary J. Goldberg

Sure thing, Richard. Yes, we're looking at a variety of options both mill and leach, as we start the project up. As I said, the drilling continues to confirm what we expected there for potential for the ore body but still more drilling to go through. And current estimates have us in the 200,000 to 300,000 ounce per year range in the first 5 years of production.

Paretosh Misra - Morgan Stanley, Research Division

Got it. And one final question on Yanacocha. You talked about fourth quarter. Any thoughts on next year or how production and cost may look like?

Gary J. Goldberg

We'll give more detail early next year when we give the guidance but part of the reduction in force that we went through is really resetting and looking at levelizing the production out for the next 3 to 4 years if you look at what the remaining reserve is at Yanacocha. So we'll get into the details on that when we give guidance early next year.

John Seaberg

Richard, any closing comments?

Richard T. O'Brien

I'd just like to thank everyone for attending today, and your continued and ongoing interest in Newmont, and we look forward to talking to you after the fourth quarter. So thanks, everyone, for attending, and thanks to the team for delivering.

John Seaberg

With that, we can end the call, operator. Thank you.

Operator

Thank you. That concludes today's conference call. You may disconnect at this time. Thank you for your participation.

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