World's Top 6 Gold Producers: 2nd Place, Newmont Mining

| About: Newmont Mining (NEM)

As part of the world's top six gold producers series, the last article was discussing about AngloGold Ashanti (NYSE:AU) ranked 3rd. Today, we will look at the 2nd ranked gold producer in the gold industry (NYSEARCA:GLD). This article will provide in-depth analysis of its assets, financial health and the future outlook of the company. This series is intended to offer an insight for potential investors to guide them on wise investment decisions in the gold market.

Newmont Mining (NYSE:NEM)

Incorporated in 1921, its headquarters are located in Denver, Colorado. This American-based company is primarily a gold producer with significant assets in seven countries: the United States, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico.

Source: Newmont Mining

Newmont is one of the world's largest gold producers and is the only gold company included in the S&P 500 Index. Besides gold, they produce a large amount of copper which add to its overall value. Furthermore, they became in 2007 the first gold company selected to be part of the Dow Jones Sustainability World Index.

Financial Highlights

As we will see, the company has a fair balance sheet with its focus on reducing production total costs and lower the risk by relying on a geographically-diversified portfolio of assets.

Production of gold in 2012 achieved 5Moz of gold compared to 5.2Moz in 2011. The average realized gold price was $1662/oz in 2012 compared to $1562/oz the year before, a rise of 6.4%. As for copper, Newmont produced 143M lbs last year, a decrease of 27.4% over 2011 with 197M lbs. The average realized price for copper reached $3.43/lbs compared to $3.54/lbs.

Let's see the production by region for a global view of where Newmont's assets are contributing more efficiently. In North America, the production reached 1.96Moz of gold, a little rise from 1.95Moz in 2011. For properties in South America, the total production was 744,000oz compared to 728,000oz the prior year. The Asia and Pacific region produced 1.7Moz of gold, a drop of 11% from 1.9Moz produced in 2011. Finally, Africa produced 561,000oz of gold compared to 586,000oz last year.

Newmont's Batu Hijau operation in the mountains of Sumbawa, Indonesia, was the main culprit for the huge fall in gold and copper production year-over-year. Lower production was attributed to the processing of lower grade ore from stockpiles as the company is preparing for a new phase of mining at the vast open-pit.

Source: Newmont Mining

In 2012, Newmont reported an all-in sustaining cash cost of $1,149/oz of gold produced compared to $929/oz in 2011 for a 23.7% increase. The cost of getting an ounce of gold out of the ground has doubled over the last five years in the gold industry and Newmont among others couldn't avert it.

Source: Newmont Mining

As expected, revenue declined to $9.9 billion from the 2011 levels of $10.3 billion. Lower production at Newmont's mines in Indonesia and Australia were primarily responsible for the drop. As for the adjusted annual net income, it reported $1.9 billion in 2012, down from $2.2 billion in 2011.

Cash and equivalents are decreasing from year-to-year. From $4.06 billion in 2010, it dropped to $1.76 billion the year after and slightly dropped for 2012 to $1.56 billion. The total debt of Newmont is substantial, with $6.3 billion for 2012 compared to $4.3 billion the year before. However, as you will see on the following chart, the assets of the company are growing from year-to-year which tends to suggest that Newmont's debt is used massively for acquisitions of new properties.

Source: Google Finance

Furthermore, by comparing the long-term debt of Newmont with its peers, we will be able to see which companies are using more of its credit than others.

NEM Long Term Debt Chart

As we can note, Newmont is the company resorting the most on its credit facilities and capital expenditures to meet its goals. The firm has almost double the amount in committed long-term debt compared to AngloGold Ashanti. However, comparing apples with apples, let's see if these companies are at the same level in terms of revenue with the chart below.

NEM Revenue TTM Chart

The debt-to-revenue ratio tells us how well a company is leveraging its debt. As we can see, Newmont has a debt-revenue ratio of 63.8% compared to 55.6% for Ashanti. Therefore, the latter is more efficient at using its loaned cash to make more money. If we look at Newmont's peers ratio, that will give us an even better picture. Kinross Gold (NYSE:KGC) is generating $4.34 billion with a long-term debt of $2.63 billion which gives a fair ratio of 60.6%.

Goldcorp (NYSE:GG) has an amazing ratio of 14.4%. Finally, Yamana Gold (NYSE:AUY) has an excellent 32.7% ratio. This little exercise has allowed us to value the true position of Newmont regarding to its long-term debt. Therefore, the company needs to improve to make better use of its loaned cash.

Top Mines In North America

Nevada, U.S.

Source: Newmont Mining

Located west of the city of Elko on the geologic feature known as the Carlin Trend, all of the mines are located within a 100-mile stretch of north central Nevada between Carlin on the east and Winnemucca on the west. The Carlin mine began production in 1965. The Twin Creeks mine is located about 15 miles north of Golconda, the Lone Tree Complex near the town of Valmy and the Midas mine near the town of the same name. Currently, an expansion of the Twin Creeks underground mine will upgrade the throughput by 20,000oz/year by 2014.

Vista Vein Underground Expansion at Twin Creeks

Source: BMO Metals & Mining Conference, February 2013

Newmont also participates in the Turquoise Ridge joint venture with 25% ownership with Barrick Gold (NYSE:ABX) which uses the mill capacity at Twin Creeks. The Phoenix mine, located 10 miles south of Battle Mountain, started commercial production in Q4 2006. The Leeville underground mine, located on the Carlin Trend northwest of the Carlin East underground mine also began commercial production at the same time of the Phoenix mine.

Source: Newmont Mining

Newmont owns a 10% undivided interest in the mineral rights and lease the remaining 90% on which it pays a royalty equivalent to 18% of the mineral production. From 2010 with 1.74Moz to 2012 with 1.75Moz, production of gold increased slightly. The company estimates about 1.7-1.8Moz production for 2013. Proved and probable reserves for the Nevada mines are estimated at 35.07Moz of gold at 1.28 g/t.

The mines in Nevada are great assets in terms of gold production and also for proved and probable reserves. As a matter of fact, according to the NRH, Turquoise Ridge is ranked 16th with 21.65Moz graded at 5.57 g/t and Carlin, 17th on the world's top 50 producing mines by global resources with 21.23Moz at 1.75 g/t. Furthermore, Phoenix mine appears as well on the list at the 37th rank with 11.43Moz at 0.49 g/t.

Project upgrades at some of the Nevada mines are determined as follows: capital expenditures in Nevada during 2012 included $57M for Leeville/Turf underground expansion, $47M for Emigrant development, $217M for surface and underground development, $151M for leaching, tailings and other facilities, $94M for process facilities improvements and $91M for mine and support equipment.

Leeville/Turf Underground Expansion

Source: BMO Metals & Mining Conference, February 2013

The Leeville/Turf underground addition of a vent shaft is expected to increase production by 70,000oz in early 2015.

Top Mine In South America

Minera Yanacocha, Peru

Source: Newmont Mining

Located high in the Andes Mountains of Peru, Yanacocha is just six miles away from the city of Cajamarca and is the largest gold producer in Latin America. With three active open-pits, production has exceeded 26Moz of gold since the mine opened in 1993. Yanacocha is a Peruvian joint venture in which Newmont owns 51.35%, Compañia de Minas Buenaventura (NYSE:BVN) 43.65%, and IFC (International Finance Corporation) 5%.

The mine produced less last year with 1.35Moz of gold compared to 1.46Moz in 2010 but more than 2011 with 1.29Moz. Estimations for 2013 are about 475,000oz to 525,000oz of gold. Proved and probable reserves are about 3.04Moz of gold at 0.92 g/t. Minera Yanacocha is ranked 32nd on the world's top 50 producing mines by global resources listed by the NRH.

Last year, capital expenditures included $261M for surface development, $110M for leach pad development and $49M for equipment and components purchases.

Top Mines In Asia-Pacific

Boddington, Australia

Source: Newmont Mining

The Boddington gold and copper mine is located in Western Australia about 9 miles northwest of the town of Boddington which is 75 miles south-east of Perth. The mine is located within the Saddleback Greenstone Belt consisting of Archaean volcanic and shallow level intrusive rocks.

The mine started its operations in July 2009. The mining operation consists of two large open-pits. In May 2012, Newmont was seeking to expand the mine life to 2052 by combining the north and south Wandoo open-pits. The waste rock facility is to be expanded as well to 2 billion tonnes.

The mine produced its first million ounces in March 2011 and is expected to produce about 850,000oz of gold and 70M lbs of copper per year. Boddington produced a little less last year with 724,000oz compared to 730,000oz of gold in 2011. As for copper, the company produced 67M lbs in 2012 compared to 65M lbs the prior year. Proved and probable reserves are estimated at 18.6Moz of gold at 0.64 g/t and 2.18 billion lbs of copper at 0.11%. According to the NRH, Boddington is ranked 11th on the same list discussed above.

Batu Hijau, Indonesia

Source: Google Earth

Located on the remote island of Sumbawa in the south central portion of the Indonesian archipelago, Batu Hijau is 950 miles east of Jakarta. The deposit is a joint venture with 45% owned by Newmont and is the mine operator. Sumitomo Corp. (OTCPK:SSUMY) owns 35% and the remaining 20% is owned by PT Pukuafu Indah. The Batu Hijau copper-gold deposit was discovered in 1990 and began commercial production in 2000 where ore is mined using conventional open-pit mining methods. Under the current mine plan, the life expectancy is estimated to last until 2034.

As discussed above, the mine didn't produce to expectations last year with a drastic drop of 78% with only 68,000oz of gold compared to 308,000oz the year before and 715,000oz in 2010. Copper production incurred the same fate last year with 157M lbs, a decrease of 42.5% over 2011 with 273M lbs. Waste tonnes mined increased by 26% as Phase 6 waste removal continued as planned. Newmont expects to process primarily stockpiled ore until Phase 6 ore becomes the primary mill feed in 2014.

Source: Newmont Mining

For 2013, the company is estimating the production rates between 20,000-30,000oz of gold and 75-90M lbs. Proved and probable reserves are estimated at 3.55Moz of gold with 0.008 g/t and 3.5 billion lbs of copper at 0.40% (45% Newmont). Batu Hijau is ranked 43rd on the world's top 50 producing mines by global resources listed by the NRH.

Top Mine In Africa

Ahafo, Ghana

Source: Google Earth

Located 186 miles northwest of the town of Accra, Ahafo gold is an open-pit mine that Newmont developed to start-up the operations in 2006. Currently mining from three open-pits with reserves contained in 17 pits, the mine has an underground potential and include a process plant containing a conventional mill and carbon-in-leach circuit. The mining operations produced its first million ounces of gold in September 2008.

Last year, the mine produced 561,000oz of gold, a slight decrease from 2011 with 566,000oz due to lower throughput and lower grade, largely offset by a drawdown of in-circuit inventory. Outlook for 2013 is estimating production of about 525,000-575,000oz of gold. Proved and probable reserves are estimated at 11.6Moz with a grade of 0.05 g/t. Ahafo mine is ranked 21st on the world's top 50 producing mines by global resources listed by the NRH. Last year's capital expenditures accounted to $28M for equipment at Ahafo and an expansion mill is under way to improve ore processing.

Projects Under Development And Exploration Program

Newmont has significant development properties. Let's take a look at some of the most promising projects under development and exploration activities.

Long Canyon Project, Nevada (U.S.)

Source: BMO Metals & Mining Conference, February 2013

The Long Canyon exploration project is located about one hundred miles from the Newmont's existing infrastructure at Carlin, Nevada. The project is expected to provide the potential for significant development and operating synergies. During 2012, the project entered into the selection and confirmation stage with the submission of an operation plan.

Source: BMO Metals & Mining Conference, February 2013

The company reports to continue making progress on the exploration program with 53 miles of drilling completed and an additional 40 miles are expected to be drilled in 2013. 2.6Moz of inferred resource has been declared so far with potential of three to four times the original estimates. The project is expected to get into production in 2017.

Conga Project, Peru (S.A)

Source: Newmont Mining

The Conga Project is a joint venture with the same structure as Minera Yanacocha asset in Peru. Newmont owns 51.35%, Buenaventura 43.65% and IFC 5%. Conga is located within close proximity of existing operations at Yanacocha. Due to local political and community protests, construction and development activities at the Conga Project were largely suspended in November 2011. However, in April 2012, the Peruvian Government confirmed that Newmont initial Environmental Impact Assessment met the Peruvian and International standards.

The review made recommendations to provide additional water capacity and social funds which was accepted. Thus, the project was carried forward in June 2012. Currently, the project is focusing on building water reservoirs ($20M), completing the last engineering activities ($110M) and building roads and water systems ($20M) for a total of $150M in projected capital spending for 2013.

Newmont is expecting the average annual attributable production of about 300,000-350,000oz/year of gold and about 80-120M lbs/year of copper in the first five years of production.

Construction of Chailhuagon Reservoir

Source: BMO Metals & Mining Conference, February 2013

The company reported 6.5Moz of attributable gold reserves and 1.69 billion lbs of attributable copper reserves. Conga deposit is ranked 18th on the world's top 50 undeveloped deposits of gold by global resources listed by the NRH.

Akyem Project, Ghana (Africa)

Source: African Gold Group

Located approximately 80 miles northwest of the town of Accra, the Akyem construction activities continue to progress on schedule and on budget with around 78% of completed construction according to Newmont.

Source: BMO Metals & Mining Conference, February 2013

First production is anticipated for late 2013 with about three to six months expected for ramp-up from construction completion to commercial production. Gold production expected would be about 350,000-450,000oz/year for the first five years of the mine's operating life of about 16 years. Gold reserves are estimated at 7.4Moz. 2013 estimated capex is about $225-$275 million. Akyem deposit is ranked 42nd on the world's top 50 undeveloped deposits of gold by global resources listed by the NRH.

Newmont's Future Outlook

The company is investing substantial amounts of money to achieve its goal of producing more gold in the next few years. As a matter of fact, estimated capital expenditures are about $2.4 to $2.6 billion in 2013 with approximately 40% to be spent on major project initiatives including further development of Akyem, the Ahafo Mill Expansion, the Conga Project and other expansion projects in Nevada.

In 2013, Newmont has estimated its gold production between 4.8Moz to 5.1Moz and its copper production between 150M lbs to 170M lbs. As shown below, production is expected to come in proportions from the regions as follows: 13% from Africa, 41% from North America, 12% from South America and 34.4% from Asia-Pacific.

Source: Barclay's Americas Mining & Materials, March 2013

The company's reserves of gold are in constant growth with its 5th consecutive year and achieved a record level for 2012 with 99.2Moz over 98.8Moz in 2011. The biggest gold reserve increases came from South America and North America. Depicted below is the 2012 attributable gold proved and probable reserves by region.

Source: Barclay's Americas Mining & Materials, March 2013

As for copper, the reserves decreased slightly from 9.7 billion lbs in 2011 to 9.5 billion lbs in 2012. The chart below is picturing the 2012 attributable copper proved and probable reserves by region.

Source: Barclay's Americas Mining & Materials, March 2013

Bottom Line

As discussed earlier, Newmont reported an all-in sustaining cash cost of $1,149/oz of gold produced last year compared to $929/oz in 2011 for a 23.7% increase. The company has a debt-revenue ratio of 63.8%, the highest of its peer group. However, with its focus on reducing production total costs, $130M in savings were realized last year.

Source: Barclay's Americas Mining & Materials, March 2013

Considering Newmont's 70% assets located in low geopolitical risk jurisdictions and long operating history in Nevada, Peru, Australia and Indonesia, management has proven that it has the capability to operate its assets with care and discipline. Furthermore, sound development risk with projects like Akyem, which is nearly complete, and the reduction of total costs lately are management's will statement to ensure stable growth of the company.

The maturing projects of Akyem and Conga along with expansions of Twin Creeks, Leeville/Turf, La Herradura and Ahafo will soon provide significant increases in gold and copper production. This higher output will translate in bigger revenues and returned capital to shareholders for years to come. Since 2008, Newmont never cut its dividends, dividends/share that grew from $0.10/quarter to $0.20/quarter in 2011, $0.35/quarter last year and a projected $0.43/quarter this year. Depicted below is a comparison of dividends per share with Newmont's peers.

Source: BMO Metals & Mining Conference, February 2013

As we can see, Newmont's dividends/share increased more rapidly than its peers from the last three years. Therefore, the company offered an enticing annual dividend of $1.40/share last year and the current dividend yield is at 4.12%, one of the best in the gold industry. All things being equal, I believe that the investments made to develop new assets and upgrading its current operating mines will pay off in the near future.

The balance sheet appears fair to me even if the company is claiming it has a strong sheet. Nevertheless, I like the current portfolio and above all, the potential of some of its projects under development such as Long Canyon and Akyem deposits. A good investment for moderate-to-bold investors looking for above average dividend yield along with upside potential of Newmont's stock shares.

Within the next few days, the last article of the series will reveal the best player in the gold industry right now with more than 20 operating mines across the world producing over seven million ounces of gold per year, holding the 1st place out of the top six gold producers around the globe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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