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Replacement ounces the Newmont challenge
By Staff reporter, 7 April 2008
FAT Prophets has added its 10oz worth on the find-versus-buy resources debate, highlighting gold major Newmont Mining Corp’s difficulty last year in replacing mined ounces. The answer, it seems, is for the company to find more Miramar’s.

“The [$C1.4 billion] Miramar acquisition adds 10.7 million ounces of indicated and inferred gold resources to Newmont’s portfolio, and will likely expand further through ongoing exploration efforts,” Sydney-based Fat Prophets said this week.

“Such resource additions are very important to Newmont due to the difficulty involved in replacing current production from existing projects. Last year for instance, Newmont’s reserves finished the year at 86.5Moz, compared to 93.9Moz at the end of 2006.”

As such, further acquisitions were likely, a point Newmont's general manager for Australia, Adriaan van Kersen, made at a recent gold mining conference in Perth. The company used a pre-tax gain of $US900 million from the sale of its Franco-Nevada royalty interests for $US1.3 billion and was intent on disposed of other non-core businesses to allow it to better focus resources on increasing reserves and production.

“Newmont’s financial footings also remain on solid ground,” Fat Prophets said. “The group ended last year with a healthy cash balance of $US1.2 billion. In addition, gearing remains a very manageable 36%, leaving the company sufficient balance sheet strength to pursue acquisitions should the opportunity arise.”

Not that Newmont had given up on exploration, with $US225 million budgeted for 2008. Of this, $US30 million would go to Hope Bay (part of the Miramar deal), with the remainder going towards development in North and South America, West Africa and Australia.

“While these efforts will likely bear fruit in time, a more pressing issue is how Newmont will stabilise and increase production in the near term,” Fat Prophets said. “This year’s gold sales are forecast to be flat on 2007 at between 5.1 and 5.4Moz. However, we believe this could be conservative given the arrival of new equipment at the Phoenix mine and the ramping up of production at Midas after the suspension of operations in June following a fatality.

“In addition, there is the soon to be completed mill at Yanacocha in Peru. Pre-commissioning activities have started and production is set to begin this quarter. Once in operation, the mill will enhance recovery and extend mine life.”

While not likely to add to production in calendar 2008, the Boddington mine in Western Australia would be a welcome addition from 2009. At the end of 2007 the project was 62% complete with a targeted completion date of the end of 2008 or the start of 2009.

“As such, production may receive a boost by year-end but if not, we expect mill start up by this time next year at the very least,” Fat Prophets said.

“Taken together we believe the production outlook for Newmont is improving. Higher production also has the benefit of helping keep costs under control. Cost inflation is an industry wide challenge, which effectively cancelled out the impact of higher gold prices for Newmont last year. As such, the start-up of a new coal fired power plant in Nevada is eagerly anticipated. The plant remains on schedule for completion this quarter. Once in operation, the project will reduce costs at the Nevada mines by around $US25 per ounce.”

Fat Prophets said “the underpinnings” of gold’s bull market had not changed in the past few weeks. It remained bearish on the US dollar, while supply from the world’s miners “continues to decline during a period of strong demand”.

“Given this view, we are maintaining our positions in gold producers such as Newmont Mining despite its less than stellar recent performance.”


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