Newmont Projects Significant Increase in Future Cash Flow And Discloses Impact of Hedge Accounting
DENVER, Oct. 13 /PRNewswire/ -- Newmont Mining Corporation (NYSE: NEM)
said that the rebound in the gold price will significantly increase its future
operating cash flow with each $10 upward move in the gold price expected to
generate $41 million in incremental annual pre-tax cash flow for the company.
"The strengthening gold price confirms our strategy of providing
shareholder value by retaining the most leverage to the commodity price. It
means greatly improved cash flow, the ability to reduce debt, and increasing
value for our long-lived assets, including a reserve base of over 52 million
ounces of gold," said Ronald C. Cambre, Chairman and CEO. "We are pleased
with the market's reaction following the announcement by the European central
banks on September 26. It confirms our belief that gold's supply/demand
fundamentals would support a higher gold price once the opportunity for
unprecedented speculative short selling was removed."
Newmont expects to produce 4.1 million equity ounces of gold in 1999 at a
total cash cost of under $180 an ounce. Furthermore, it expects production to
increase and costs to decline in 2000. Thus the $62, or 25 percent, rise in
the gold price over the past three weeks, if sustained, would translate into
an increase in next year's pre-tax cash flow of more than $250 million, or
$1.50 a share, a 75 percent improvement over what the company would have
generated at the previous price level.
In early August, when gold hit a 20-year low, the company purchased put
options, giving it the right but not the obligation, to sell 2.85 million
ounces of gold at $270 per ounce over the next two years. To finance this
transaction, Newmont sold offsetting call options on 2.35 million ounces of
gold, or 4.5 percent of its reserves, for delivery in 2004 to 2009 at prices
of $350 to $392 an ounce. "The transaction provided insurance to protect our
near-term cash flow in an irrational market, while preserving our leverage to
an increase in the gold price," Cambre said.
Producer hedging has generated considerable discussion and concern in
recent weeks as investors have sought to determine the imbedded financial
risks in each company's hedge position. Newmont has no cash financial
exposure from its current hedge position, although it may incur an opportunity
loss five to ten years from now if the spot price for gold is above the
exercise price on the calls.
Under interpretation of U.S. Generally Accepted Accounting Principles, the
long-dated calls must be reported on a mark-to-market basis and accounted for
separately from the puts. This would result in a non-cash, pre-tax charge in
the third quarter of $63 million.
Newmont believes this approach differs from long-standing industry
practice of recording such gains and losses only when realized. Furthermore,
inclusion of mark-to-market valuations in the income statement introduces
volatility to earnings and distorts the true economic impact of price changes
on the business. The company is seeking clarification of this issue prior to
release of its third quarter results in the belief that investors want to see
consistency in reporting by all parties required to file financial statements
in the U.S.
During August, 133,300 ounces were sold under the puts. Since then an
additional 1,133,000 ounces, including one million covered by a knockout
provision, expired during the price run-up. The calls were executed at a
fixed price and are not subject to margin requirements, gold lease rate
changes or other future charges.
Excluding the hedging impact, the company expects to report positive
earnings for the third quarter based on a realized gold price of $271 an ounce
for the period. During the quarter the company produced 1,043,000 ounces of
gold at a total cash cost of approximately $175 per ounce.
"To reiterate, we have no cash exposure from our hedge position. Our
focus remains on cash flow. As a low cost producer, continued upward momentum
in the gold price means only one thing: greater value for our shareholders,"
Cambre added.
For answers to frequently asked questions on the subject of hedging, see
the press release section of the company's web page: http://www.newmont.com.
This press release contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
are intended to be covered by the safe harbor created thereby. Such
forward-looking statements include, without limitation, (i) estimates of
future earnings, (ii) estimates of future gold production, (iii) estimates of
future production costs and (iv) estimates of future cash flow. Where the
company expresses an expectation or belief as to future events or results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis. However, such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Such risks include, but are not limited to, gold
price volatility, increased production costs and variances in ore grade or
recovery rates from those assumed in mining plans. For a more detailed
discussion of such risks and other factors, see Page 15 of the company's 1998
Annual Report on Form 10-K.
The following are answers to frequently asked questions about Newmont's
hedge position and the impact it may have on cash flow and reported earnings:
-- How are you able to avoid margin calls or floating rate exposure on
your hedge position? The contractual agreement with our bankers was
secured on the basis of our large reserve position, the strength of our
balance sheet and Newmont's long-standing investment-grade credit
rating.
-- What will happen to the puts and calls? If the gold price remains
above $270 an ounce, the puts will expire unexercised; if the price
falls below that level they will be exercised providing the income
protection originally intended. Likewise, if the gold price remains
below the strike price of the calls in the years in which they mature,
they too will expire unexercised. If the price is above the strike
price, we can deliver the specified ounces at prices and profit margins
well above today's level, or roll the calls over into other contracts
for future delivery. Additionally, if the price dips in the next
several years and volatility declines, we may buy back the calls.
-- What is your true economic exposure? There is a potential opportunity
loss of not being able to sell small quantities gold at higher than
contracted prices five to ten years from now. In any event, there
would be no cash impact unless we decided to buy-back the calls.
-- So your worst case scenario is that the gold price continues to
increase? No, that is the best case scenario since 95 percent of our
reserves will be produced and sold at the then higher spot price.
-- Help me understand the accounting. Although no cash was involved, the
fair market value of the puts was $37 million. This amount was
recorded on the balance sheet as an asset to be amortized as the puts
were exercised or expired. A $12 million charge related to the puts
would be recorded in the third quarter. The calls were recorded as a
liability of $37 million. Under mark-to-market accounting, a
Black-Scholes option-pricing model is used to determine the value of
these calls at the end of each accounting period. The model calculates
a value based on the price of gold, its volatility and the passage of
time that represents what it would cost to close out the options. At a
time of rising prices and high volatility, the option price, and our
potential contractual obligation, increases giving rise to a
mark-to-market loss on the income statement. In our case, (with gold
rising from $255 an ounce when the calls were issued to $299 on
September 30) various bullion bankers calculate our calls as being
worth $70 million to $88 million at the end of the quarter. The
difference between that value and the $37 million originally booked is
considered an unrealized loss for the quarter. If mark-to-market
accounting is determined to be appropriate, Newmont would record the
more conservative number.
-- What is your view of this accounting treatment? While marking a hedge
position to market provides valuable supplemental information for
investors, Newmont believes that it distorts the true economic impact
of price changes and introduces volatility in reported earnings. The
disparity in pricing under the same option model underscores the
subjectivity of this method. As a largely unhedged producer, we
realize nearly $1 million a quarter in increased cash flow for each
$1 increase in the gold price. Importantly, the value of our reserves
also increases with no offsetting marked-to-market gain that would
reflect the true economic position of the company.
-- Why not end the confusion and buy in your hedge position? It doesn't
make economic sense at this time to spend dollars to turn an unrealized
accounting charge into an actual cash loss.
-- So what happens going forward? The third quarter was distorted by the
large move in the gold price at the end of the period with no
corresponding income benefit during the three months. Going forward,
we will record a quarterly charge of $6 million over the next year to
amortize the puts. The mark-to-market impact of the calls is
impossible to estimate in advance. However, typically these non-cash
items would be more than offset by increased gold sales revenue. A
higher gold price and volatility would result in a higher
marked-to-market charge, but with a correspondingly larger increase in
pretax earnings and cash flow. Perversely, if the gold price on
December 31 is lower than it was on September 30, we could record an
unrealized gain on our hedge position.
-- Do you have any other gold hedges? Yes, the company has a commitment
to deliver 156,000 ounces of gold from its Minahasa operation in
Indonesia over the next 14 months at a price of $454 an ounce. This
contract qualified for hedge accounting so that gains above the spot
gold price are booked when the ounces are sold. And, in accordance
with this accounting treatment, the fair market value of approximately
$19.5 million is not recorded on the balance sheet.
SOURCE Newmont Mining Corporation
Web site: http://www.newmont.com
Company News On-Call: http://www.prnewswire.com/comp/615675.html
or fax, 800-758-5804, ext. 615675
CONTACT: Media: Doug Hock, 303-837-5812, or Investor Relations:
Terry Terens, 303-837-6141, both of Newmont Mining Corporation
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