Newmont Sells Canadian Gold Project On High Costs And Investment Requirements

by Trefis Team
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Newmont Mining
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Newmont Mining (NYSE:NEM) has signed a letter of intent to sell its stalled Hope Bay gold-mining project in Canada to TMAC Resources Inc., which is a privately held mining exploration and development focused company. The proposed transaction, according to Newmont, will follow acquisition agreement and equity financing. The company did not elaborate on the nature of the equity financing. The transaction is, as usual, subject to regulatory and third party approvals. [1]

Newmont acquired the Hope Bay project in 2007 through its $1.5 billion acquisition of Miramar Mining Corporation. It took a $1.6 billion write-down on the project in the fourth quarter of the last financial year and incurred further charges of $129 million for care and maintenance of the project by end of Q3 2012. [2]

See our complete analysis for Newmont here

What Triggered The Decision To Sell?

The development of Hope Bay, located in the harsh Canadian Arctic region, was earlier put on hold this year. The project was not included in Newmont’s strategic growth plan or capital expenditure outlook for 2012. The decision to sell seems to be driven by the prospect of incurring high production costs which have been escalating across the industry in general. Cost Applicable to Sales (CAS) stood at $693 per ounce of gold for the third quarter, up 11% year-over-year. Newmont said that the overall CAS figure for 2012 is likely to be at the higher end of its guidance of $650-675 per ounce. ((Newmont Announces Quarterly Revenue of $2.5 Billion, Cash Flow from Continuing Operations of $578 Million, Newmont News Release))

Also, high capital expenditure would surely have been incurred in the initial phase of development of the project, which would have lasted a few years before the first gold could be produced.

Newmont is already struggling with its Conga project in Peru, which has been put on the back burner for now owing to strong local opposition. The company will now undertake social projects to increase its credibility in the urban and rural community which will contribute to the improvement of social conditions and allow it to move forward with the project. A lot of capital expenditure has already been incurred here with no production to show for it and there may be none even by the end of 2014. [3]

The performance of the company this year has been less than satisfactory. For the first nine months of the year, Newmont reported attributable gold production of 3.73 million ounces, down from 3.87 million ounces over the same period last year. Attributable copper production of 108 million pounds of copper was reported for the first nine months of 2012, down from 152 million pounds during the first nine months of 2011. [4]

All these factors taken together, the company understandably would want to focus on projects closer to yielding gold ore. The management would have to answer shareholders at the end of the day. For example, Newmont’s African production is expected to grow over the next few years, primarily through the development of Akyem in Ghana, which is progressing very well. The Akyem project is approximately 65% complete and on budget, with first production expected in late 2013. This is expected to be followed by a ramp-up in production over a period of three to six months. We think that it makes sense to deploy scarce capital in areas which can contribute to production quickly. The cash flows generated from higher production could then be deployed in long term, capital-intensive projects.

We have revised the Trefis price estimate for Newmont Mining to $59 after the earnings results for the third quarter.

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Notes:
  1. UPDATE: Newmont Mining Moves to Unload Hope Bay Project in Canada, NASDAQ []
  2. Q3 2012 10-Q, SEC []
  3. Newmont Mining: Lower Production And Profits, Future Growth In Question, Trefis []
  4. Weak Asian/Pacific mine performance hits Newmont 3Q results, MineWeb []
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