Newmont Mining (NYSE:NEM) reported its first quarter earnings on April 29. It reported adjusted net income of $354 million for the quarter, down from $578 million in Q1 2012. As expected, revenues declined to $2.2 billion from the comparable 2012 figure of $2.8 billion. Lower production was the primary reason for the weak financial results, although weaker average realized prices for gold and copper also played a role. Lower grade ore and recovery in North America and lower mill grade in South America were the primary drivers behind low production figures. 
Input and labor costs in the mining industry have been rising rapidly over the last few years and hence the cost of getting metals and minerals out of the ground has shot up. The Cost Applicable to Sales (CAS) figures for the first quarter were up for both gold and copper. It stood at $758 per ounce of gold and $2.19 per pound of copper, up 22% and 11% respectively year-over-year. Lower production volume accounted for nearly three quarters of the increase in CAS from last year. Higher input costs in terms of labor, energy and the new carbon tax in Australia were other significant factors responsible. Lower grade ore results in lower production of the metal, which in turn causes an increase in cost per unit sold. 
While the situation at the Batu Hijau mine is not expected to improve in 2013, the production from the Yanacocha mine is also expected to decline going forward. The company’s primary areas of focus for advanced project spending will be Nevada, Indonesia and Africa.
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Apart from reporting a CAS figure, Newmont has come up with a new all-in sustaining cash cost measure that will include the cost applicable to sales, copper credits, G&A, exploration expense, advanced projects expense, R&D expense, other miscellaneous expenses, and sustaining capital expenditure. This helps investors in gauging the company’s performance in a better manner. In the first quarter, Newmont reported an attributable all-in sustaining cash cost of $1,115 per ounce of gold, up from $1,046 per ounce in Q1 2012.
Performance Of Some Major Mines
Attributable gold production in Nevada was reported at 381,000 ounces with a CAS figure of $774 per ounce during the first quarter. The production decreased by 12% year-over-year due to lower ore grade and recovery at Mill 5 and Mill 6 and lower grade at the Twin Creeks autoclave. CAS increased by 25% due to a lower number of ounces sold and lower capitalized mine development activities in 2013 as compared to 2012.
Attributable gold production at Yanacocha in Peru stood at 147,000 ounces with CAS of $568 per ounce. Gold production decreased 22% year-over-year due to lower mill grade and lower leach ore placement from Chaquicocha. CAS per ounce increased 24% due to lower production and lower silver by-product credits.
Attributable gold and copper production at Batu Hijau in Indonesia was 7,000 ounces and 20 million pounds respectively, at CAS figures of $993 per ounce of gold and $2.05 per pound of copper. Gold and copper production declined by 36% and 5%, respectively, due to lower ore grade and recovery. CAS rose by 9% per ounce of gold and 3% per pound of copper due to lower production, partially offset by lower mill maintenance costs. 
The Road Ahead
In Nevada, Newmont has received full funding approval worth $398 million for the Turf/Leeville vent shaft from the company’s board. This project will improve ore grades and facilitate further exploration when it comes on line in 2015. It will also begin production at Phoenix Copper Leach by the end of this year, which will generate value from what is currently thrown away as waste. 
Newmont will also move forward with drilling at Long Canyon and continue to target first production by 2017. In South America, the company will continue with its “Water First” approach at the Conga mine and expects the first reservoir to complete within the next two months. It is also in the process of negotiating a mineral agreement with the government of Suriname to develop the Merian project.
At Batu Hijau, the problem of low grade ore is expected to persist for the rest of the year. Newmont is still working through the Phase 6 stripping campaign and plans to reach higher grade ore later in 2014. Upon completion of this stripping phase, it expects gold production to increase by as much as 10 times in 2015 over the 2013 outlook.
Newmont’s African production is expected to grow over the next few years, primarily through the development of Akyem in Ghana, which is progressing well. The Akyem project is approximately 80% complete and on budget with first production expected in late 2013. Gold production from here is expected to be 350,000 to 450,000 ounces per year. The Subika underground project has been put in care and maintenance, and Newmont will explore project economics further before taking a final decision.
The company is maintaining its full year production guidance of $4.8-5.1 million ounces of gold and 150-170 million pounds of copper. However, it admitted that it was possible that gold production by 2017 would reach just about 5.5 million ounces, rather than the 6-7 million ounces anticipated earlier.
While Newmont has maintained its gold price expectation for 2013 at $1,500 per ounce and its reserves are valued at a price assumption of $1,400 per ounce, it will test its reserves at $1,200 per ounce to examine whether they are still economically viable.
We have a Trefis price estimate for Newmont Mining of $41 which will be revised shortly in view of the recent results.Notes: