Newmont Sells North American Gold Mine To Optimize Portfolio
Newmont Mining (NYSE:NEM) has announced the sale of its Midas underground gold mine in Nevada to Klondex Mines Ltd. for around $83 million. Midas is an underground mine and mill complex located in the north central part of Nevada between the municipalities of Reno and Elko. Newmont acquired it through its takeover of Australia’s Normandy Mining in 2002.
The deal is subject to approval from the relevant regulators and is expected to be closed early next year, so production from here is likely to be reported as part of discontinued operations in Newmont’s fourth quarter results. The money from the deal will play some part in optimizing Newmont’s portfolio and may help in reducing its hefty debt to some extent. [1]
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Financial Details Of The Transaction
The total consideration of $83 million includes $55 million in cash and the replacement of Newmont surety arrangements with Nevada and federal regulatory authorities to the tune of approximately $28 million.
In addition to the above, Newmont will receive 5 million warrants for common shares of Klondex that have a 15-year term. The exercise price for these warrants will be determined on the closing date of the transaction. There is also scope for acceleration of the 15-year term under certain circumstances, which haven’t been disclosed yet. [2] For reference, Klondex shares currently trade at $1.42 per share.
The Midas Mine
The Midas mine is the smallest mine in Newmont’s portfolio by proven and probable reserves. On December 31, 2012, it had just 200,000 tons of proven gold ore reserves with 30,000 ounces of gold. Even probable reserves amounted to just 400,000 tons of ore and 20,000 ounces of gold. Considering that Barrick has proven and probable gold reserves of 35.1 million ounces in Nevada alone, this represents a very miniscule portion of its total reserves. [3]
Also, since Barrick is expected to produce between 7.0-7.4 million ounces of gold this year, the sale of Midas will not impact their relative share.
Newmont’s Rationale For The Sale
At the end of Q3 2013, Newmont had more than $6 billion in long-term debt on its balance sheet with cash and cash equivalents worth only $1.5 billion. Also, with gold prices under severe stress and rising costs of production, cash flows are constrained at the moment. Therefore, Newmont needs to reduce cost of production as well as invest scarce capital judiciously. By selling off the Midas mine, Newmont can get rid of assets that use capital relatively inefficiently and drive the overall production cost higher due to the lower yield of ores. [4]
This year, Newmont’s efforts to reduce costs and improve efficiency have reduced consolidated spending by $700 million to date. The sale of Midas will continue to contribute to this effort.
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Notes:- Newmont Optimizing Portfolio with Agreement to Sell Midas Operation, Newmont Press Release [↩]
- Newmont Mining is selling off Nevada mine for $83 million, Denver Business Journal [↩]
- Newmont Mining 2012 10-K, SEC [↩]
- Newmont Mining Q3 2013 10-Q, SEC [↩]