As expected, revenues declined to $9.9 billion from the 2011 levels of $10.3 billion. Lower production at Newmont’s mines in Indonesia and Australia was primarily responsible for the drop. The production drop was attributed to continued Phase 6 waste mining at Batu Hijau, lower grade and ore availability at Tanami, and mine sequencing at Waihi.
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 of getting an ounce of gold out of the ground has doubled over the last five years. Newmont is facing the same issues as reflected in its reported Cost Applicable to Sales (CAS) figures.
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Cost Applicable to Sales (CAS) figures for 2012 went up for both gold and copper. CAS stood at $677 per ounce of gold and $2.34 per pound of copper, up 15% and 86% respectively year-over-year. CAS per ounce of gold increased due to lower production from Batu Hijau, Tanami, and Waihi, and higher royalty and waste mining costs. CAS per pound of copper increased 86% due to lower production from Batu Hijau, higher waste mining at Batu Hijau, and higher mill maintenance costs at Boddington.
While the situation at the Batu Hijau mine is not expected to improve in 2013, production from the Yanacocha mine is also expected to decline going forward. The company’s primary areas of focus for advanced project spending next year will be Nevada, Indonesia and Africa. 
Change In Cash Cost Measure
Current operating measures used in the gold industry do not capture all of the sustaining expenditures incurred to produce gold, and therefore do not reflect a complete picture of operating performance, the ability to generate free cash flow from operations, or the expenditures that would be included in the valuation of a gold mining company.
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. It is hoped that this measure will help in gauging Newmont’s performance in a better manner. The World Gold Council is expected to make this a standard reporting metric in mid-2013.
In 2012, Newmont reported an all-in sustaining cash cost of $1,149 per ounce of gold produced. The figure in 2013 is expected to remain flat compared to 2012 levels despite a roughly 5% expected increase in CAS due to inflation and the impact of lower grades of ore. The company aims to achieve this by reducing its combined general and administrative costs, exploration cost, advance project cost and sustaining capital expenditures by approximately 15% to 20% compared with 2012.
Batu Hijau Mainly Responsible For Production Decline
Newmont’s Batu Hijau operation in Indonesia was the main culprit for the huge fall in gold and copper production year-over-year. Lower production was attributed to the processing of lower grade ore from stockpiles as the company prepares for a new phase of mining at the vast open pit in the mountains of Sumbawa, the island where the Batu Hijau mines are located.
2012 attributable gold and copper production decreased 78% and 42%, respectively, as a result of processing primarily lower grade stockpiled material. Waste tons mined increased by 26% as Phase 6 waste removal continued as planned. Newmont expects to process primarily stockpiled ore until Phase 6 ore becomes the primary mill feed in 2014.
The operating environment in Indonesia is also quite challenging for mining companies. Foreign firms are required to divest 51% of mine assets after 10 years of production. The government has also decided to impose a 20% levy on raw ore exports and requires companies to start smelting all ore locally by 2014. Newmont has explicitly said no to building a smelter, which means that unless the government relents or compromises, Newmont’s exports could technically halt in 2014. In our opinion, the overall operating environment in Indonesia for Newmont is likely to be quite challenging for the foreseeable future. If the ban indeed comes into effect, it will have serious ramifications for Newmont’s exports.
The Road Ahead
At Batu Hijau, the situation is expected to be no different in 2013. Production is expected to be comparable to 2012 levels. 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.
The big concern would be Yanacocha in South America where production is expected to decrease by as much as 25% in 2013 and expected to stay at the same level for a couple of years. The expected drop in production is a result of natural depletion of the mine. Capital expenditure in South American will drop significantly because Newmont doesn’t plan to spend much on the Conga project this year. 
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 78% complete and on budget with first production expected in late 2013.
In addition, the company plans to spend $300-350 million on an attributable basis on Long Canyon in Nevada, Elang in Indonesia, and the Subika expansion in Africa to drive future growth.
We have a Trefis price estimate for Newmont Mining of $59 which will be revised shortly.Notes: