UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
For the Quarterly Period Ended June 30, 2006
or
For the transition period from to
Commission File Number: 001-31240
NEWMONT MINING CORPORATION
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code (303) 863-7414
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12-b2 of the Exchange Act.
(Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). ¨ Yes x No
There were 420,916,727 shares of common stock outstanding on July 21, 2006 (and 28,757,293 exchangeable shares).
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Revenues
Sales - gold, net
Sales - copper, net
Costs and expenses
Costs applicable to sales (exclusive of depreciation, depletion and amortization shown separately below)
Gold
Copper
Depreciation, depletion and amortization
Exploration
Advanced projects, research and development
General and administrative
Other expense, net
Other income (expense)
Other income, net (Note 3)
Interest expense, net
Income from continuing operations before income tax expense, minority interest and equity income of affiliates
Income tax expense
Minority interest in income of consolidated subsidiaries
Equity income (loss) of affiliates
Income from continuing operations
Loss from discontinued operations (Note 5)
Net income
Income per common share (Note 6)
Basic:
Loss from discontinued operations
Diluted:
Basic weighted-average common shares outstanding
Diluted weighted-average common shares outstanding
Cash dividends declared per common share
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents
Marketable securities and other short-term investments (Note 10)
Trade receivables
Accounts receivable
Inventories (Note 11)
Stockpiles and ore on leach pads (Note 12)
Deferred stripping costs (Note 2)
Deferred income tax assets
Other current assets
Current assets
Property, plant and mine development, net
Investments (Note 10)
Long-term stockpiles and ore on leach pads (Note 12)
Other long-term assets
Goodwill
Assets of operations held for sale (Note 5)
Total assets
Current portion of long-term debt (Note 13)
Accounts payable
Employee-related benefits
Derivative instruments (Note 9)
Other current liabilities (Note 14)
Current liabilities
Long-term debt (Note 13)
Reclamation and remediation liabilities (Note 15)
Deferred income tax liabilities
Other long-term liabilities (Note 14)
Liabilities of operations held for sale (Note 5)
Total liabilities
Commitments and contingencies (Note 18)
Minority interest in subsidiaries
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net income to net cash from operations:
Revenue from prepaid forward sales obligation
Accretion of accumulated reclamation obligations
Amortization of deferred stripping costs, net
Deferred income taxes
Minority interest expense
Gain on asset sales, net
Hedge loss, net
Other operating adjustments and write-downs
Decrease (increase) in operating assets:
Trade and accounts receivable
Inventories, stockpiles and ore on leach pads
Other assets
Increase (decrease) in operating liabilities:
Accounts payable and other accrued liabilities
Reclamation liabilities
Net cash provided from continuing operations
Net cash (used in) provided from discontinued operations
Net cash from operations
Investing activities:
Additions to property, plant and mine development
Additions to property, plant and mine development of discontinued operations
Investments in marketable debt and equity securities
Proceeds from sale of marketable debt and equity securities
Acquisition of minority interests (Note 8)
Proceeds from sale of assets
Other
Net cash used in investing activities
Financing activities:
Proceeds from debt, net
Repayment of debt
Dividends paid to common stockholders
Dividends paid to minority interests
Proceeds from stock issuance
Change in restricted cash and other
Net cash (used in) provided from financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(dollars in millions, except per share, per ounce and per pound amounts)
(1) BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements of Newmont Mining Corporation and its subsidiaries (collectively, “Newmont” or the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included. The results reported in these interim Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be reported for the entire year. These interim Condensed Consolidated Financial Statements should be read in conjunction with Newmont’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2005, filed March 2, 2006.
References to “A$” refer to Australian currency, “CDN$” to Canadian currency, “IDR” to Indonesian currency and “$” to United States currency.
Certain amounts for the three and six months ended June 30, 2005 have been reclassified to conform to the 2006 presentation. The Company has reclassified the income statement and cash flow statement amounts for the Golden Grove and Holloway operations from the historical presentation to discontinued operations in the Condensed Consolidated Statements of Income and Cash Flows for all periods presented.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
Deferred Stripping Costs
On January 1, 2006 the Company adopted Emerging Issues Task Force Issue No. 04-06 (“EITF 04-06”), “Accounting for Stripping Costs Incurred during Production in the Mining Industry.” EITF 04-06 addresses the accounting for stripping costs incurred during the production phase of a mine and refers to these costs as variable production costs that should be included as a component of inventory to be recognized in Costs applicable to sales in the same period as the revenue from the sale of inventory. As a result, capitalization of post-production stripping costs is appropriate only to the extent product inventory exists at the end of a reporting period. The guidance requires application through recognition of a cumulative effect adjustment to opening retained earnings in the period of adoption, with no charge to current earnings for prior periods. The results for prior periods have not been restated. The cumulative effect adjustment reduced opening retained earnings by $81 (net of tax and minority interests) and eliminated the $71 net deferred stripping asset from the balance sheet. Adoption of EITF 04-06 had no impact on the Company’s cash position or net cash from operations.
Prior to 2006 at some of the Company’s mining operations, deferred stripping costs were charged to Costs applicable to sales as gold or copper was produced and sold using the units of production method based on estimated recoverable quantities of proven and probable gold or copper reserves, using a stripping ratio calculated as the ratio of total tons to be moved to total proven and probable ore reserves, which resulted in the recognition of the costs of waste removal activities over the life of the mine as gold or copper was produced. The application of the deferred stripping accounting method generally resulted in an asset (deferred stripping costs), although a liability (advanced stripping costs) arose when the actual stripping ratio incurred to date was less than the expected stripping ratio over the life of the mine. The Advanced stripping costs primarily pertained to the Batu Hijau operation.
Movements in the net deferred stripping cost balance were as follows:
Opening balance
Cumulative effect adjustment
Disposition of Ovacik
Additions
Amortization
Closing balance
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
The deferred and advanced stripping cost balances are presented in the balance sheet at December 31, 2005 in other assets or other liabilities as follows:
Other Assets:
Current
Long-term
Other Liabilities:
Deferred stripping, net
Stock Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“FAS 123(R)”). Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. In accordance with APB 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123(R) using the modified prospective transition method. Under this method, compensation cost recognized in the three and six months ended June 30, 2006 includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, and b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). The results for prior periods have not been restated.
As a result of adopting FAS 123(R), the Company’s Income from continuing operations and Net income for the second quarter of 2006 is $6 lower ($0.01 per share, basic and diluted) and $10 lower ($0.03 per share basic and $0.02 per share diluted) for the first half of 2006 than if we had continued to account for share-based compensation under APB 25 as we did in the comparable prior year periods. Prior to the adoption of FAS 123(R), cash retained as a result of tax deductions relating to stock-based compensation was included in operating cash flows, along with other tax cash flows, and requires tax benefits relating to the deductibility of increases in the equity instruments issued under share-based compensation arrangements that are not included in Costs applicable to sales(“excess tax benefits”) to be presented in the Statement of Cash Flows as financing cash inflows. The benefit realized for tax deductions from option exercises totaled $7 for the second quarter of 2006 and $12 for the first half of 2006.
The Company currently maintains the 2005 Stock Incentive Plan (“Stock Plan”), approved by stockholders on April 27, 2005, for executives and eligible employees. Under this Stock Plan, options to purchase shares of stock can be granted with exercise prices not less than fair market value of the underlying stock at the date of grant. Fair market value of a share of common stock as of the grant date is the average of the high and low sales prices for a share of the Company’s common stock on the New York Stock Exchange. The Company also maintains prior stock plans, but no longer grants awards under these plans. Options granted under the Company’s stock plans vest over periods ranging from two to four years and are exercisable over a period of time not to exceed 10 years from grant date. At June 30, 2006, 17,374,807 shares were available for future grants under the Company’s Stock Plan.
The value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected term of the option award and stock price volatility. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. Expected volatility is based on the historical volatility of our stock. These estimates involve inherent uncertainties and the application of management judgment. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those options expected to vest. As a result, if other assumptions had been used, our recorded and pro forma stock-based compensation expense could have been different from that reported. The Black-Scholes option-pricing model used the following assumptions for the six months ended June 30, 2006 and 2005, respectively: weighted-average risk-free interest rates of 4.9% and 3.9%; dividend yields of 0.7% and 1%; expected lives of five years and four years; and volatility of 34% and 40%. 1,238,750 and 1,056,368 stock option awards were granted during the three and six months ended June 30, 2006 and 2005, respectively.
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The following table summarizes activity for stock options outstanding at June 30, 2006:
Outstanding at beginning of year
Granted
Exercised
Forfeited and expired
Outstanding at June 30, 2006
Options exercisable at June 30, 2006
The following table summarizes information about stock options outstanding at June 30, 2006, with exercise prices equal to the fair market value on the date of grant with no restrictions on exercisability after vesting:
Options Exercisable
Range of Exercise Prices
$0 to $20
$20 to $30
$30 to $40
$40 to $50
$50+
Total/average
As of June 30, 2006, there was $38 of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 2.2 years. The total intrinsic value of options exercised in the second quarter of 2006 and 2005 was $19 and $1, respectively. The total intrinsic value of options exercised in the first half of 2006 and 2005 was $40 and $4, respectively. 953,791 stock options vested during the three and six months ended June 30, 2006. The weighted-average fair market value of the stock options vested was $39.28 in 2006. 1,129,823 stock options vested during the three and six months ended June 30, 2005. The weighted-average fair market value of the stock options vested was $33.57 in 2005.
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS 123(R) to options granted under our stock option plans in the first half of 2005:
Net income, as reported
Less: Compensation expense determined under the fair value method, net of tax
Pro forma net income
Net income per common share, basic and diluted:
As reported
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Other Stock-Based Compensation
The Company grants restricted stock to certain employees. Shares of restricted stock are granted upon achievement of certain financial and operating thresholds at fair market value on the grant date. Prior to vesting, these shares of restricted stock are subject to certain restrictions related to ownership and transferability. Holders of restricted stock are entitled to vote the shares and to receive any dividends declared on the shares. For the three and six months ended June 30, 2006 and 2005, 102,491 and 155,061 shares of restricted stock, respectively, were granted and issued, of which 101,267 and 95,464 shares remained unvested at June 30, 2006 for the 2006 and 2005 grants, respectively. The weighted-average fair market value of the stock grants issued were $58 and $45 in 2006 and 2005, respectively. Compensation expense recorded for restricted stock was $nil and $3 for the three months ended June 30, 2006 and 2005, respectively. Compensation expense recorded for restricted stock was $nil and $6 for the six months ended June 30, 2006 and 2005, respectively. The shares of restricted stock vest in equal increments annually over three years.
Restricted stock units also are granted, upon achievement of certain financial and operating thresholds, to employees in certain foreign jurisdictions. For the three and six months ended June 30, 2006, the Company granted 19,181 restricted stock units at the weighted-average fair market value of $58 per underlying share of the Company’s common stock. For the three and six months ended June 30, 2005, the Company granted 27,386 restricted stock units at the weighted-average fair market value of $45 per underlying share of the Company’s common stock. Compensation expense recorded for the foreign jurisdiction restricted stock units was $nil for the three months ended June 30, 2006 and 2005. Compensation expense recorded for the foreign jurisdiction restricted stock units was $nil and $1 for the six months ended June 30, 2006 and 2005, respectively. These restricted stock units vest in equal increments annually over three years. Upon vesting, the employee is entitled to receive for each restricted stock unit one share of the Company’s common stock.
The Company grants deferred stock awards to certain other employees. The deferred stock awards vest over periods between two and three years. For the three and six months ended June 30, 2006 and 2005 there were 237,946 and 98,379 deferred stock awards granted by the Company, respectively. At June 30, 2006 and December 31, 2005, 412,187 and 303,002 deferred stock awards, respectively, remained unvested. Compensation expense recorded for deferred stock awards was $2 and $1 for the three months ended June 30, 2006 and 2005, respectively, and $3 and $3 for the six months ended June 30, 2006 and 2005, respectively. Upon vesting, the employee is entitled to receive the number of shares of the Company’s common stock specified in the deferred stock award.
Income Taxes
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the financial statements.
(3) OTHER INCOME, NET
Royalty and dividend income
Interest income
Foreign currency exchange gains
Gain on sale of other assets, net
Gain on investments, net
(Loss) gain on ineffective portion of derivative instruments, net
Start-up income, net
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(4) EMPLOYEE PENSION AND OTHER BENEFIT PLANS
Pension benefit costs, net
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of loss
Other benefit costs, net
A pension settlement loss of $4 was recognized in the six months ended June 30, 2005 and included in Other expense, net.
(5) DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE
During the fourth quarter of 2005, Newmont committed to plans to divest its Holloway operation in Canada and the Martabe exploration project in Indonesia. Newmont has reached an agreement with Agincourt Resources Limited related to the Martabe project and expects the sale to be completed in 2006. Newmont also expects the sale of Holloway to be completed during the year.
During June 2005, Newmont announced the pending sale of its Golden Grove copper-zinc operation in Western Australia to Oxiana Limited (“Oxiana”) for proceeds including cash of A$190 and 82 million Oxiana shares. The sale was completed on July 26, 2005.
Newmont has accounted for the imminent dispositions in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company has reclassified the balance sheet amounts and the income statement results from the historical presentation to Assets and Liabilities of operations held for sale on the Condensed Consolidated Balance Sheets and to Loss from discontinued operations in the Condensed Consolidated Statements of Income for all periods presented. The Condensed Consolidated Statements of Cash Flows have been reclassified for assets held for sale and discontinued operations for all periods presented.
The following table details selected financial information included in the Loss from discontinued operations:
Sales - base metals, net
Loss from operations
Loss on impairment
Pre-tax loss
Income tax benefit
9
The major classes of Assets and Liabilities of operations held for sale are as follows:
Assets:
Inventories
Property, plant and mine development
Total assets of operations held for sale
Liabilities:
Reclamation and remediation
Other liabilities
Total liabilities of operations held for sale
(6) INCOME PER COMMON SHARE
Basic income per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income per common share is computed similarly to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
Numerator:
Denominator:
Basic
Effect of employee stock-based awards
Diluted
Income per common share
Options to purchase 2.2 million and 2.6 million shares of common stock at average exercise prices of $53.85 and $50.40 were outstanding as of June 30, 2006 and 2005, respectively, but were not included in the computation of diluted weighted average number of common shares because their effect would have been anti-dilutive.
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(7) COMPREHENSIVE INCOME
Other comprehensive income (loss), net of tax:
Unrealized gain on marketable equity securities
Foreign currency translation adjustments
Changes in fair value of cash flow hedge instruments
Comprehensive income
(8) ACQUISITIONS
On January 20, 2006, Newmont acquired the remaining 15% interest in the Akyem project, bringing its interest in the project to 100%.
On February 27, 2006, Newmont announced that it was proceeding with the development of the Boddington Project in Western Australia with AngloGold Ashanti Limited. Construction of the Boddington Project is expected to cost Newmont approximately $900 to $1,000, with initial production expected in late 2008 or early 2009.
On March 20, 2006, Newmont acquired Newcrest Mining Limited’s 22.22% interest in the Boddington Project, bringing its interest in the project to 66.67%, for total consideration of $164.
(9) SALES CONTRACTS, COMMODITY AND DERIVATIVE INSTRUMENTS
For the three months ended June 30, 2006 and 2005, losses of $35 and $1, respectively, were included in Other income, net for the ineffective portion of derivative instruments designated as cash flow hedges. For the six months ended June 30, 2006 and 2005, losses of $59 and gains of $1, respectively, were included in Other income, net for the ineffective portion of derivative instruments designated as cash flow hedges. The amount anticipated to be reclassified from Accumulated other comprehensive income to income for derivative instruments during the next 12 months is a loss of approximately $100. The maximum period over which hedged forecasted transactions are expected to occur is 5 years.
Newmont had the following derivative contracts outstanding at June 30, 2006:
Gold Put Option Contracts
($ denominated):
Ounces (thousands)
Average price
Copper Collar Contracts(3)
Pounds (millions)
Average cap price
Average floor price
$/IDR Forward Purchase Contracts(3):
$ (millions)
Average rate (IDR/$)
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Provisional Copper and Gold Sales
The Company’s provisional sales contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward London Metal Exchange price at the time of sale. The embedded derivative, which does not qualify for hedge accounting, is marked to market through earnings each period prior to final settlement.
For the three and six months ended June 30, 2006 and 2005, the Company recorded the following gross revenues before treatment and refining charges, which were subject to final price adjustments at June 30, 2006 and 2005, as follows:
Gross revenue subject to final price adjustments
The average final price adjustments realized were as follows:
Average final price adjustments
Price-Capped Forward Sales Contracts
In 2001, Newmont entered into transactions that closed out certain call options. The options were replaced with a series of forward sales contracts requiring physical delivery of the same quantity of gold over slightly extended future periods. Under the terms of the contracts, Newmont will realize the lower of the spot price on the delivery date or the capped price ranging from $381 per ounce in 2009 to $392 per ounce in 2011. The initial fair value of the forward sales contracts of $54 was recorded as deferred revenue and will be included in revenues as delivery occurs. The forward sales contracts are accounted for as normal sales contracts under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities-an Amendment to SFAS No. 133.”
Newmont had the following price-capped forward sales contracts outstanding at June 30, 2006:
The fair value of the price-capped forward sales contracts at June 30, 2006 and December 31, 2005 was ($532) and ($338), respectively.
Interest Rate Swap Contracts
In 2001, Newmont entered into contracts to hedge the interest rate risk exposure on a portion of its $275 8 5/8% notes and its $200 8 3/8% debentures. For the three months ended June 30, 2006 and 2005, these transactions resulted in a reduction in interest expense of $nil and $1, respectively. For the six months ended June 30, 2006 and 2005, these transactions resulted in a reduction in interest expense of $nil and $2, respectively. The fair value of the interest rate swaps was ($1) at June 30, 2006 and $2 at December 31, 2005.
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(10) INVESTMENTS
Current:
Marketable Debt Securities:
Auction rate securities
Marketable Equity Securities:
Other investments, at cost
Long-term:
Canadian Oil Sands Trust
Gabriel Resources, Ltd.
Shore Gold, Inc.
Miramar Mining Corporation
Investment in Affiliates:
European Gold Refineries
AGR Matthey Joint Venture
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(11) INVENTORIES
In-process
Concentrate
Precious metals
Materials, supplies and other
(12) STOCKPILES AND ORE ON LEACH PADS
Stockpiles
Ore on leach pads
(13) DEBT
Sale-leaseback of refractory ore treatment plant
5 7/8% notes, net of discount
8 5/8% debentures, net of discount
Newmont Australia 7 5/8% guaranteed notes, net of premium
Prepaid forward sales obligation
PTNNT project financing facility
PTNNT shareholder loan
Yanacocha credit facility
Project financings, capital leases and other
Scheduled minimum debt repayments at June 30, 2006 are $84 for the remainder of 2006, $173 in 2007, $245 in 2008, $127 in 2009, $127 in 2010 and $1,158 thereafter.
On May 19, 2006, Yanacocha entered into an unsecured $100 bank financing with a syndicate of Peruvian commercial banks, comprised of Banco de Credito del Peru, Banco Continental and Banco Wiese Sudameris. Quarterly repayments begin in May 2007 with final maturity May 2014. Borrowings under the facility bear interest at a rate of three month Libor plus 1.875%. The loan is non-recourse to Newmont.
During June 2006, 161,111 ounces of gold were physically delivered in connection with the prepaid forward sales obligation. The effect was a non-cash reduction in debt of $48.
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(14) OTHER LIABILITIES
Other current liabilities:
Accrued operating costs
Income and mining taxes
Accrued capital expenditures
Reclamation and remediation costs
Interest
Royalties
Taxes other than income and mining
Deferred revenue
Advanced stripping costs
Other long-term liabilities:
Income taxes
Deferred revenue from the sale of future product
Derivative instruments
(15) RECLAMATION AND REMEDIATION (ASSET RETIREMENT OBLIGATIONS)
At June 30, 2006 and December 31, 2005, $444 and $431, respectively, were accrued for reclamation obligations relating to mineral properties in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” In addition, the Company is involved in several matters concerning environmental obligations associated with former, primarily historic, mining activities. Generally, these matters concern developing and implementing remediation plans at the various sites involved. At June 30, 2006 and December 31, 2005, $72 and $77, respectively, were accrued for such obligations. These amounts are also included in Reclamation and remediation liabilities.
The following is a reconciliation of the liability for asset retirement obligations:
Balance at beginning of period
Additions, changes in estimates and other
Liabilities settled
Disposition of liability
Accretion expense
Balance at end of period
The current portions of Reclamation and remediation liabilities of $60 and $63 at June 30, 2006 and December 31, 2005, respectively, are included in Other current liabilities.
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(16) SEGMENT INFORMATION
Financial information relating to Newmont’s segments is as follows:
Sales, net:
Cost applicable to sales:
Depreciation, depletion and amortization:
Other income, net
Pre-tax income (loss) before minority interest and equity income of affiliates
16
Equity income of affiliates
Amortization of deferred (advanced) stripping, net
17
Total assets from continuing operations
Assets held for sale
18
19
20
(17) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Newmont USA, a 100 percent owned subsidiary of Newmont Mining Corporation, has fully and unconditionally guaranteed the 5 7/8% publicly traded notes. The following condensed consolidating financial information is provided for Newmont USA, as guarantor, and for Newmont Mining Corporation, as issuer, as an alternative to providing separate financial statements for the guarantor. The accounts of Newmont Mining Corporation are presented using the equity method of accounting for investments in subsidiaries.
Condensed Consolidating Statement of Income
Other income (expense), net
Interest income - intercompany
Interest expense - intercompany
Income from continuing operations before taxes, minority interest and equity income of affiliates
Income tax (expense) benefit
Minority interest in income of subsidiaries
Net income (loss)
21
Interest income, foreign currency exchange and other income - intercompany
22
23
24
Condensed Consolidating Balance Sheets
Assets
Marketable securities and other short-term investments
Stockpiles and ore on leach pads
Investments
Investments in subsidiaries
Long-term stockpiles and ore on leach pads
Assets of operations held for sale
Liabilities
Current portion of long-term debt
Employee related benefits
Other current liabilities
Long-term debt
Reclamation and remediation liabilities
Other long-term liabilities
Liabilities of operations held for sale
Stockholders’ equity
Preferred stock
Accumulated other comprehensive income (loss)
25
Deferred stripping costs
26
Condensed Consolidating Statement of Cash Flows
Adjustments to reconcile net income to net cash provided by operating activities
Change in operating assets and liabilities
Net cash used in discontinued operations
Acquisition of minority interests
Net cash (used in) provided by investing activities
Net borrowings (repayments)
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Net cash from discontinued operations
Investments in affiliates
Net borrowings
Proceeds from stock issuance and other
Net cash provided from (used in) financing activities
(18) COMMITMENTS AND CONTINGENCIES
General
The Company follows SFAS No. 5, “Accounting for Contingencies,” in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable (greater than a 75% probability) that a liability had been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss may be incurred.
Operating Segments
The Company’s operating segments are identified in Note 16. Except as noted in this paragraph, all of the Company’s commitments and contingencies specifically described in this Note 18 relate to the Corporate and Other reportable segment. The Nevada Operations matters under Newmont USA Limited relate to the Nevada reportable segment. The PT Newmont Minahasa Raya matters relate to the Other Operations reportable segment. The Yanacocha matters relate to the Yanacocha reportable segment. The Newmont Yandal Operations Pty Limited and the Newmont Australia Limited matters relate to the Australia/New Zealand reportable segment.
Environmental Matters
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable
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laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.
Estimated future reclamation costs are based principally on legal and regulatory requirements. At June 30, 2006 and December 31, 2005, $444 and $431, respectively, were accrued for reclamation costs relating to mineral properties in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” See Note 15.
In addition, the Company is involved in several matters concerning environmental obligations associated with former mining activities. Generally, these matters concern developing and implementing remediation plans at the various sites involved. The Company believes that the related environmental obligations associated with these sites are similar in nature with respect to the development of remediation plans, their risk profile and the compliance required to meet general environmental standards. Based upon the Company’s best estimate of its liability for these matters, $72 and $77 were accrued for such obligations at June 30, 2006 and December 31, 2005, respectively. These amounts are included in Other current liabilities and Reclamation and remediation liabilities. Depending upon the ultimate resolution of these matters, the Company believes that it is reasonably possible that the liability for these matters could be as much as 112% greater or 37% lower than the amount accrued at June 30, 2006. The amounts accrued for these matters are reviewed periodically based upon facts and circumstances available at the time. Changes in estimates are recorded in Other expense, net in the period estimates are revised.
Details about certain of the more significant matters involved are discussed below.
Dawn Mining Company LLC (“Dawn”)-51% Newmont Owned
Midnite Mine Site. Dawn previously leased an open pit uranium mine, currently inactive, on the Spokane Indian Reservation in the State of Washington. The mine site is subject to regulation by agencies of the U.S. Department of Interior (the Bureau of Indian Affairs and the Bureau of Land Management), as well as the United States Environmental Protection Agency (“EPA”).
In 1991, Dawn’s mining lease at the mine was terminated. As a result, Dawn was required to file a formal mine closure and reclamation plan. The Department of Interior commenced an analysis of Dawn’s proposed plan and alternate closure and reclamation plans for the mine. Work on this analysis has been suspended indefinitely. In mid-2000, the mine was included on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). In March 2003, the EPA notified Dawn and Newmont that it had thus far expended $12 on the Remedial Investigation/Feasibility Study under CERCLA (“RI/FS”). In October 2005, the EPA issued the RI/FS on this property in which it indicated a preferred remedy estimated to cost approximately $150. Newmont and Dawn filed comments on the RI/FS with the EPA in January 2006.
On January 28, 2005, the EPA filed a lawsuit against Dawn and Newmont under CERCLA in the U.S. District Court for the Eastern District of Washington. The EPA has asserted that Dawn and Newmont are liable for reclamation or remediation work and costs at the mine. Dawn does not have sufficient funds to pay for the reclamation plan it proposed or for any alternate plan, or for any additional remediation work or costs at the mine. Newmont intends to vigorously contest any claims as to its liability.
Newmont cannot reasonably predict the likelihood or outcome of this lawsuit or any other action against Dawn or Newmont arising from this matter.
Dawn Mill Site. Dawn also owns a uranium mill site facility, located on private land near Ford, Washington, which is subject to state and federal regulation. In late 1999, Dawn sought and later received state approval for a revised closure plan that expedites the reclamation process at the site. The currently approved plan for the site is guaranteed by Newmont.
Idarado Mining Company (“Idarado”)-80.1% Newmont Owned
In July 1992, Newmont and Idarado signed a consent decree with the State of Colorado (“State”), which was agreed to by the U.S. District Court of Colorado, to settle a lawsuit brought by the State under CERCLA.
Idarado agreed in the consent decree to undertake specified remediation work at its former mining site in the Telluride/Ouray area of Colorado. Remediation work at this property is substantially complete. If the remediation does not achieve specific performance objectives defined in the consent decree, the State may require Idarado to implement supplemental activities at the site, also as defined in the consent decree. Idarado and Newmont obtained a $6 reclamation bond to secure their potential obligations
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under the consent decree. In addition, Idarado settled natural resources damages and past and future response costs, and agreed to habitat enhancement work under the consent decree. All of this work is substantially complete.
Newmont Capital Limited-100% Newmont Owned
In February 1999, the EPA placed the Lava Cap mine site in Nevada County, California on the National Priorities List under CERCLA. The EPA then initiated a Remedial Investigation/Feasibility Study under CERCLA to determine environmental conditions and remediation options at the site.
Newmont Capital, formerly known as Franco-Nevada Mining Corporation, Inc., owned the property for approximately three years from 1984 to 1986 but never mined or conducted exploration at the site. The EPA asserts that Newmont Capital is responsible for clean up costs incurred at the site. Newmont Capital and the EPA have entered into an agreement tolling the statute of limitations until December 31, 2006 to facilitate settlement negotiations with respect to potential claims under CERCLA. Based on Newmont Capital’s limited involvement at Lava Cap, it does not believe it has any liability for environmental conditions at the site, and intends to vigorously defend any formal claims by the EPA. Newmont cannot reasonably predict the likelihood or outcome of any future action arising from this matter.
Newmont USA Limited-100% Newmont Owned
Pinal Creek. Newmont is a defendant in a lawsuit brought on November 5, 1991 in U.S. District Court in Arizona by the Pinal Creek Group, alleging that the company and others are responsible for some portion of costs incurred to address groundwater contamination emanating from copper mining operations located in the area of Globe and Miami, Arizona. Two former subsidiaries of Newmont, Pinto Valley Copper Corporation and Magma Copper Company (now known as BHP Copper Inc.), owned some of the mines in the area between 1983 and 1987. The court has dismissed plaintiffs’ claims seeking to hold Newmont liable for the acts or omissions of its former subsidiaries. Based on information presently available, Newmont believes it has strong defenses to plaintiffs’ remaining claims, including, without limitation, that Newmont’s agents did not participate in any pollution causing activities; that Newmont’s liabilities, if any, were contractually transferred to one of the plaintiffs; that portions of plaintiffs’ claimed damages are not recoverable; and that Newmont’s equitable share of liability, if any, would be immaterial. While Newmont has denied liability and is vigorously defending these claims, we cannot reasonably predict the final outcome of this lawsuit.
Nevada Operations. On November 19, 2002, Great Basin Mine Watch and the Mineral Policy Center (Appellants) filed suit in U.S. District Court in Nevada against the Department of the Interior and the Bureau of Land Management (BLM), challenging and seeking to enjoin the BLM’s July 2002 Record of Decision approving the Company’s amended Plan of Operations covering the Gold Quarry South Layback Project, and the BLM’s September 2002 Record of Decision approving a new Plan of Operations for the Leeville Mine. Appellants sought a declaration that the BLM’s decisions were unlawful and an injunction prohibiting Newmont’s approved activities. Newmont intervened in this action on behalf of the government defendants and filed an answer denying all of Appellants’ claims. In March 2004, the Court granted summary judgment in favor of the government and Newmont on all claims, thus ending the U.S. District Court proceedings. In June 2004, Appellants appealed the U.S. District Court’s decision to the U.S. Ninth Circuit Court of Appeals. While Newmont believes that this appeal is without merit, an unfavorable outcome could result in additional conditions on operations that could have a material adverse effect on the Company’s financial position or results of operations.
On October 16, 2002, Great Basin Mine Watch filed an appeal with the Nevada State Environmental Commission, challenging the Nevada Division of Environmental Protection’s (NDEP) renewal of the Clean Water Act discharge permit for Newmont’s Gold Quarry Mine. This permit governs the conditions under which Newmont may discharge mine-dewatering water in connection with its ongoing mining operations. Great Basin Mine Watch alleges that the terms of the renewed permit violate the Clean Water Act and Nevada water quality laws. Newmont intervened in this action on behalf of the NDEP. A hearing before the Nevada State Environmental Commission was held in June 2003 in Elko, Nevada. At the end of the hearing, the Commission ruled in favor of NDEP on all claims and affirmed NDEP’s renewal of the Clean Water Act discharge permit. Great Basin Mine Watch appealed this decision in the Nevada District Court in Carson City, Nevada. In September 2004, the Nevada District Court ruled in favor of NDEP on most issues but ruled in favor of Great Basin Mine Watch with respect to certain proposed permit amendments. Newmont and NDEP filed an appeal with the Nevada Supreme Court, seeking to uphold these proposed amendments. The Nevada District Court stayed its decision pending this appeal and Gold Quarry continues to operate under its new permit. On April 22, 2006, a panel of the Nevada Supreme Court issued an opinion affirming the new permit in most respects but invalidating certain proposed permit amendments. Newmont has requested reconsideration of this ruling before the panel and, if necessary, will request reconsideration before the full court. Newmont cannot reasonably predict the final outcome of this appeal, and an unfavorable
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outcome could result in additional conditions on operations that could have a material adverse effect on the company’s financial position or results of operations.
Grass Valley. On February 3, 2004, the City of Grass Valley, California brought suit against Newmont under CERCLA in the U.S. District Court for the Northern District of California. This matter involves an abandoned mine adit on property previously owned by a predecessor of Newmont and currently owned by the City of Grass Valley. The complaint alleges that the adit is discharging metals-bearing water into a stream on the property, in concentrations in excess of current EPA drinking water standards. Newmont cannot reasonably predict the likely outcome of this matter.
Grey Eagle Mine Site. By letter dated September 3, 2002, the EPA notified Newmont that the EPA had expended $3 in response costs to address environmental conditions associated with a historic tailings pile located at the Grey Eagle Mine site near Happy Camp, California, and requested that Newmont pay those costs. The EPA has identified four potentially responsible parties, including Newmont. Newmont does not believe it has any liability for environmental conditions at the Grey Eagle Mine site, and intends to vigorously defend any formal claims by the EPA. Newmont cannot reasonably predict the likelihood or outcome of any future action against it arising from this matter.
PT Newmont Minahasa Raya (“PTNMR”)-80% Newmont Owned
In July 2004, a criminal complaint was filed against PTNMR, the Newmont subsidiary that operated the Minahasa mine in Indonesia, alleging environmental pollution relating to submarine tailings placement into nearby Buyat Bay. The Indonesian police detained five PTNMR employees during September and October of 2004. The police investigation and the detention of PTNMR’s employees was declared illegal by the South Jakarta District Court in December 2004, but in March 2005, the Indonesian Supreme Court upheld the legality of the police investigation, and the police turned their evidence over to the local prosecutor. In July 2005, the prosecutor filed an indictment against PTNMR and its President Director, alleging environmental pollution at Buyat Bay. After the court rejected motions to dismiss the proceeding, the prosecutor called its first witnesses in October 2005. The trial is continuing and is expected to conclude later in 2006.
On March 9, 2005, the Indonesian Ministry of the Environment filed a civil lawsuit against PTNMR and its President Director in relation to these allegations, seeking in excess of $100 in monetary damages. In October 2005, PTNMR filed an objection to the court’s jurisdiction, contending that the Government previously agreed to resolve any disputes through out-of-court conciliation or arbitration. The Court upheld PTNMR’s objection and dismissed the case in November 2005. The Government filed a notice of appeal of this ruling. On February 16, 2006, PTNMR and the Government of the Republic of Indonesia signed an agreement settling the civil lawsuit. Under the terms of the agreement, the Government and PTNMR will nominate members to an independent scientific panel that will develop and implement a ten-year environmental monitoring and assessment program to make a definitive, scientific conclusion regarding the condition of Buyat Bay. PTNMR is required to fund specific remedial measures if, as a result of its mining operations, pollution has occurred. The agreement also provides for enhanced community development programs in North Sulawesi. PTNMR will provide initial funding of $12 to cover the cost of the monitoring and community development programs. Over a ten year period, PTNMR will contribute an additional $18. The funds will be managed by an organization governed by interested stakeholders. Accountability for the fund will be ensured through yearly reports that will be made available to the public. The transparency of the scientific panel’s activities will also be assured through annual reports to the public. Pursuant to the agreement, the civil lawsuit against PTNMR has been terminated.
Independent sampling and testing of Buyat Bay water and fish, as well as area residents, conducted by the World Health Organization and the Australian Commonwealth Scientific and Industrial Research Organization, confirm that PTNMR has not polluted the Buyat Bay environment, and, therefore, has not adversely affected the fish in Buyat Bay or the health of nearby residents. The Company remains steadfast that it has not caused pollution or health problems and will continue to vigorously defend itself against these allegations. However, Newmont cannot predict the outcome of the criminal proceeding or whether additional legal actions may occur. This matter could adversely affect our ability to operate in Indonesia.
Resurrection Mining Company (“Resurrection”)-100% Newmont Owned
Newmont, Resurrection and other defendants were named in lawsuits filed by the State of Colorado under CERCLA in 1983, which were subsequently consolidated with a lawsuit filed by EPA in 1986. These proceedings sought to compel the defendants to remediate the impacts of pre-existing, historic mining activities near Leadville, Colorado, which date back to the mid-1800s, and which the government agencies claim were causing substantial environmental problems in the area.
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In 1988 and 1989, the EPA issued administrative orders with respect to one area on the site and the defendants have collectively implemented those orders by constructing a water treatment plant, which was placed in operation in early 1992. Remaining remedial work for this area consists of water treatment plant operation and continuing environmental monitoring and maintenance activities. Newmont and Resurrection are currently responsible for 50% of these costs, but their share of such costs could increase in the event other defendants become unable to pay their share of such costs. On August 9, 2005, ASARCO LLC, the party responsible for the other 50% of these costs, filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. The Company is evaluating the effect that the ASARCO bankruptcy could have on its obligations.
The parties also have entered into a consent decree with respect to the remaining areas at the site, which apportions liabilities and responsibilities for these areas. The EPA approved remedial actions for selected components of Resurrection’s portion of the site, which were initiated in 1995. The EPA has not yet selected the final remedy for the site. Accordingly, Newmont cannot yet determine the full extent or cost of its share of the remedial action that will be required. The government agencies may also seek to recover for damages to natural resources. In March 1999, the parties entered into a Memorandum of Understanding (“MOU”) to facilitate the settlement of natural resources damages claims under CERCLA for the upper Arkansas River Basin. In January 2004, an MOU report was issued that evaluated the extent of natural resource damages and possible restoration activities that might be required, which Resurrection and other parties could potentially be required to fund.
Other Legal Matters
Minera Yanacocha S.R.L. (“Yanacocha”)-51.35% Newmont Owned
Choropampa. In June 2000, a transport contractor of Yanacocha spilled approximately 151 kilograms of elemental mercury near the town of Choropampa, Peru, which is located 53 miles (85 kilometers) southwest of the Yanacocha mine. Elemental mercury is not used in Yanacocha’s operations but is a by-product of gold mining and was sold to a Lima firm for use in medical instruments and industrial applications. A comprehensive health and environmental remediation program was undertaken by Yanacocha in response to the incident. In August 2000, Yanacocha paid under protest a fine of 1,740,000 Peruvian soles (approximately $0.5) to the Peruvian government. Yanacocha has entered into settlement agreements with a number of individuals impacted by the incident. As compensation for the disruption and inconvenience caused by the incident Yanacocha entered into agreements with and provided a variety of public works in the three communities impacted by this incident. Yanacocha cannot predict the likelihood of additional expenditures related to this matter.
Yanacocha, various wholly-owned subsidiaries of Newmont, and other defendants have been named in lawsuits filed by over 1,000 Peruvian citizens in Denver District Court for the State of Colorado. These actions seek compensatory and punitive damages based on claims associated with the elemental mercury spill incident. In February 2005, Yanacocha and the various Newmont defendants answered the complaint in the Denver District Court. The parties in these cases have agreed to submit these matters to binding arbitration.
Additional lawsuits relating to the Choropampa incident were filed against Yanacocha in two of the local courts of Cajamarca, Peru, in May 2002 by over 900 Peruvian citizens. A significant number of the plaintiffs in these lawsuits entered into settlement agreements with Yanacocha prior to filing such claims. The Superior Court of Cajamarca has granted resolutions upholding the validity of certain challenged settlement agreements. The Plaintiffs have appealed these rulings to Peru’s Supreme Court, where they remain pending. In 2005, Yanacocha entered into settlement agreements with approximately 350 additional plaintiffs.
Neither Newmont nor Yanacocha can reasonably predict the final outcome of any of the above-described lawsuits.
Conga. Yanacocha is involved in a dispute with the Provincial Municipality of Celendin regarding the authority of that governmental body to regulate the development of the Conga ore deposit. In the fourth quarter of 2004, the Municipality of Celendin enacted an ordinance declaring the area around Conga to be a mining-free reserve and naturally protected area. Yanacocha has challenged this ordinance on the grounds that, under Peruvian law, local governments lack authority to create such areas and deny the rights granted by Yanacocha’s mining concessions. Based on legal precedent established by Peru’s Constitutional Tribunal, it is reasonable to believe that Yanacocha’s mining rights will be upheld.
Yanacocha has carefully evaluated the social issues and dynamics of the communities in and around the area of Conga. Yanacocha has engaged in extensive community and external affairs efforts at this early stage of the Conga project. It is Yanacocha’s current assessment that a significant percentage of the population in the communities immediately surrounding the Conga area support the project and oppose the Celendin ordinance. Yanacocha will continue to engage actively with these communities during the process of permitting the project, and will expand its outreach efforts to communities in the surrounding region. It will continually monitor and evaluate conditions in the area and any resulting impact on Yanacocha’s ability to successfully permit and develop the Conga deposit.
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Newmont Australia Limited (“Normandy”)-100% Newmont Owned
In February 1999, Normandy Mining Limited (now known as Newmont Australia Limited) sold certain subsidiary companies in a transaction that resulted in net cash proceeds of A$663. The sale did not give rise to any tax liability to Normandy because of the tax basis that Normandy had in the shares of the subsidiaries and the capital losses available to offset the net gain realized on the sale. This transaction is currently the subject of a review by the Australian Taxation Office (“ATO”). The ATO has sought documents from Newmont Australia Limited, the buyer of the subsidiaries and other parties. In December 2003, the ATO issued two draft position papers with respect to its current view of certain proposed tax adjustments required for two of Newmont Australia Limited’s wholly-owned Australian subsidiaries that participated in the transaction. The Company continues to believe that Normandy’s tax treatment was in accordance with the provisions of the relevant tax laws and intends to vigorously defend its position. Newmont Australia Limited cannot reasonably predict what future action the ATO may take in relation to this matter.
Newmont Mining Corporation
On June 8, 2005, UFCW Local 880 – Retail Food Employers Joint Pension Fund filed a punative class action in the federal district court in Colorado purportedly on behalf of purchasers of Newmont Mining Corporation (“Newmont”) publicly traded securities between July 28, 2004 and April 26, 2005. The action names Newmont, Wayne W. Murdy, Pierre Lassonde and Bruce D. Hansen as defendants. Substantially similar purported class actions were filed in the same court on June 15, 2005 by John S. Chapman and on June 20, 2005 by Zoe Myerson. In October 2005, the court consolidated these cases and, in April 2006, a consolidated amended complaint was filed. The amended complaint names additional defendants, David Francisco, Russell Ball, Thomas Enos and Robert Gallagher. The amended complaint alleges, among other things, that Newmont and the individual defendants violated certain antifraud provisions of the federal securities laws by failing to disclose alleged operating deficiencies. The complaints seek unspecified monetary damages and other relief. While Newmont and its officers who are named defendants deny the claims made and intend to vigorously defend against the claims, we cannot reasonably predict the final outcome of these cases.
On June 14, 2005, June 30, 2005 and July 1, 2005, purported derivative actions were filed, on behalf of Newmont, by Doris Staehr, Frank J. Donio and Jack G. Blaz, respectively, in the federal district court in Colorado against certain of Newmont’s current and former directors and officers. Each action alleges that certain of these defendants breached their fiduciary duties by engaging in insider trading and misappropriation of information, and that all defendants breached their fiduciary duties and engaged in conduct that constituted abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment in connection with, among other things, failing to disclose alleged operating deficiencies and failing to prevent alleged violations of environmental laws in Indonesia. The plaintiffs seek, on behalf of Newmont, among other remedies, all damages sustained by the Company as a result of the allegedly improper conduct. In November 2005, the court consolidated these cases and in December 2005 the court appointed a lead plaintiff. On April 10, 2006, Plaintiffs filed a consolidated amended complaint. While Newmont and its officers and directors who are named defendants deny the claims made and intend to vigorously defend against the claims, we cannot reasonably predict the final outcome of these cases.
In a related development, on January 13, 2006, a purported Newmont shareholder sent to the Board of Directors a letter demanding the Company take action against the defendants in the purported derivative actions with respect to the matters alleged in the derivative complaints. The Board has taken the demand under consideration.
Newmont Yandal Operations Pty Ltd (“NYOL”)-100% Newmont Owned
On September 3, 2003, J. Aron & Co. commenced proceedings in the Supreme Court of New South Wales (Australia) against NYOL, its subsidiaries and the administrator in relation to the completed voluntary administration of the NYOL group. J. Aron & Co., an NYOL creditor, initially sought injunctive relief that was denied by the court on September 8, 2003. On October 30, 2003, J. Aron & Co. filed a statement of claim alleging various deficiencies in the implementation of the voluntary administration process and seeking damages and other relief against NYOL and other parties. Newmont cannot reasonably predict the final outcome of this lawsuit.
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Zarafshan-Newmont Joint Venture - 50% Newmont Owned
In June 2006, an economic court in Uzbekistan ruled in favor of tax authorities and against the Zarafshan-Newmont Joint Venture (“ZNJV”), which is 50 percent owned by the Company, in two claims to collect approximately $48 in taxes other than income taxes. The tax authorities argued that Decree 151, which protected ZNJV from changes in tax laws and provided other financial and operational benefits, became ineffective and that the taxes and penalties claimed are owed for the period 2002-2005. ZNJV argued that, although Decree 151 had been granted to remain in effect for so long as ZNJV had ongoing operations, subsequent governmental action could only have repealed Decree 151 as of June 1, 2006, and it was clearly in force prior to that date.
Although ZNJV has written confirmation from the Ministry of Justice of the Republic of Uzbekistan that Decree 151 is in effect for the life of the Joint Venture, which includes the period 2002-2005, and believes that the rulings of the economic court are in error, the tax authorities are restricting the bank accounts and may attach the assets of ZNJV. ZNJV appealed the economic court ruling for approximately $37 (for 2002-2004) and intends to appeal the economic court ruling for approximately $11 (for 2005). In July 2006, the Board of Appeal ruled in favor of the tax authorities for the 2002-2004 claim. ZNJV intends to appeal this ruling through additional appropriate legal mechanisms available to it, including, if necessary, through international arbitration. Because the Company does not believe it is probable that these judgments will be upheld in international arbitration, it has not recorded any portion of the $24 (50% share) potential liability in its accounts. In addition, other government entities have initiated a series of actions that could adversely affect certain material project agreements and operations.
At June 30, 2006, the book value of the Company’s ownership interest in ZNJV was approximately $94. The ultimate outcome of this matter cannot be determined at this time. The Company believes the book value to be recoverable either through: continued negotiation with the Uzbekistan government, the sale of its interest in ZNJV, continued operations upon settlement of the above mentioned matters, or through available legal remedies, including international arbitration. See Note 20 for subsequent events affecting ZNJV.
The Company operates in numerous countries around the world and accordingly it is subject to, and pays annual income taxes under, the various income tax regimes in the countries in which it operates. Some of these tax regimes are defined by contractual agreements with the local government, and others are defined by the general corporate income tax laws of the country. The Company has historically filed, and continues to file, all required income tax returns and to pay the taxes reasonably determined to be due. The tax rules and regulations in many countries are highly complex and subject to interpretation. From time to time the Company is subject to a review of its historic income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Company’s business conducted within the country involved. At June 30, 2006 and December 31, 2005, the Company has accrued income taxes (and related interest and penalties, if applicable) in the amount of $227 and $220, respectively, classified in Other long-term liabilities. This amount represents what the Company believes will be the probable outcome of such disputes for all tax years for which additional income taxes can be assessed.
Other Commitments and Contingencies
In a 1993 asset exchange, a wholly-owned subsidiary transferred a coal lease under which the subsidiary had collected advance royalty payments totaling $484. From 1994 to 2018, remaining advance payments under the lease to the transferee total $390. In the event of title failure as stated in the lease, this subsidiary has a primary obligation to refund previously collected payments and has a secondary obligation to refund any of the $390 collected by the transferee, if the transferee fails to meet its refund obligation. The subsidiary has title insurance on the leased coal deposits of $240 covering the secondary obligation. The Company and the subsidiary regard the circumstances entitling the lessee to a refund as remote.
The Company has minimum royalty obligations on one of its producing mines in Nevada for the life of the mine. Amounts paid as a minimum royalty (where production royalties are less than the minimum obligation) in any year are recoverable in future years when the minimum royalty obligation is exceeded. Although the minimum royalty requirement may not be met in a particular year, the Company expects that over the mine life, gold production will be sufficient to meet the minimum royalty requirements. Minimum royalty payments payable are nil for 2006, $9 for 2007, $3 for 2008 and $27 thereafter.
As part of its ongoing business and operations, the Company and its affiliates are required to provide surety bonds, bank letters of credit and bank guarantees as financial support for various purposes, including environmental reclamation, exploration permitting, workers compensation programs and other general corporate purposes. At June 30, 2006 and December 31, 2005, there were $394
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and $386, respectively, of outstanding letters of credit, surety bonds and bank guarantees (excluding the surety bond supporting the prepaid forward transaction described in Note 9 to the Consolidated Financial Statements in Newmont’s Annual Report on Form 10-K for the year ended December 31, 2005, filed March 2, 2006). The surety bonds, letters of credit and bank guarantees reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the market place. The obligations associated with these instruments are generally related to performance requirements that the Company addresses through its ongoing operations. As the specific requirements are met, the beneficiary of the associated instrument cancels and/or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure. Generally, bonding requirements associated with environmental regulation are becoming more restrictive. In addition, the surety markets for certain types of environmental bonding used by the Company have become increasingly constrained. The Company, however, believes it is in compliance with all applicable bonding obligations and will be able to satisfy future bonding requirements, through existing or alternative means, as they arise.
Under the Batu Hijau Contract of Work with the Indonesian government, beginning in 2005, and continuing through 2010, a portion of each foreign shareholders’ equity interest in the project must be offered for sale to the Indonesian government or to Indonesian nationals. The price at which such interest must be offered for sale to the Indonesian parties is the highest of the then-current replacement cost, the price at which shares of the project company would be accepted for listing on the Jakarta Stock Exchange, or the fair market value of such interest in the project company as a going concern. An Indonesian national currently owns a 20% equity interest in Batu Hijau, which requires the Newmont/Sumitomo partnership to offer a 3% interest in 2006. Pursuant to this provision of the Batu Hijau Contract of Work, it is possible that the ownership interest of the Newmont/Sumitomo partnership in Batu Hijau could be reduced to 49% by the end of 2010.
Newmont is from time to time involved in various legal proceedings related to its business. Except in the above-described proceedings, management does not believe that adverse decisions in any pending or threatened proceeding or that amounts that may be required to be paid by reason thereof will have a material adverse effect on the Company’s financial condition or results of operations.
(19) SUPPLEMENTARY DATA
Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges for the six months ended June 30, 2006 was 10.7. The ratio of earnings to fixed charges represents income from continuing operations before income tax expense, minority interest, equity income (loss) of affiliates and cumulative effect of changes in accounting principles, divided by interest expense. Interest expense includes amortization of capitalized interest and the portion of rent expense representative of interest. The computation of the ratio of earnings to fixed charges can be found in Exhibit 12.1.
(20) SUBSEQUENT EVENTS
On July 3, 2006, the Company’s Board of Directors approved a plan to sell the Company’s 50% interest in the Zarafshan-Newmont Joint Venture. As a result, beginning in the third quarter, the Company will reclassify the balance sheet amounts and the income statement results from the historical presentation to Assets and Liabilities of operations held for sale.
The major classes of Assets and Liabilities of the ZNJV are as follows:
Inventories and ore on leach pads
Current and long-term debt
In July 2006, the Company signed a binding agreement to sell the Martabe gold project in Sumatra, Indonesia to Agincourt Resources Limited for approximately $80. The Martabe sale is expected to close in the third quarter.
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In July 2006, the Company signed a binding agreement to sell its Alberta oil sands project for CDN$310 in cash from the Korean National Oil Corporation. The transaction is expected to close in the third quarter for an estimated pre-tax gain of $270.
On July 27, 2006, Yanacocha issued $100 of bonds into the Peruvian capital markets under a $200 bond program approved by the Peruvian securities regulatory authority. The bonds are held by various Peruvian entities, including pension funds, mutual funds, government funds and insurance companies. The issuance is comprised of $42 of floating interest rate bonds bearing interest at a rate of Libor plus 1.4375%; and $58 of fixed rate bonds bearing interest at 7.0%. The bonds have a four year grace period and amortize quarterly over six years. The bonds are unsecured and are non-recourse to Newmont. Funds generated from the issuance will be used by Yanacocha primarily for capital expenditures.
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ITEM 1A. RISK FACTORS.
Risks related to Newmont’s operations.
Our operations outside North America and Australia are subject to risks of doing business abroad.
Certain Factors Outside of Our Control May Affect Our Ability to Support the Carrying Value of Goodwill
Our accounting policies and methods of reporting financial conditions, including accounting for goodwill, require certain estimates, assumptions and judgments for which there is no clear authoritative guidance. Management makes such estimates, assumptions and judgments in good faith based on what they believe is the best available information. The Company has received from the Securities and Exchange Commission, and responded to, five letters, dated December 27, 2005, February 17, 2006, April 5, 2006, May 23, 2006 and July 5, 2006 requesting additional information and additional disclosure regarding accounting for Exploration Segment goodwill. As of the date of this Report, those comments remain unresolved.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (dollars in millions, except per share, per ounce and per pound amounts).
The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Newmont Mining Corporation and its subsidiaries (collectively, “Newmont” or the “Company”). References to “A$” refer to Australian currency, “CDN$” to Canadian currency, “IDR” to Indonesian currency and “$” to United States currency.
This item should be read in conjunction with our interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this quarterly report.
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Selected Financial and Operating Results
Net income per common share, basic
Consolidated gold ounces sold (thousands)
Consolidated copper pounds sold (millions)
Average price received(1)
Gold (per ounce)
Copper (per pound)
Costs applicable to sales(2)
Consolidated Financial Results
Newmont’s income from continuing operations for the second quarter and first half of 2006 was $161, or $0.36 per share and $374, or $0.83 per share, respectively. Results for the second quarter and first half of 2006 compared to 2005 were favorably impacted by higher realized gold and copper prices, partially offset by higher diesel, labor and commodity costs and fewer gold ounces and copper pounds sold. A favorable tax adjustment was also recorded during the first quarter of 2006.
Gold sales, net for the three months ended June 30, 2006 increased $275, or 33%, compared to the corresponding period in 2005 as higher realized prices more than offset lower ounces sold. Gold sales, net for the six months ended June 30, 2006 increased $450, or 27%, compared to the corresponding period in 2005 as higher realized prices more than offset lower ounces sold. The following analysis summarizes the change in consolidated gold sales revenue:
Consolidated gold sales:
Gross
Less: Treatment and refining charges
Net
Consolidated gold ounces sold (thousands):
Less: Incremental start-up sales
Average price realized per ounce:
Before treatment and refining charges
After treatment and refining charges
The change in consolidated gold sales is due to:
Change in consolidated ounces sold
Change in average realized gold price
Change in treatment and refining charges
Copper sales, net for the second quarter of 2006 increased $38, or 23%, compared to the corresponding period in 2005 as lower sales volumes and higher treatment and refining charges were more than offset by higher realized prices. Copper sales, net for the first
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half of 2006 increased $66, or 24%, compared to the corresponding period in 2005 as lower sales volumes and higher treatment and refining charges were more than offset by higher realized prices. In addition, for the second quarter and first half of 2006, a loss of $32 and $55, respectively, was included in Other income, net for the ineffective portion of copper collar contracts. The following analysis summarizes the change in consolidated copper sales revenue:
Consolidated copper sales:
Gross before hedging
Copper collar contracts
Provisional pricing mark-to-market
Gross after hedging
Average price realized per pound:
The change in consolidated copper sales is due to:
Change in consolidated pounds sold
Change in average realized copper price
The following is a summary of net gold and copper sales:
Nevada, USA
Yanacocha, Peru
Australia/New Zealand:
Tanami, Australia
Kalgoorlie, Australia
Jundee, Australia
Pajingo, Australia
Martha, New Zealand
Batu Hijau, Indonesia
Other Operations:
Golden Giant, Canada
Zarafshan, Uzbekistan
Kori Kollo, Bolivia
La Herradura, Mexico
Corporate
Costs applicable to sales increased $85, or 15%, for the second quarter of 2006 compared to the second quarter of 2005 while increasing $112, or 10% for the first half of 2006 compared to the first half of 2005, as detailed in the table below. The increase in the second quarter and first half of 2006 is primarily due to increased diesel and other commodity prices, increased labor costs and the adoption of new accounting pronouncements for deferred stripping costs and share-based payments. For a complete discussion regarding variations in operations, see Results of Consolidated Operations below.
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The following is a summary of Costs applicable to sales:
Deferred stripping. On January 1, 2006 the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-06, “Accounting for Stripping Costs Incurred during Production in the Mining Industry.” Beginning in 2006, stripping costs incurred during the production phase of a mine are included as a component of inventory recognized in Costs applicable to sales in the same period as the revenue from the sale of inventory. Previously, deferred stripping costs were charged to Costs applicable to sales at some of the Company’s mining operations as gold or copper was produced and sold using the units of production method based on estimated recoverable quantities of proven and probable gold or copper reserves, using a stripping ratio calculated as the ratio of total tons to be moved to total proven and probable ore reserves, which resulted in the recognition of the costs of waste removal activities over the life of the mine as gold or copper was produced. The net deferred stripping amounts included in Costs applicable to sales by operation were as follows:
Increase (decrease) in Costs applicable to sales:
See Recent Accounting Pronouncements, below.
Depreciation, depletion and amortization (“DD&A”) decreased $2, or 1% and $21, or 7%, for the second quarter and first half 2006, respectively, compared to the corresponding periods in 2005 as detailed in the table below and primarily relates to lower production and inventory increases at Batu Hijau, partially offset by higher capital expenditures. Newmont expects 2006 DD&A to be between $630 and $670.
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The following is a summary of Depreciation, depletion and amortization:
Other:
Merchant Banking
Corporate and Other
Exploration increased $8, or 21% and $15, or 23%, for the second quarter and first half of 2006, respectively, compared to the corresponding periods in 2005. The increase was primarily a result of increased spending in North and South America. Newmont expects 2006 Exploration expense to be between $160 and $165.
Advanced projects, research and development increased $16, or 133% and $20, or 69%, for the second quarter and first half of 2006, respectively, compared to the corresponding periods in 2005 and includes spending for the Phoenix, Leeville, Akyem, Ahafo, Alberta oil sands and other projects. Newmont expects 2006 Advanced projects, research and development expenses to be between $65 and $75.
General and administrative expenses increased $5, or 16% and $11, or 17% for the second quarter and first half of 2006, respectively, compared to the corresponding periods in 2005 primarily as a result of increased labor (including stock based compensation), consulting and contract services costs. Newmont expects 2006 General and administrative expenses to be between $150 and $160, including stock based compensation.
Other expense, net decreased $3, or 19% and $13, or 33%, for the second quarter and first half of 2006, compared to the corresponding periods in 2005. The second quarter and first half of 2006 expense is primarily due to legal and other costs incurred to defend and settle pollution allegations at Minahasa in Indonesia. The expense in the comparable periods in 2005 was primarily attributable to costs incurred to stabilize a waste dump in Nevada, defend pollution allegations at Minahasa in Indonesia and to settle senior management pension obligations.
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Other income, net was $34 and $44 for the second quarter of 2006 and 2005, respectively, and $69 and $111 for the first half of 2006 and 2005, respectively, and is summarized as follows:
Royalty and dividend income increased in 2006 due to higher gold, oil and gas prices and increased distributions received from the Canadian Oil Sands Trust.
Interest income increased due to increased funds available for investment and higher investment yields.
On March 31, 2005, the Minera El Bermejal joint venture, 44% owned by Newmont and 56% owned by Industrias Penoles, completed the sale of its interest in the Mezcala gold deposit for cash proceeds of $70 (Newmont’s share $31). The Company recorded a pre-tax gain of $31.
(Loss) gain on ineffective portion of derivative instruments, net for the second quarter 2006 and 2005, was a loss of $35 and $1, respectively, for the ineffective portion of copper collar and interest rate swap derivative instruments designated as cash flow hedges. (Loss) gain on ineffective portion of derivative instruments for the first half of 2006 and 2005, was a loss of $59 and a gain of $1, respectively, for the ineffective portion of copper collar and interest rate swap derivative instruments designated as cash flow hedges.
Start-up income, net includes the gold and copper revenue net of incremental operating costs related to the start-up of the Leeville and Phoenix operations in Nevada.
Interest expense, netof capitalized interest decreased $8, or 26% and $9 or 17%, for the second quarter and first half of 2006 compared to the corresponding periods in 2005. Increased interest expense due to the issuance of the 5 7/8% notes in March 2005 was more than offset by increased capitalized interest. Capitalized interest totaled $16 and $9 for the second quarter of 2006 and 2005, respectively, and $31 and $15 for the first half of 2006 and 2005, respectively, as a result of the higher level of capital expenditures in 2006. Newmont expects 2006 Interest expense, net to be between $95 and $105.
Income tax expense during the second quarter of 2006 was $120 compared to $44 during the second quarter of 2005, and $158 for the first half of 2006 compared to $97 for the first half of 2005. The effective tax rate for the second quarter of 2006 was 29% compared to 27% during the second quarter of 2005. The increase in tax expense in 2006 is primarily due to an increase in pre-tax income for the second quarter of 2006 to $409 from $207 for the second quarter of 2005. The increase is offset by discrete events related to (i) a change in Australian tax law regarding the ability of the Company to change its functional currency for tax reporting purposes, (ii) a change in the Canadian statutory tax rates and (iii) the release of valuation allowance relative to the Company’s deferred tax assets attributable to foreign tax credits. The estimated effective tax rate in 2006 is different from the United States statutory rate of 35% primarily due to (i) U.S. percentage depletion, (ii) income tax benefits associated with the change in Australian and Canadian tax law, (iii) the valuation allowance release relative to foreign tax credits, and (iv) the effect of different income tax rates in countries where earnings are indefinitely reinvested. The effective tax rate in 2005 is different from the United States statutory rate of 35% primarily due to (i) U.S. percentage depletion, (ii) additional tax benefits associated with the change in Australian tax law regarding the ability of the company to file consolidated income tax returns, and (iii) the valuation allowance release relative to the Company’s deferred tax assets for post-retirement benefit obligations. For a complete discussion of the factors that influence the Company’s effective tax rate, see Management’s Discussion and Analysis of Results of Operations and Financial Condition in Newmont’s Annual Report on Form 10-K for the year ended December 31, 2005, filed March 2, 2006. Newmont expects the 2006 full year tax rate to be approximately 24% to 28% assuming an average gold price of $600 per ounce.
The Loss from discontinued operations resulted from the classification of the Golden Grove copper-zinc operation in Australia and the Holloway mine in Canada as discontinued operations. The Company reclassified the income statement results from the historical presentation to discontinued operations in the Condensed Consolidated Statements of Income for all periods presented (see Note 5 to the Condensed Consolidated Financial Statements).
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Results of Consolidated Operations
Three Months Ended June 30,
Nevada
Yanacocha(2) (51.35% owned)
Australia/New Zealand
Batu Hijau(2) (52.875% economic interest)
Other(2)
Total/Weighted-Average
Six Months Ended June 30,
Consolidated gold ounces sold decreased 6% in the second quarter of 2006 from 2005, primarily due to decreased throughput and lower grade ores processed in Nevada and Australia/New Zealand, partially offset by increased leach production at Kori Kollo from new leaching that began in the third quarter of 2005.
Consolidated copper pounds sold decreased 24% in the second quarter of 2006 from 2005, primarily due to a 30% decrease in ore grade.
Costs applicable to sales per consolidated gold ounce sold increased 23% in the second quarter of 2006 from 2005, primarily due to the decrease in production and higher materials and labor costs in Nevada and Australia/New Zealand. Costs applicable to sales per consolidated copper pound increased 58% in the second quarter 2006 from 2005, primarily due to the decrease in copper production at Batu Hijau. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the second quarter of 2005, $12 of mining costs were deferred and reduced Costs applicable to sales per ounce of gold by $9 and increased Costs applicable to sales per pound of copper sold by $0.04. Deferral of open pit waste removal costs is no longer permitted during production. See Recent Accounting Pronouncements.
Consolidated gold ounces sold decreased 6% in the first half of 2006 from 2005, primarily due to decreased throughput and lower grade ores processed in Nevada and Australia/New Zealand, partially offset by increased leach production at Kori Kollo from new leaching that began in the third quarter of 2005.
Consolidated copper pounds sold decreased 22% in the first half of 2006 from 2005, primarily due to a 20% decrease in copper ore grade and processing 7% fewer tons of ore due to hard ore comprising a significant portion of the mill feed in the first half.
Costs applicable to sales per consolidated gold ounce sold increased 20% in the first half of 2006 from 2005, primarily due to the decrease in production and higher materials and labor costs in Nevada and Australia/New Zealand. Costs applicable to sales per consolidated copper pound increased 36% in 2006 from 2005, primarily due to the decrease in copper production at Batu Hijau.Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the first half of 2005, $46 of
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mining costs were deferred and reduced Costs applicable to sales by $9 per ounce of gold and $0.05 per pound of copper sold. Deferral of open pit waste removal cost is no longer permitted during production. See Recent Accounting Pronouncements.
The Company expects consolidated sales of between 7.5 and 7.8 million ounces of gold in 2006 at Costs applicable to sales of between $290 to $310 per ounce and between 430 and 450 million pounds of copper at Costs applicable to sales of between $0.65 and $0.70 per pound.
Nevada Operations
Nevada gold ounces sold decreased 10% in the second quarter of 2006 from 2005, primarily as a result of a 16% decrease in mill ore grade. The decrease in mill ore grade resulted from lower production at the Midas and Deep Post underground mines due to adverse ground conditions and manpower shortages. Costs applicable to sales per ounce increased 43%, primarily due to the decrease in production and increased labor, diesel, power, cyanide and underground contract service costs. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the second quarter of 2005, $18 of mining costs was deferred and reduced Costs applicable to sales by $30 per ounce.
Nevada gold ounces sold decreased 10% in the first half of 2006 from 2005, primarily a result of a 15% decrease in mill ore grade. The decrease in mill ore grade resulted from mining lower grade ore at the Midas and Deep Post underground mines. Costs applicable to sales per ounce increased 36%, primarily due to the decrease in production and increased labor, diesel, power, cyanide and underground contract service costs. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the first half of 2005, $32 of mining costs was deferred and reducedCosts applicable to sales by $27 per ounce. Consolidated gold sales for 2006 are expected to be between 2.4 and 2.6 million ounces at Costs applicable to sales of between $380 and $395 per ounce.
Construction of the Phoenix and Leeville projects is nearing completion with the commencement of operations expected during the third and fourth quarters of 2006, respectively. Construction of a 200-megawatt coal-fired power plant is approximately 10% complete. Capital costs are expected to be between $450 and $475 and completion is targeted for mid-2008. Gold production at the Lone Tree property continues to decline as the mine prepares for planned shut down in the second half of the year.
Non-governmental organizations have brought a series of legal actions relating to the Nevada operations, as described in more detail in Note 18 to the Consolidated Financial Statements. While Newmont believes that the legal actions are without merit, unfavorable outcomes could result in additional conditions being imposed on the Company’s operations, and such conditions could have a material adverse effect on results of operations or financial position.
Yanacocha Operations
Second quarter 2006 Yanacocha gold ounces sold increased 9% from the 2005 second quarter as a 30% increase in ore grade and timing of flows from the leach pads more than offset a 16% decrease in tons of ore placed. The decrease in ore placed resulted from increased waste removal at the La Quinua and Yanacocha pits. Ore grade increased at La Quinua as mining accessed higher grade material at the bottom of the pit. Costs applicable to sales per ounce increased 19% due to increased consumption and prices of diesel, cyanide, lime and other commodities and higher labor and royalty costs due to increased gold prices.
First half 2006 Yanacocha gold ounces sold increased 4% over the first half of 2005 primarily a result of a 28% increase in ore grade, partially offset by timing of flows from the leach pads. Ore grade increased at La Quinua as mining accessed higher grade material at the bottom of the pit. Costs applicable to sales per ounce increased 16% due to increased consumption and prices of diesel, cyanide, lime and other commodities and higher labor and royalty costs due to increased gold prices.
Consolidated gold sales for 2006 are expected to be between 2.6 and 2.7 million ounces at Costs applicable to sales of between $190 and $205 per ounce. Consolidated gold sales for 2007 through 2010 are expected to average between 1.6 and 1.8 million ounces with Costs applicable to sales anticipated to experience cost pressures above the prior estimate of $255 per ounce. Gold sales and costs will be determined by, among other factors, higher labor and commodity costs, further mine plan optimization efforts, the discovery and development of additional oxide deposits, the construction of the gold mill, currently assumed to commence production in 2008, and the development of the Conga project, currently assumed to commence production in 2010.
During 2004, Peru enacted legislation to establish a sliding scale mining royalty of up to 3% based on the volume of mine production. The royalty is calculated on revenue from sales of product less certain refining and transportation expenses. While the Peruvian royalty became effective during the second quarter of 2004, it did not apply to those projects that had tax stabilization agreements prior to the adoption of the royalty law. Virtually all of Yanacocha’s current production is derived from projects that were stabilized prior to the enactment of the royalty legislation; however, future projects not covered by the tax stabilization agreements will be burdened by this royalty. In addition, the recent presidential and congressional elections and the regional election scheduled
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for November 2006 may result in changes to the government’s positions on regulations and policies that could impact Yanacocha’s operations. It is possible that the new government will attempt to set aside the tax stabilization agreements and impose the mining royalty on projects covered by such agreements or that additional payments may be required to address the perception that proceeds from mining activities should be more equitably shared.
Although there is a collective bargaining agreement in place at Yanacocha through February 2007, a minority of the union membership staged a three-day strike in April 2006. The strike had no material impact on operations. There can be no assurance that on-going or future disputes will be resolved without disruption to operations.
Australia/New Zealand Operations
Tanami
Kalgoorlie (50% owned)
Jundee
Pajingo
Martha
Australia/New Zealand operations sold 19% fewer ounces of gold in the second quarter of 2006 compared to 2005, primarily due to lower production resulting from processing lower grades at Kalgoorlie, Pajingo and Martha combined with lower throughput at Tanami, Kalgoorlie and Pajingo. Costs applicable to sales per ounce for the second quarter increased in 2006 from 2005 by 17%, primarily due to the decrease in production, partially offset by a devaluation of the Australian and New Zealand dollars compared to the U.S. dollar. The favorable foreign exchange movements decreased Australia/New Zealand Costs applicable to sales in the second quarter of 2006 from 2005 by approximately $11 per ounce. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the second quarter of 2005, $1 of mining costs were amortized and increased Costs applicable to sales by $2 per ounce.
Australia/New Zealand operations sold 22% fewer ounces of gold in the first half of 2006 compared to 2005, primarily due to lower grades at Kalgoorlie, Jundee and Martha combined with lower throughput at Tanami, Kalgoorlie and Pajingo. Costs applicable to sales per ounce for the first half increased in 2006 from 2005 by 22%, primarily due to the decrease in production, partially offset by a devaluation of the Australian and New Zealand dollars compared to the U.S. dollar. The favorable foreign exchange movements decreased Australia/New ZealandCosts applicable to sales in 2006 from 2005 by approximately $14 per ounce. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the first half of 2005, $4 of mining costs were amortized and increased Costs applicable to sales by $4 per ounce. Consolidated gold sales for 2006 are expected to be between 1.4 and 1.5 million ounces at Costs applicable to sales of between $375 and $395 per ounce.
Tanami, Australia. Gold ounces sold decreased 29% in the second quarter of 2006 from 2005, primarily due to a 32% decline in mill throughput resulting from the completion of processing Groundrush stockpiles and lower ore grade from the Granites. Costs applicable to sales per ounce increased 16%, primarily due to lower gold production.
Gold ounces sold decreased 27% in the first half of 2006 from 2005, primarily due to a 31% decline in mill throughput resulting from the completion of processing Groundrush stockpiles and lower ore grade from the Granites. Costs applicable to sales per ounce increased 18%, primarily due to lower gold production.
Kalgoorlie, Australia. Gold ounces sold decreased 12% in the second quarter of 2006 from 2005, primarily due to a 22% decrease in tons milled due to more abrasive and harder ore as well as an additional planned shut down for shovel repairs. Costs applicable to sales per ounce increased 41%, primarily due to lower gold production and increased diesel and maintenance costs.
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Gold ounces sold decreased 16% in the first half of 2006 from 2005, primarily due to a 15% decrease in tons milled and a 13% decrease in ore grade milled partially offset by favorable changes in in-circuit inventories. Mill throughput in 2006 was limited due to more abrasive and harder ore as well as an additional planned shut down for shovel repairs. Costs applicable to sales per ounce increased 42%, primarily due to lower gold production, and increased maintenance, diesel, reagent and ore re-handling costs. In the first half of 2005, $3 of deferred stripping costs was amortized, increasing Costs applicable to sales by $13 per ounce.
Jundee, Australia. Gold ounces sold in the second quarter of 2006 remained constant with the second quarter of 2005. Costs applicable to sales per ounce decreased 14%, primarily attributable to fewer tons mined and less underground development.
Gold ounces sold decreased 16% in the first half of 2006 from 2005, due to a 5% decrease in tons milled and a 10% decrease in mill ore grade. The decrease in tons milled was attributable to severe weather conditions, flooding and an extended mill shutdown. Costs applicable to sales per ounce increased 3%, primarily attributable to lower gold production and unplanned maintenance costs partially offset by reduced mining activity.
Pajingo, Australia. Gold ounces sold decreased 18% in the second quarter of 2006 from 2005, due to a 15% decrease in tons milled and a 12% decrease in mill ore grade. The decrease in tons milled was attributable to ground control issues in Vera South Deeps and access issues at Jandam. Costs applicable to sales per ounce increased 30%, primarily due to lower production.
Gold ounces sold decreased 22% in the first half of 2006 from 2005, primarily due to a 23% decrease in tons milled. The decrease in tons milled was attributable to ground control issues in Vera South Deeps and access issues at Jandam. Costs applicable to sales per ounce increased 28% primarily due to lower production.
Martha, New Zealand. Gold ounces sold decreased 34% in the second quarter of 2006 from 2005, primarily due to a 30% decrease in mill ore grade. Costs applicable to sales per ounce remained constant as the lower production was offset by reduced open pit mining activities. In the second quarter of 2005, $1 of deferred stripping costs was amortized, increasingCosts applicable to sales by $12 per ounce.
Gold ounces sold decreased 25% in the first half of 2006 from 2005, primarily due to a 25% decrease in mill ore grade. Costs applicable to sales per ounce remained constant as the lower production was offset by reduced open pit mining activities and the amortization of deferred mining costs in 2005. In the first half of 2005, $1 of deferred stripping costs was amortized, increasing Costs applicable to sales by $12 per ounce.
Batu Hijau Operation
Copper sales decreased 24% in the second quarter of 2006 from 2005, primarily due to a 30% decrease in copper ore grade. Gold sales decreased 23%, primarily due to a 33% decrease in gold ore grade. Total tons mined were 24% higher in the second quarter of 2006 from 2005 primarily due to the addition of 26 haul trucks and one additional shovel. The ore grade declined due to mining at the top of Phases 4 and 5 in 2006 compared to mining in the bottom of Phase 3 in 2005. Mine phase sequencing was adjusted as a result of mine plan revisions completed earlier in the year. Costs applicable to sales increased 58% per pound of copper and 32% per ounce of gold due to the decrease in copper and gold production, the expansion of the mining fleet and increased diesel, tire, labor and process maintenance costs. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the second quarter of 2005, $6 of stripping costs was amortized, increasing Costs applicable to sales by $0.04 per pound of copper and $2 per ounce of gold.
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Copper sales decreased 22% in the first half of 2006 from 2005 due to a 7% reduction in mill tons processed attributable to harder ore and a 20% decrease in copper ore grade. Gold sales decreased 17% due to the decrease in mill tons processed and a 15% decrease in gold ore grade milled. Costs applicable to sales increased 36% per pound of copper and 20% per ounce of gold due to the decrease in copper and gold production, the expansion of the mining fleet and increased diesel, tire, labor and process maintenance costs. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the first half of 2005, $6 of stripping costs was amortized, increasing Costs applicable to sales by $0.05 per pound of copper and $16 per ounce of gold.
Batu Hijau has revised its mine operating plan to address previously disclosed geotechnical instability of the operation’s east pit wall and harder than modeled ore. Consolidated sales for 2006 are expected to total between 430 and 450 million pounds of copper at Costs applicable to sales of between $0.65 and $0.70 per pound and between 400,000 and 455,000 ounces of gold at Costs applicable to sales of between $200 and $225 per ounce.
Under the Batu Hijau Contract of Work, beginning in 2005 and continuing through 2010, a portion of the project must be offered for sale to the Indonesian government or to Indonesian nationals, equal to the difference between the following percentages and the percentage of shares already owned by the Indonesian government or Indonesian nationals (if such number is positive): 15%, by the end of 2005; 23%, by the end of 2006; 30%, by the end of 2007; 37%, by the end of 2008; 44%, by the end of 2009; and 51%, by the end of 2010. The price at which such interest must be offered for sale to the Indonesian parties is the highest of the then-current replacement cost, the price at which shares of the project company would be accepted for listing on the Jakarta Stock Exchange, or the fair market value of such interest in the project company as a going concern.
A company owned by an Indonesian national currently owns a 20% interest in Batu Hijau, which requires the Newmont/Sumitomo partnership to offer a 3% interest for sale in 2006. An offer to sell a 3% interest was made to the government of Indonesia earlier this year. This offer resulted in discussions with the government about valuation, and it is anticipated that a revised offer will be made in the third quarter of 2006.
Other Operations
Golden Giant
Zarafshan(2) (50% owned)
Kori Kollo(3) (88% owned)
La Herradura (44% owned)
Golden Giant, Canada. Mining operations at Golden Giant were completed in December 2005. Remnant mining and milling production in the second quarter and first half of 2006 was higher than expected due to additional in-circuit inventory ounces. Remnant production, at significantly reduced levels, is expected through the third quarter of 2006.
Zarafshan, Uzbekistan. Gold ounces sold decreased 8% in the second quarter of 2006 from 2005, primarily due to timing of flows from the leach pads as ore grade increased 23%. Costs applicable to sales per ounce remained constant.
Gold ounces sold decreased 12% in the first half of 2006 from 2005 primarily due to timing of flows from the leach pads as tons placed on the leach pads increased 5% and ore grade increased 10%. Costs applicable to sales per ounce increased 10%, primarily a result of the lower production. Consolidated gold sales for 2006 are expected to be between 130,000 and 150,000 ounces at Costs applicable to sales of between $250 and $270 per ounce.
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Kori Kollo, Bolivia. Gold ounces sold increased significantly in the second quarter and first half of 2006 as compared to 2005, resulting from the placement of additional material from the Kori Kollo pit on the existing leach pad and ore from the Kori Chaca pit on a new leach pad beginning in the third quarter of 2005. Production in the second quarter and first half of 2005 was entirely from residual leaching of an existing leach pad. Costs applicable to sales per ounce increased by 12% in the second quarter of 2006 from 2005 primarily as a result of higher production taxes and decreased 18% in the first half of 2006 from 2005, as a result of the increased production. Consolidated gold sales for 2006 are expected to be between 120,000 and 130,000 ounces at Costs applicable to sales of between $280 and $300 per ounce.
La Herradura, Mexico. Gold ounces sold decreased 7% in the second quarter of 2006 from 2005, primarily as a result of a 15% decrease in ore grade. Costs applicable to sales per ounce increased by 59%, primarily due to decreased production and increased labor, diesel and other commodity costs. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the second quarter of 2005, $1 of mining costs were deferred and reduced Costs applicable to sales by $27 per ounce.
Gold ounces sold remained constant in the first half of 2006 from 2005 primarily a result of timing of flows from the leach pads as the grade of ore placed on the leach pads decreased 21%. Costs applicable to sales per ounce increased by 45%, primarily due to an increase in waste tons mined and increased labor, diesel and other commodity prices. Costs applicable to sales were also impacted by the change in accounting for open pit waste removal costs. In the first half of 2005, $1 of mining costs were deferred and reduced Costs applicable to sales by $16 per ounce. Consolidated gold sales for 2006 are expected to be between 80,000 and 90,000 ounces at Costs applicable to sales of between $225 and $245 per ounce.
During the first half of 2006, Merchant Banking assisted with completion of the acquisition of an additional 22.22% interest in Boddington and the remaining 15% interest in Akyem, bringing the Company’s ownership to 66.67% and 100%, respectively.
During the second quarter of 2006, Merchant Banking closed a private placement and ore purchase agreement with Queenstake Resources Ltd. for approximately $10 and reinvested dividends from Canadian Oil Sands Trust of $9.
Subsequent to quarter end, the Company signed a binding agreement to sell the Martabe gold project in Sumatra, Indonesia to Agincourt Resources Limited for approximately $80. The Martabe sale is expected to close in the third quarter.
Merchant Banking has also been advancing value maximization strategies for the Company’s oil sands, iron ore, coal, gas and gold refining assets. After completing a three season resource delineation program and prefeasibility study at modest cost, Newmont received a CDN$310 cash offer for the Company’s Alberta oil sands project from the Korean National Oil Corporation late in the quarter. Subsequent to quarter end, a binding agreement was signed and the transaction is expected to close in the third quarter for an approximate $270 pre-tax gain.
Merchant Banking earned $29 and $21 of Royalty and dividend income for the second quarter of 2006 and 2005, respectively, and $58 and $39 for the first half of 2006 and 2005, respectively.
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Foreign Currency Exchange Rates
The Company’s foreign operations sell their gold and copper production based on U.S. dollar metal prices. Approximately 35% and 33%, of Newmont’s Costs applicable to sales were paid in local currencies during the second quarter of 2006 and 2005, respectively. Approximately 34% of Newmont’s Cost’s applicable to sales were paid in local currencies during the first six months of 2006 and 2005. Variations in the local currency exchange rates in relation to the U.S. dollar at Newmont’s foreign mining operations decreased Costs applicable to sales by approximately $1 and $8 during the second quarter and first half of 2006, respectively, as compared to the corresponding period in 2005.
Liquidity and Capital Resources
Cash Provided from Operating Activities
Net cash provided from continuing operations increased 81% for the first half of 2006 compared to 2005. Cash flow from operations during 2006 was positively impacted by higher realized gold and copper prices, partially offset by fewer gold ounces and copper pounds sold. Also impacting cash flows from operations during 2006 were higher operating costs, as discussed above in Results of Consolidated Operations, a $100 increase in accounts receivable primarily due to trade receivables at Batu Hijau and a $224 increase in inventories, stockpiles and ore on leach pads. Net cash provided from continuing operations was also impacted by the physical delivery of 161,111 ounces of gold under the prepaid forward sales obligation which resulted in the recognition of $48 of non-cash revenue in the first half of 2006.
Investing Activities
Net cash used in investing activities was $433 during the first half of 2006 compared to $714 during the same period of 2005.
Additions to property, plant and mine development were:
Boddington, Australia
Other, Australia
Ghana, West Africa:
Ahafo, Ghana
Akyem, Ghana
Capital expenditures for Nevada operations during the first half of 2006 and 2005 related to activities for the development of the Leeville, Phoenix, and Power Plant projects, and mine equipment replacement. Yanacocha capital expenditures were for continuing leach pad construction, mine development and mine equipment. Australia/New Zealand capital expenditures for the first six months of 2006 and 2005 resulted from mine development and underground fleet replacement combined with the Boddington project. Expenditures at Batu Hijau primarily included the purchase of additional surface equipment. Capital expenditures at Ahafo resulted from construction and development costs during both periods. Newmont expects to spend approximately $1,400 to $1,600 on capital expenditures in 2006.
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Marketable debt securities. The Company had net proceeds of $1,530 and net investments of $1,057 from auction rate marketable debt securities during the first half of 2006 and 2005, respectively. The Company accounts for these investments as short-term available-for-sale marketable debt securities.
Marketable equity securities. During the first half of 2006 the Company purchased marketable equity securities and warrants of Queenstake Resources for $10 and reinvested dividends in Canadian Oil Sands Trust for $9. During the first half of 2005, the Company purchased marketable equity securities of Shore Gold Inc. for $42.
Acquisition of minority interests. In January 2006, Newmont acquired the remaining 15% interest in the Akyem project, bringing its interest in the project to 100%. An environmental impact statement was submitted to the Ghana Environmental Protection Agency in August 2005. Once the environmental impact statement is approved, a detailed review of capital costs, production timing and construction plans will commence.
On March 20, 2006, Newmont acquired Newcrest Mining Limited’s 22.22% interest in the Boddington Project, bringing its interest in the project to 66.67%, for consideration of $164. Development of the Boddington Project in Western Australia with AngloGold Ashanti Limited was also announced in the first quarter 2006. Construction of the Boddington Project is expected to cost Newmont approximately $900 to $1,000, with initial production expected in late 2008 or early 2009. The project has a current estimated mine life of more than 15 years, with Newmont’s share of annual production expected to be approximately 700,000 ounces for the first five years and average approximately 600,000 ounces over the life of the project.
Financing Activities
Net cash (used in) provided from financing activities was $(88) and $353 during the first half of 2006 and 2005, respectively.
On May 19, 2006, Yanacocha entered into an unsecured $100 bank financing with a syndicate of Peruvian commercial banks, comprised of Banco de Credito del Peru, Banco Continental and Banco Wiese Sudameris. Quarterly repayments begin May 2007 with final maturity May 2014. Borrowings under the facility bear interest at a rate of three month Libor plus 1.875%. The loan is non-recourse to Newmont.
In March 2005, net proceeds of $582 were received from the issuance of 30-year 5 7/8% Notes.
During the first half of 2006, the Company made scheduled debt repayments of $63, including $19 related to the sale-leaseback of the refractory ore treatment plant, classified as a capital lease, and $43 related to the Batu Hijau project financing facility.
Scheduled minimum long-term debt cash repayments as of June 30, 2006 are $84 for the remainder of 2006, $173 in 2007, $245 in 2008, $127 in 2009, $127 in 2010 and $1,158 thereafter. Newmont expects to be able to fund maturities of its debt from cash provided by operating activities or existing cash on hand. Approximately $523 of the total scheduled minimum long-term debt repayments as of June 30, 2006 relate to the project financing facility for Batu Hijau, which is non-recourse to Newmont. Approximately $87 of this facility is classified as a current liability. Additionally, PT Newmont Nusa Tenggara shareholder loans of $39 as of June 30, 2006 from one of its shareholders, Nusa Tenggara Mining Corporation, are payable on demand, subject to the project financing facility subordination terms, and are also non-recourse to Newmont. This amount is also classified as a current liability. During June 2006, 161,111 ounces of gold were delivered in connection with the Prepaid forward sales obligation, resulting in a non-cash reduction of debt of $48.
On June 30, 2006, Newmont Ghana Gold Limited (NGGL), a wholly-owned subsidiary, entered into a $125 project financing with the International Finance Corporation (IFC). The financing is comprised of a $75 A-loan funded by the IFC; and a $50 B-loan funded by a syndicate of commercial lenders. The financing contains certain Conditions of Disbursement that must be completed prior to funds being made available. NGGL anticipates drawing down on the financing during the second half of 2006. Amounts borrowed under the financing would be secured by the assets of the project and would be guaranteed by Newmont pending the successful completion of requirements associated with the Project Financial Completion Certificate (“Project Financial Completion”). The loans would require semi-annually payments beginning in April 2007. The A-loan has a final maturity of October 2018 and borrowings would be subject to an interest rate of Libor plus 1.125% pre-completion, and Libor plus 2.00% following Project Financial Completion. The B-loan has a final maturity of October 2017 and borrowings would be subject to an interest rate of Libor plus 0.80% pre-completion, and Libor plus 1.40% post-completion for the first 4-years. The interest rate on the B-loan then increases to Libor plus 1.70% (years 5-7); Libor plus 1.90% (years 8-9) and Libor plus 2.00% (thereafter).
On July 27, 2006, Yanacocha issued $100 of bonds into the Peruvian capital markets under a $200 bond program approved by the Peruvian securities regulatory authority. The bonds are held by various Peruvian entities, including pension funds, mutual funds, government funds and insurance companies. The issuance is comprised of $42 of floating interest rate bonds bearing interest at a rate of Libor plus 1.4375%; and $58 of fixed rate bonds bearing interest at 7.0%. The bonds have a four year grace period and amortize
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quarterly over six years. The bonds are unsecured and are non-recourse to Newmont. Funds generated from the issuance will be used by Yanacocha primarily for capital expenditures.
As of June 30, 2006, the Company was in compliance with all required debt covenants and other restrictions related to its debt agreements.
The Company declared regular quarterly dividends totaling $0.20 per common share through June 30, 2006 ($0.10 per common share paid on March 29, 2006 and $0.10 per common share paid on June 29, 2006). Additionally, Newmont Mining Corporation of Canada Limited, a subsidiary of the Company, declared regular quarterly dividends on its exchangeable shares totaling CDN$0.2279 per share (CDN$0.1152 per share paid on March 29, 2006 and CDN$0.1127 per share paid on June 29, 2006). The total paid to common stockholders in the first half of 2006 was $90 compared to $89 in the first half of 2005. The Company also used $89 and $71 to pay dividends to minority interests for the first half of 2006 and 2005, respectively.
During the first half of 2006, the Company issued 1,618,960 common shares totaling $57, related to the exercise of stock options.
Off-Balance Sheet Arrangements
The Company has the following off-balance sheet arrangements: operating leases and $394 of outstanding letters of credit, surety bonds and bank guarantees (excluding the surety bond supporting the prepaid forward transaction described in Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 2, 2006). Newmont also provides a contingent support line of credit to PT Newmont Nusa Tanggara of which Newmont’s pro-rata share is $37. Batu Hijau has sales agreements to sell copper concentrates at market prices as follows (in millions of pounds): 1,524 for the remainder of 2006; 1,715 in 2007; 1,576 in 2008; 1,383 in 2009; 1,389 in 2010; and 4,167 thereafter. For information regarding these agreements, see Item 3, Provisional Copper and Gold Sales, below.
Environmental
The Company’s mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with all applicable laws and regulations. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the amount of such future expenditures. Estimated future reclamation costs are based principally on legal and regulatory requirements. At June 30, 2006 and December 31, 2005, $444 and $431, respectively, were accrued for reclamation costs relating to currently producing mineral properties.
In addition, the Company is involved in several matters concerning environmental obligations associated with former mining activities. Generally, these matters concern developing and implementing remediation plans at the various sites involved. The Company believes that the related environmental obligations associated with these sites are similar in nature with respect to the development of remediation plans, their risk profile and the compliance required to meet general environmental standards. Based upon the Company’s best estimate of its liability for these matters, $72 and $77 were accrued for such obligations at June 30, 2006 and December 31, 2005, respectively. Depending upon the ultimate resolution of these matters, the Company believes that it is reasonably possible that the liability for these matters could be as much as 112% greater or 37% lower than the amount accrued at June 30, 2006. The amounts accrued for these matters are reviewed periodically based upon facts and circumstances available at the time. Changes in estimates are charged to Costs and expenses, other in the period estimates are revised.
For more information on the Company’s reclamation and remediation liabilities, see Notes 15 and 18 to the Condensed Consolidated Financial Statements.
During the first half of 2006 and 2005, capital expenditures were approximately $58 and $15, respectively, to comply with environmental regulations. Ongoing costs to comply with environmental regulations have not been a significant component of operating costs.
Newmont spent $4 and $6, respectively, during the first half of 2006 and 2005 for environmental obligations related to the former mining sites discussed in Note 18 to the Condensed Consolidated Financial Statements.
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Recent Accounting Pronouncements
On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment. As a result of adopting FAS 123(R), the Company’s Income from continuing operations and Net income for the second quarter of 2006 is $6 lower ($0.01 per share, basic and diluted) and $10 lower ($0.03 per share basic and $0.02 per share diluted) for the first half of 2006 than if we had continued to account for share-based compensation under APB 25 as we did in the comparable prior year periods.
Safe Harbor Statement
Certain statements contained in this report (including information incorporated by reference) are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided for under these sections. Our forward-looking statements include, without limitation: (a) statements regarding future earnings, and the sensitivity of earnings to gold and other metal prices; (b) estimates of future mineral production and sales for specific operations and on a consolidated basis; (c) estimates of future production costs and other expenses, for specific operations and on a consolidated basis; (d) estimates of future cash flows and the sensitivity of cash flows to gold and other metal prices; (e) estimates of future capital expenditures and other cash needs for specific operations and on a consolidated basis and expectations as to the funding thereof; (f) statements as to the projected development of certain ore deposits, including estimates of development and other capital costs, financing plans for these deposits, and expected production commencement dates; (g) estimates of future costs and other liabilities for certain environmental matters; (h) estimates of reserves, and statements regarding future exploration results and reserve replacement; (i) statements regarding modifications to Newmont’s hedge positions; (j) statements regarding future transactions relating to portfolio management or rationalization efforts; and (k) projected synergies and costs associated with acquisitions and related matters.
Where we express 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, our forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by those forward-looking statements. Important factors that could cause actual results to differ materially from such forward-looking statements (“cautionary statements”) are disclosed under “Risk Factors” in the Newmont Annual Report on Form 10-K for the year ended December 31, 2005, as well as in other filings with the Securities and Exchange Commission. Many of these factors are beyond Newmont’s ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements.
All subsequent written and oral forward-looking statements attributable to Newmont or to persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Newmont disclaims any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (dollars in millions, except per ounce and per pound amounts).
Metal Prices
Changes in the market price of gold significantly affect Newmont’s profitability and cash flow. Gold prices can fluctuate widely due to numerous factors, such as demand; forward selling by producers; central bank sales, purchases and lending; investor sentiment; the strength of the U.S. dollar and global mine production levels. Changes in the market price of copper also affect Newmont’s profitability and cash flow. Copper is traded on established international exchanges and copper prices generally reflect market supply and demand, but can also be influenced by speculative trading in the commodity or by currency exchange rates.
For the three and six months ended June 30, 2006 and 2005, Batu Hijau recorded the following gross revenues before treatment and refining charges, which were subject to final price adjustments at June 30, 2006 and 2005, as follows:
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In 2001, Newmont entered into contracts to hedge the interest rate risk exposure on a portion of its $275 8 5/8% 2011 notes and its $200 8 3/8% 2005 debentures. For the second quarter of 2006 and 2005, these transactions resulted in a reduction in interest expense of $nil and $1, respectively. For the first half of 2006 and 2005, these transactions resulted in a reduction in interest expense of $nil and $2, respectively. The fair value of the interest rate swaps was ($1) at June 30, 2006 and $2 at December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES.
During the fiscal period covered by this report, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods.
Even an effective internal control system, no matter how well designed, has inherent limitations—including the possibility of the circumvention or overriding of controls. Therefore, the Company’s internal control over financial reporting can provide only reasonable assurance with respect to the reliability of the Company’s financial reporting and financial statement preparation.
There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information regarding legal proceedings is contained in Note 18 to the Condensed Consolidated Financial Statements contained in this Report and is incorporated herein by reference.
ITEM 2. ISSUER PURCHASES OF EQUITY SECURITIES.
Period
(a)
Total Number of Shares Purchased
(b)
AveragePrice PaidPer Share
(c)
Total Number ofShares Purchased asPart of Publicly Announced Plans orPrograms
(d)
Maximum Number (orApproximate Dollar Value) ofShares that may yet bePurchased under the Plans orPrograms
April 1, 2006 through April 30, 2006
May 1, 2006 through May 31, 2006
June 1, 2006 through June 30, 2006
ITEM 6. EXHIBITS.
(a) The exhibits to this report are listed in the Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
/s/ RICHARD T. O’BRIEN
Richard T. O’Brien
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ RUSSELL BALL
Russell Ball
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Description
Computation of Ratio of Earnings to Fixed Charges, filed herewith.
Letter from PricewaterhouseCoopers LLC to the Securities and Exchange Commission dated May 4, 2006. Incorporated herein by reference to Exhibit 16 of Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 4, 2006.
Certification Pursuant to Rule 13A-14 or 15-D-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by the Principal Executive Officer, filed herewith.
Certification Pursuant to Rule 13A-14 or 15-D-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer, filed herewith.
Statement Required by 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Principal Executive Officer, filed herewith.1
Statement Required by 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Chief Financial Officer, filed herewith.1
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