Moody's: Newmont?s sale of stake in Indonesian mine is credit positive
Tuesday, July 12 2016 - 12:36 AM WIB
Although we expect that leverage will rise initially, the sale of Batu Hijau eliminates substantive ongoing investment requirements. Furthermore, the sale is in line with Newmont?s plan to sell non-core assets, reduce debt and invest in strategic assets, including Long Canyon Phase 1 in the US and the expansion of its Tanami mine in Australia. These projects are scheduled to begin production in 2017, adding as much as 625,000 ounces a year in gold production. The sale also helps decrease political risk for Newmont and eliminates the need to renew its license to export copper concentrate from Indonesia every six months.
Batu Hijau incurred a $315 million pre-tax loss in 2014, during the mine?s Phase 6 stripping program. However, we expect that Newmont?s copper assets will produce better earnings this year and in 2017 than in prior years, given that the stripping program at Batu Hijau was complete, which allows the company access to better ore grades. Although the absence of such copper earnings is likely to hurt performance over the next several quarters, the improved financial position and elimination of further capital investment requirements at Batu Hijau will permanently benefit Newmont. Pro forma for the asset sale and assuming all the proceeds go toward debt reduction, we estimate pro forma leverage of around 2.7x, as measured by debt/EBITDA for the 12 months that ended 31 March, up from the 2.2x that Newmont reported. We estimate Batu Hijau produced around $900 million EBITDA for this same period.
For the 12 months that ended 31 March, Newmont generated approximately $7.8 billion of revenue. In recent years, the company has sought to sell higher-cost, shorter-lived mines and reinvest the proceeds in lower-cost, longer-lived assets. These include the acquisition of the Cripple Creek & Victor mines in Colorado from AngloGold Ashanti in August 2015 and beginning commercial operation in November at the Turf No. 3 Vent Shaft Project in Nevada, which the company expects will produce 100,000-150,000 ounces of gold annually. The company expects production at the Merian project in Suriname, of which Newmont owns 75%, to begin in late 2016, with gold production of as much as 500,000 ounces annually for the first five years.
Meanwhile, the company forecasts Phase 1 of the Long Canyon Project to reach commercial operation in the first half of 2017, adding roughly 100,000-150,000 ounces of gold annually. The Tanami expansion in Australia, which will add 425,000-475,000 ounces of gold over its first five years, remains on schedule for increased production in the second half of 2017.
Newmont increased its gold production approximately 4% over 2014 levels to 5 million ounces on an attributable basis in 2015, significantly increased its free cash flow generation to $705 million on an adjusted basis, reduced debt and continued to maintain solid liquidity. From 2014 through 31 March 2016, Newmont reduced balance-sheet debt by approximately $1 billion to $5.7 billion at 31 March 2016. We expect the company to continue its focus on debt reduction. (ends)