Form 10-K Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-31240
Newmont Mining Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-1611629 (State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1700 Lincoln Street
Denver, Colorado
80203 (Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code (303) 863-7414
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $1.60 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2003: $11,747,114,016. There were 400,563,988 shares of common stock outstanding (and 42,252,191 exchangeable shares exchangeable into Newmont Mining Corporation common stock on a one-for-one basis) on March 2, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant’s definitive Proxy Statement submitted to the Registrant’s stockholders in connection with our 2004 Annual Stockholders Meeting to be held on April 28, 2004, are incorporated by reference into Part III of this report.
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This document (including information incorporated herein by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve a degree of risk and uncertainty due to various factors affecting Newmont Mining Corporation and our affiliates and subsidiaries. For a discussion of some of these factors, see the discussion in Item 1A, Risk Factors, of this report.
Newmont Mining Corporation is the world’s largest gold producer with significant assets or operations on five continents. We have mining operations in the United States, Australia, Peru, Indonesia, Canada, Uzbekistan, Turkey, Bolivia, New Zealand and Mexico. As of December 31, 2003, Newmont had gold reserves of 91.3 million equity ounces and an aggregate land position of approximately 60,000 square miles (155,840 square kilometers). In 2003, we obtained more than 65% of our equity gold production from politically and economically stable countries, namely the United States, Australia and Canada. Newmont is also engaged in the production of silver, copper and zinc.
Newmont Mining Corporation’s original predecessor corporation was incorporated in 1921 under the laws of Delaware. On February 13, 2002, at a special meeting of the stockholders of Newmont, stockholders approved adoption of an Agreement and Plan of Merger that provided for a restructuring of Newmont to facilitate the February 2002 acquisitions described below and to create a more flexible corporate structure. Newmont merged with an indirect, wholly-owned subsidiary, which resulted in Newmont becoming a wholly-owned subsidiary of a new holding company. The new holding company was renamed Newmont Mining Corporation. There was no impact to the consolidated financial statements of Newmont as a result of this restructuring and former stockholders of Newmont became stockholders of the new holding company. In this report, “Newmont,” the “Company” and “we” refer to Newmont Mining Corporation and/or our affiliates and subsidiaries.
On February 16, 2002, Newmont completed the acquisition of Franco-Nevada Mining Corporation Limited, a Canadian company, pursuant to a Plan of Arrangement. On February 20, 2002, Newmont gained control of Normandy Mining Limited, an Australian company, through an off-market bid for all of the ordinary shares of Normandy. On February 26, 2002, when Newmont’s off-market bid for Normandy expired, Newmont had a relevant interest in more than 96% of Normandy’s outstanding shares. Newmont exercised compulsory acquisition rights under Australian law to acquire all of the remaining shares of Normandy in April 2002. The results of operations of Normandy and Franco-Nevada have been included in this Annual Report and Newmont’s financial statements from February 16, 2002 forward.
In 2001, Newmont completed an acquisition of Battle Mountain Gold Company. The acquisition was accounted for as a pooling of interests and, as such, the financial statements in this report include Battle Mountain’s financial data as if Battle Mountain had always been a part of Newmont.
During 2002 and 2003, Newmont continued to review its asset base and operations, with the goal of achieving synergies by consolidating separately-managed assets, combining administrative and exploration staffs, achieving purchasing economies and better utilizing existing processing facilities. We also sold or disposed of lower-margin or non-core operations or interests. Although we will continue to evaluate the potential of achieving additional synergies, the review of our asset base and operations, integration of separately-managed assets and consolidation of administrative and exploration staffs is substantially complete.
In November 2003, Newmont completed a public offering of 25 million shares of common stock, receiving gross proceeds of approximately $1.0 billion.
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Unless explicitly stated otherwise in this report, production, ounces sold, revenue and other financial information with respect to 2001 does not include the operations or revenues of Normandy or Franco-Nevada.
For the years ended December 31, 2003, 2002 and 2001, Newmont had revenues of $3.21 billion, $2.66 billion and $1.67 billion, respectively. In 2003 and 2002, Newmont had net income applicable to common shares of $475.7 million and $154.3 million, respectively. In 2001, Newmont had a net loss applicable to common shares of $54.1 million.(1)
Newmont’s corporate headquarters are in Denver, Colorado, USA.
For additional information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations.
Segment Information, Export Sales, etc.
Newmont predominantly operates in a single industry, engaged in worldwide gold production, exploration for gold and acquisition of gold properties. Newmont also has a Base Metals Segment, a Merchant Banking Segment and an Exploration Segment. See Note 26 to the Consolidated Financial Statements for information relating to our business segments, our domestic and export sales, and our customers.
Gold
General. Newmont sold 7.38 million equity ounces of gold in 2003 and 7.63 million equity ounces in 2002. References in this report to “equity ounces” or “equity pounds” mean that portion of gold or base metals, respectively, produced, sold, or included in proven and probable reserves that is attributable to our ownership or economic interest.
Approximately 39% of Newmont’s equity gold sales in 2003 came from North American operations and 61% came from overseas operations. In 2002, approximately 42% of our gold sales came from North American operations and 58% came from overseas operations. In 2003, 33% of overseas production, or 20% of total production, was attributable to Yanacocha in Peru. As of December 31, 2003, approximately 44% of our total long-lived assets were related to operations outside North America, with 23% of that total in Indonesia and 26% in Peru.
Most of Newmont’s revenue comes from the sale of refined gold in the international market. The end product at each of Newmont’s gold operations, however, is generally doré bars. In certain limited circumstances Newmont sells doré directly to a customer, but generally, because doré is an alloy consisting mostly of gold but also containing silver, copper and other metals, doré bars are sent to refiners to produce bullion that meets the required market standard of 99.95% pure gold. Under the terms of refining agreements, the doré bars are refined for a fee, and Newmont’s share of the refined gold and the separately-recovered silver are credited to Newmont’s account or delivered to buyers, except in the case of the doré produced from Newmont’s operation in Uzbekistan. Doré from that operation is refined locally and the refined gold is physically returned to Newmont for sale in international markets.
Newmont has interests in two gold refining businesses: a 40% interest in the AGR Matthey joint venture in Australia, which is one of the world’s largest gold refineries and the largest distributor into the Asian market; and a 50% interest in European Gold Refineries SA in Switzerland, which owns 100% of a gold refining business and a 66.65% interest in a gold distribution business.
(1) All references to “dollars,” “U.S.$,” or “$” in this report refer to United States currency unless otherwise specified. References to “A$” are to Australian currency, “CDN$” to Canadian currency, “NZD$” to New Zealand currency and “CHF” to Swiss currency.
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Gold Uses. Gold has two main categories of use—product fabrication and investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and high-karat jewelry, in addition to equity in gold companies such as Newmont.
Gold Supply. The worldwide supply of gold consists of a combination of new production from mining and the draw-down of existing stocks of bullion and fabricated gold held by governments, financial institutions, industrial organizations and private individuals. In recent years, mine production has accounted for 60% to 70% of the total annual supply of gold.
Gold Price. The following table presents the annual high, low and average afternoon fixing prices over the past ten years, expressed in U.S. dollars, for gold per ounce on the London Bullion Market.
Year
High Low Average 1994
$ 396 $ 370 $ 384 1995
$ 396 $ 372 $ 384 1996
$ 415 $ 367 $ 388 1997
$ 362 $ 283 $ 331 1998
$ 313 $ 273 $ 294 1999
$ 326 $ 253 $ 279 2000
$ 313 $ 264 $ 279 2001
$ 293 $ 256 $ 271 2002
$ 349 $ 278 $ 310 2003
$ 416 $ 320 $ 363 2004 (through March 8, 2004)
$ 426 $ 391 $ 409
Source of Data: Kitco and Reuters
On March 8, 2004, the afternoon fixing price for gold on the London Bullion Market was $399.85 per ounce and the spot market price of gold on the New York Commodity Exchange (“Comex”) was $401.15 per ounce.
Newmont generally sells its gold or doré at the prevailing market prices during the month in which the gold or doré is delivered to the customer. Newmont recognizes revenue from a sale when the price is determinable, the gold or doré has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured.
Copper
General. At December 31, 2003, Newmont had a 56.25% economic interest (a 45% ownership interest) in the Batu Hijau mine in Indonesia, which began production in 1999. During 2003, the Batu Hijau mine sold copper/gold concentrates containing 343.4 million equity pounds of copper and 328,900 equity ounces of gold. The Batu Hijau concentrates contain approximately 31% copper and about 0.51 ounce of gold per ton. In addition, the 100% owned Golden Grove operation in Western Australia sold concentrates containing 74.3 million pounds of copper during 2003. The Golden Grove copper concentrates contain approximately 25% copper. The majority of Newmont’s production is sold under long-term contracts, and the balance on the spot market.
Copper Uses. Refined copper, the final product from the treatment of concentrates, is incorporated into wire and cable products for use in the construction, electric utility, communications and transportation industries. Copper is also used in industrial equipment and machinery, consumer products and a variety of other electrical and electronic applications and is used to make brass. Copper substitutes include aluminum, plastics, stainless steel and fiber optics. Refined, or cathode, copper is also an internationally traded commodity.
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Copper Price. The price of copper is quoted on the London Metal Exchange in terms of dollars per metric ton of high grade copper. Copper prices tend to be more cyclical than gold prices and are more directly affected by worldwide supply and demand. The volatility of the copper market is illustrated by the following table, which shows the dollar per pound equivalent of the high, low and average prices of high grade copper on the London Metal Exchange in each of the last ten years.
Year
High Low Average 1994
$ 1.40 $ 0.78 $ 1.05 1995
$ 1.47 $ 1.23 $ 1.33 1996
$ 1.29 $ 0.83 $ 1.04 1997
$ 1.23 $ 0.77 $ 1.03 1998
$ 0.85 $ 0.65 $ 0.75 1999
$ 0.84 $ 0.61 $ 0.71 2000
$ 0.91 $ 0.73 $ 0.82 2001
$ 0.83 $ 0.60 $ 0.72 2002
$ 0.77 $ 0.64 $ 0.71 2003
$ 1.05 $ 0.70 $ 0.81 2004 (through March 8, 2004)
$ 1.39 $ 1.06 $ 1.20
Source of Data: London Metal Exchange
On March 8, 2004, the closing spot price of high grade copper was equivalent to $1.33 per pound on the London Metal Exchange.
Zinc
General. Newmont produces zinc, lead and copper concentrates at its Golden Grove operation in Western Australia. Golden Grove sold concentrates containing 104.7 million pounds of zinc during 2003. The Golden Grove zinc concentrates contain approximately 52% zinc.
Zinc Uses. Newmont delivers and sells its zinc concentrates to major zinc smelters in Japan and Korea. The majority of the concentrates are sold under long-term “evergreen” contracts. The pricing terms of these contracts are negotiated annually. Refined zinc, the final product from the treatment of the concentrates, is primarily used for galvanizing iron and steel products such as sheet and strip steel, pipes, tubes, wire and wire rope. Other uses include the manufacture of a broad range of die-cast products and the manufacture of brass.
Zinc Price. The price of zinc is quoted on the London Metal Exchange in terms of dollars per metric ton. The volatility of the zinc market is illustrated by the following table, which shows the dollar per pound equivalent of the high, low and average prices of zinc on the London Metal Exchange in each of the last ten years.
Year
High Low Average 1994
$ 0.54 $ 0.41 $ 0.45 1995
$ 0.55 $ 0.43 $ 0.47 1996
$ 0.50 $ 0.44 $ 0.46 1997
$ 0.80 $ 0.47 $ 0.60 1998
$ 0.52 $ 0.42 $ 0.46 1999
$ 0.56 $ 0.41 $ 0.49 2000
$ 0.58 $ 0.46 $ 0.51 2001
$ 0.48 $ 0.33 $ 0.40 2002
$ 0.38 $ 0.33 $ 0.35 2003
$ 0.46 $ 0.34 $ 0.38 2004 (through March 8, 2004)
$ 0.52 $ 0.45 $ 0.48
Source of Data: London Metal Exchange
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On March 8, 2004, the closing spot price of zinc on the London Metal Exchange was equivalent to $0.50 per pound.
With respect to gold, Newmont’s philosophy is to remain largely unhedged. Therefore, Newmont generally sells its gold production at market prices. Historically, Newmont has, on a limited basis, entered into derivative contracts to protect the selling price for certain anticipated gold production and to manage risks associated with commodities, interest rates and foreign currency. The hedging policy authorized by Newmont’s Board of Directors limits total gold hedging activity to 16 million ounces. Prior to the acquisitions of Normandy and Franco-Nevada, Newmont utilized forward sales contracts for a portion of the gold production from the Minahasa mine in Indonesia and from the Nevada and Canadian operations. No costs were incurred in connection with these forward sales contracts and there were no margin requirements related to these contracts.
At the time of Normandy’s acquisition, three of its affiliates had a substantial derivative instrument position. Those affiliates are now known as Newmont Gold Treasury (“NGT”), Newmont NFM Limited and Newmont Yandal Operations Pty Ltd (“NYOL”). Normandy’s policy was to hedge a minimum of 60% of recoverable reserves (which are generally between 80% and 95% of total reserves). Normandy utilized forward sales contracts with fixed and floating gold lease rates, but did not enter into contracts that required margin calls and had no outstanding long-dated sold call options.
Following the Normandy acquisition, and in accordance with our unhedged philosophy, efforts to proactively reduce and simplify the Normandy hedge positions were undertaken. The Newmont NFM and NGT gold hedge books were reduced by approximately 9.4 million ounces from February 16, 2002 to December 31, 2003. Gold forward sales contracts and other “committed hedging obligations” were reduced by 7.5 million ounces by delivering production into the contracts or through early close-outs. Similarly, uncommitted contracts for 1.9 million ounces were either delivered into, were allowed to lapse or were closed out early. Thus, as of December 31, 2003, the Newmont NFM gold hedge book has been eliminated, and the NGT gold hedge book has been reduced to zero committed ounces and 528,000 uncommitted ounces.
In addition, on May 28, 2003, a wholly-owned subsidiary of Newmont offered to acquire all of NYOL’s gold hedge obligations from NYOL’s counterparties. Six of seven of these counterparties accepted this offer, receiving $0.50 for each dollar of net mark-to-market liability under their individual hedge contracts, calculated as of May 22, 2003. On July 3, 2003, NYOL was placed into voluntary administration (a form of Australian insolvency proceeding). On September 10, 2003, NYOL emerged from the voluntary administration process, remaining a wholly-owned indirect subsidiary of Newmont, following acceptance by NYOL’s creditors of an offer from another Newmont subsidiary that effectively valued the assets of NYOL at more than $200 million. Acceptance of this offer by NYOL’s creditors had the effect of extinguishing NYOL’s hedge contract liability.
As of December 31, 2002, the mark-to-market valuation of the Normandy gold hedge positions was a negative $433 million, broken down as follows: NGT, negative $122 million; Newmont NFM, negative $23 million; and NYOL, negative $288 million. At December 31, 2003, the mark-to-market valuation of the Normandy gold hedge positions was approximately negative $12 million.
For additional information, see Hedging in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and Note 15 to the Consolidated Financial Statements.
Newmont has a separate Merchant Banking business unit. Merchant Banking is a “reportable segment” for financial reporting purposes, with sub-segments relating to portfolio management (providing in-house investment banking and advisory services) and management of Newmont’s equity portfolio, royalty portfolio and downstream gold refining and distribution business.
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With respect to portfolio management, the Merchant Banking group helps Newmont maximize net asset value per share and increase cash flow, earnings and reserves by working with Newmont’s exploration, operations and finance teams to prioritize near-term goals within longer-term strategies. Merchant Banking is engaged in developing value optimization strategies for operating and non-operating assets, business development activities, potential merger and acquisition analysis and negotiations, monetizing inactive exploration properties, capitalizing on Newmont’s proprietary technology and know-how and acting as an internal resource for other corporate groups to improve and maximize business outcomes. In 2003, Merchant Banking completed more than 40 separate transactions. Merchant Banking was instrumental in the acquisitions of the minority interests at Tanami in Australia and Martha in New Zealand, through the Newmont NFM and Otter privatizations, and in the Ahafo project in Ghana. In 2002 and 2003, Merchant Banking advised Newmont regarding the process of extinguishing the majority of bond and derivative liabilities of NYOL. For additional information on the NYOL transactions, see Note 12 to the Consolidated Financial Statements.
A key aspect of portfolio management is assisting Newmont in extracting economies of scale with its partners and neighboring mines. Merchant Banking continues to evaluate district optimization opportunities in Nevada, Australia and Canada, covering a broad range of alternatives, including asset exchanges, unitization, joint ventures, partnerships, sales, spinouts and buyouts. In 2003, Merchant Banking assisted in the acquisition of a 25% interest in the Turquoise Ridge joint venture in Nevada, enabling ores from the Getchell and Turquoise Ridge mines to be processed at Newmont’s Twin Creeks Mill.
In early 2003, Merchant Banking was instrumental in creating the seventh largest gold company in the world by contributing its equity interest in Echo Bay Mines Ltd. and selling its interest in the TVX Newmont Americas joint venture into the newly merged Kinross Gold Corporation. Merchant Banking sold part of Newmont’s interest in Kinross in September 2003 for $225 million. The approximate fair value of Newmont’s equity portfolio was $140 million as of December 31, 2003.
Merchant Banking is responsible for managing Newmont’s royalty income portfolio. Royalties offer a natural hedge against lower gold prices by providing free cash flow from a diversified set of assets with limited operating, capital or environmental risk while retaining upside exposure to further exploration discoveries and reserve expansions. Merchant Banking seeks to grow Newmont’s royalty portfolio in a number of different ways, and looks for opportunities to acquire existing royalties from third parties or to create them in connection with transactions. Merchant Banking also identifies current Newmont properties or exploration targets for sale if they are incompatible with our core objectives. In the case of a sale, Merchant Banking often seeks to retain royalty or other future participation rights in addition to cash or other consideration received in the sale. Through this process, Newmont intends to continue to benefit from any discoveries made by other operators on lands on which we have a royalty, and to obtain revenues from the properties without incurring operating or capital risk.
In 2003, Newmont’s royalty interests generated $56.3 million in revenue. Newmont has royalty interests in Barrick Gold Corporation’s Goldstrike and Eskay Creek mines, Placer Dome’s Henty and Bald Mountain mines and Stillwater Mining’s Stillwater and East Boulder palladium-platinum mines, among others. Newmont also has a significant oil and gas royalty portfolio in western Canada. During the year, new royalties were added through property transactions and asset sales. A land lease program in Nevada is accelerating exploration of non-core lands with Newmont retaining royalties and future participation rights. For additional information regarding Newmont’s royalty portfolio, see Item 2, Properties, Royalty Properties, below.
Merchant Banking manages Newmont’s interests in two gold refining and product distribution businesses, AGR Matthey joint venture (“AGR”) in Australia and European Gold Refineries SA (“EGR”) in Switzerland. Newmont has a 40% interest in AGR, from which Newmont received dividends in 2003 of $2.1 million. AGR is one of the world’s largest gold refineries and is the largest distributor of gold into the Asian market. The products division markets wholesale finished jewelry and supplies the jewelry manufacturing industry throughout Australia and Asia.
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During 2003, Newmont acquired a 50% interest in EGR, with Swiss residents holding the remaining 50%. Simultaneously, EGR purchased 100% of a Swiss gold refinery, Valcambi SA (“Valcambi”), and 66.65% of a gold distribution business, Finorafa SA (“Finorafa”). Valcambi is a London Gold Delivery precious metals refiner and manufacturer of semi-finished products for the luxury Swiss watch industry, and Finorafa is the second largest distributor and financier of gold products for the Italian market.
Newmont spent $115.2 million in 2003, $88.9 million in 2002 and $55.5 million in 2001 for exploration, research and development. The Exploration Segment is responsible for all activities, regardless of location, associated with the Company’s efforts to discover mineralized material (as defined in Note 2 to the Consolidated Financial Statements) that will potentially advance into proven and probable reserves. Exploration work may be conducted in areas surrounding our existing mines for the purpose of locating additional deposits and determining mine geology, and in other prospective gold regions. Our exploration teams employ state-of-the-art technology, including airborne geophysical data acquisition systems, satellite location devices and field-portable imaging systems, as well as geochemical and geological prospecting methods, to identify prospective targets.
As of December 31, 2003, Newmont had proven and probable reserves of 91.3 million equity ounces. As a result of exploration efforts and the assumption of a higher gold price, Newmont added 15.1 million equity ounces to proven and probable reserves in 2003, with 8.8 million ounces being depleted from mining.
In Nevada, Newmont added approximately 6 million equity ounces, before depletion of 3.0 million equity ounces from mining, for year-end 2003 proven and probable reserves of 33.7 million equity ounces.
In Peru, exploration at Yanacocha focused on defining surface and covered oxide mineralization in the La Quinua basin including the prospective Corimayo deposit, which was brought into reserves in 2002. Exploration work also continued to further define mineralized sulfide material below several oxide deposits. In 2003, 1.5 million equity ounces were added to proven and probable reserves, and 2.0 million equity ounces were depleted from mining, for year-end proven and probable reserves of 16.3 million equity ounces.
In Australia, the Company added 738,000 equity ounces of proven and probable reserves at Kalgoorlie and 222,000 ounces at Pajingo. These additions, plus the increase in ownership at Tanami to 100%, helped offset depletion of 2.0 million equity ounces, for year-end 2003 Australian proven and reserves of 16.2 million equity ounces.
At Batu Hijau, positive exploration and mine optimization efforts resulted in proven and probable reserves of 6.3 billion equity pounds of copper and 7.1 million equity ounces of gold as of December 31, 2003, despite depletion of 492 million equity pounds of copper and 442,000 equity ounces of gold.
In addition to reserve additions at our core operations, exploration and mine development efforts in 2003 focused on two projects in Ghana, Ahafo and Akyem, nearly doubling the prior year’s reserves. As of December 31, 2003, the Company reported reserves of 7.6 million ounces at Ahafo and 4.3 million equity ounces at Akyem.
For additional information, see Item 2, Properties, Proven and Probable Reserves.
Other than operating licenses for our mining and processing facilities, there are no third party patents, licenses or franchises material to Newmont’s business. In many countries, however, we conduct our mining and exploration activities pursuant to concessions granted by, or under contract with, the host government. These countries include, among others, Australia, Bolivia, Ghana, Indonesia, Peru, Mexico, Turkey and Uzbekistan. The concessions and contracts are subject to the political risks associated with foreign operations. See Item 1A, Risk Factors, Risks Related to Newmont Operations, below. For a more detailed description of our Indonesian Contracts of Work, see Item 2, Properties, below.
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Condition of Physical Assets and Insurance
Our business is capital intensive, requiring ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. For more information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Liquidity and Capital Resources, below.
We maintain insurance against property loss and business interruption and insure against risks that are typical in the operation of our business, in amounts that we believe to be reasonable. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to environmental liability and political risk. There can be no assurance that claims would be paid under such insurance in connection with a particular event. See Item 1A, Risk Factors, Risks Related to Newmont Operations, below.
Newmont’s United States mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment, including the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Endangered Species Act; the Federal Land Policy and Management Act; the National Environmental Policy Act; the Resource Conservation and Recovery Act; and related state laws. These laws and regulations are continually changing and are generally becoming more restrictive. Newmont’s activities outside the United States are also subject to governmental regulations for the protection of the environment. In general, environmental regulations have not had, and are not expected to have, a material adverse impact on Newmont’s operations or our competitive position.
We conduct our operations so as to protect the public health and environment and believe our operations are in compliance with all applicable laws and regulations. Each operating Newmont mine has a reclamation plan in place that meets all applicable legal and regulatory requirements. We have made, and expect 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 December 31, 2003, $361.0 million was accrued for reclamation costs relating to currently producing mineral properties.
Newmont also 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. We believe 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 activities required to meet general environmental standards. Based upon our best estimate of our liability for these matters, $58.6 million was accrued as of December 31, 2003 for such obligations associated with properties previously owned or operated by Newmont or our subsidiaries. These amounts are included in Other current liabilities and Reclamation and remediation liabilities. Depending upon the ultimate resolution of these matters, we believe that it is reasonably possible that the liability for these matters could be as much as 54% greater or 41% lower than the amount accrued as of December 31, 2003. 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 in the period estimates are revised.
For a discussion of the most significant reclamation and remediation activities, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, and Note 27 to the Consolidated Financial Statements, below.
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There were approximately 13,400 people employed by Newmont and our affiliates worldwide at December 31, 2003, and approximately 13,200 people employed by Newmont and our affiliates worldwide at December 31, 2002.
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:
• statements regarding future earnings, and the sensitivity of earnings to gold and other metal prices;
• estimates of future mineral production and sales for specific operations and on a consolidated basis;
• estimates of future production costs and other expenses, for specific operations and on a consolidated basis;
• estimates of future cash flows and the sensitivity of cash flows to gold and other metal prices;
• estimates of future capital expenditures and other cash needs for specific operations and on a consolidated basis and expectations as to the funding thereof;
• 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;
• estimates of future costs and other liabilities for certain environmental matters;
• estimates of reserves, and statements regarding future exploration results and reserve replacement;
• statements regarding modifications to Newmont’s hedge positions;
• statements regarding future transactions relating to portfolio management or rationalization efforts;
• estimates regarding timing of future capital expenditures, production or closure activities; and
• 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. Such risks include, but are not limited to: the price of gold and copper; currency fluctuations; geological and metallurgical assumptions; operating performance of equipment, processes and facilities; labor relations; timing of receipt of necessary governmental permits or approvals; domestic and foreign laws or regulations, particularly relating to the environment and mining; domestic and international economic and political conditions; the ability of Newmont to obtain or maintain necessary financing; and other risks and hazards associated with mining operations. More detailed information regarding these factors is included in Item 1, Business, Item 1A, Risk Factors, and elsewhere throughout this report. 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 these 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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Newmont maintains an internet web site at www.newmont.com. Newmont makes available, free of charge, through the Investor Information section of the web site, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Newmont has provided same day access to such reports through its web site since November 15, 2002. Newmont’s Corporate Governance Guidelines, the charters of key committees of its Board of Directors and its Code of Business Ethics and Conduct are also available on the web site. Any of the foregoing information is available in print to any stockholder who requests it by contacting Newmont’s Investor Relations Department.
Every investor or potential investor in Newmont should carefully consider the following risks, which have been separated into two groups:
• risks related to the gold mining industry generally; and
• risks related to Newmont’s operations.
Risks Related to the Gold Mining Industry Generally
A Substantial or Extended Decline in Gold Prices Would Have a Material Adverse Effect on Newmont
Newmont’s business is extremely dependent on the price of gold, which is affected by numerous factors beyond Newmont’s control. Factors tending to put downward pressure on the price of gold include:
• sales or leasing of gold by governments and central banks;
• a strong U.S. dollar;
• global and regional recession or reduced economic activity;
• speculative trading;
• decreased demand for gold for industrial uses, use in jewelry and investment;
• high supply of gold from production, disinvestment, scrap and hedging;
• sales by gold producers in forward transactions and other hedging transactions; and
• devaluing local currencies (relative to gold priced in U.S. dollars) leading to lower production costs and higher production in certain major gold-producing regions.
Any drop in the price of gold adversely impacts our revenues, profits and cash flows, particularly in light of our unhedged philosophy. Newmont has recorded asset write-downs in recent years as a result of a sustained period of low gold prices. Newmont may experience additional asset impairment as a result of low gold prices in the future.
In addition, sustained low gold prices can:
• reduce revenues further through production cutbacks due to cessation of the mining of deposits or portions of deposits that have become uneconomic at the then-prevailing gold price;
• halt or delay the development of new projects;
• reduce funds available for exploration, with the result that depleted reserves are not replaced; and
• reduce existing reserves, by removing ores from reserves that cannot be economically mined or treated at prevailing prices.
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Also see the discussion in Item 1, Business, Gold Price.
Gold Producers Must Continually Obtain Additional Reserves
Gold producers must continually replace gold reserves depleted by production. Depleted reserves must be replaced by expanding known ore bodies or by locating new deposits in order for gold producers to maintain production levels over the long term. Gold exploration is highly speculative in nature, involves many risks and frequently is unproductive. No assurances can be given that any of our new or ongoing exploration programs will result in new mineral producing operations. Once mineralization is discovered, it may take many years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change.
Estimates of Proven and Probable Reserves Are Uncertain
Estimates of proven and probable reserves are subject to considerable uncertainty. Such estimates are, to a large extent, based on interpretations of geologic data obtained from drill holes and other sampling techniques. Gold producers use feasibility studies to derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the predicted configuration of the ore body, expected recovery rates of metals from the ore, comparable facility, equipment, and operating costs, and other factors. Actual cash operating costs and economic returns on projects may differ significantly from original estimates. Further, it may take many years from the initial phase of drilling before production is possible and, during that time, the economic feasibility of exploiting a discovery may change.
Increased Costs Could Affect Profitability
Cash costs at any particular mining location frequently are subject to great variation from one year to the next due to a number of factors, such as changing ore grade, metallurgy and revisions to mine plans in response to the physical shape and location of the ore body. In addition, cash costs are affected by the price of commodities such as fuel and electricity. Such commodities are at times subject to volatile price movements, including increases that could make production at certain operations less profitable. A material increase in costs at any one location could have a significant effect on Newmont’s profitability.
Mining Accidents or Other Adverse Events at a Mining Location Could Reduce Our Production Levels
At any of Newmont’s operations, production may fall below historic or estimated levels as a result of mining accidents such as a pit wall failure in an open pit mine, or cave-ins or flooding at underground mines. In addition, production may be unexpectedly reduced at a location if, during the course of mining, unfavorable ground conditions or seismic activity are encountered; ore grades are lower than expected; the physical or metallurgical characteristics of the ore are less amenable to mining or treatment than expected; or our equipment, processes or facilities fail to operate properly or as expected.
Currency Fluctuations May Affect the Costs that Newmont Incurs
Currency fluctuations may affect the costs that we incur at our operations. Gold is sold throughout the world based principally on the U.S. dollar price, but a portion of Newmont’s operating expenses are incurred in local currencies. The appreciation of non-U.S. dollar currencies against the U.S. dollar can increase the costs of gold production in U.S. dollar terms at mines located outside the United States, making such mines less profitable. The currencies that primarily impact Newmont’s results of operations are the Australian and Canadian dollars.
During 2003, the Australian and Canadian dollars strengthened by an average of 17% and 11%, respectively, against the U.S. dollar. This increased U.S. dollar reported operating costs in Australia and Canada by approximately $76.2 million and $7.6 million, respectively. For additional information, see Item 7,
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Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Results of Operations, Foreign Currency Exchange Rates, below. For a more detailed description of how currency exchange rates may affect costs, see discussion in Foreign Currency in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Gold Mining Companies Are Subject to Extensive Environmental Laws and Regulations
Newmont’s exploration, mining and processing operations are regulated in all countries in which we operate under various federal, state, provincial and local laws relating to the protection of the environment, which generally include air and water quality, hazardous waste management and reclamation. Delays in obtaining or failure to obtain government permits and approvals may adversely impact our operations. The regulatory environment in which Newmont operates could change in ways that would substantially increase costs to achieve compliance. In addition, significant changes in regulation could have a material adverse effect on Newmont’s operations or financial position. For a more detailed discussion of potential environmental liabilities, see the discussion in Environmental Matters, Note 27 to the Consolidated Financial Statements.
Risks Related to Newmont Operations
Our Operations Outside North America and Australia Are Subject to Risks of Doing Business Abroad
Exploration, development and production activities outside of North America and Australia are potentially subject to political and economic risks, including:
• cancellation or renegotiation of contracts;
• disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act;
• changes in foreign laws or regulations;
• royalty and tax increases or claims by governmental entities, including retroactive claims;
• expropriation or nationalization of property;
• currency fluctuations (particularly in countries with high inflation);
• foreign exchange controls;
• restrictions on the ability of local operating companies to sell gold offshore for U.S. dollars, and on the ability of such companies to hold U.S. dollars or other foreign currencies in offshore bank accounts;
• import and export regulations, including restrictions on the export of gold;
• restrictions on the ability to pay dividends offshore;
• risk of loss due to civil strife, acts of war, guerrilla activities, insurrection and terrorism;
• risk of loss due to disease and other potential endemic health issues; and
• other risks arising out of foreign sovereignty over the areas in which our operations are conducted.
Consequently, Newmont’s exploration, development and production activities outside of North America and Australia may be substantially affected by factors beyond Newmont’s control, any of which could materially adversely affect Newmont’s financial position or results of operations. Furthermore, in the event of a dispute arising from such activities, Newmont may be subject to the exclusive jurisdiction of courts outside North America or Australia, which could adversely affect the outcome of a dispute.
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Newmont has substantial investments in Indonesia, a nation that since 1997 has undergone financial crises and devaluation of its currency, outbreaks of political and religious violence, changes in national leadership, and the secession of East Timor, one of its former provinces. Despite democratic elections in 1999, a change in government occurred in late July 2001, and civil unrest, independence movements and tensions between the civilian government and the military continue. The presidential election occurring in 2004 could lead to increased instability. These factors heighten the risk of abrupt changes in the national policy toward foreign investors, which in turn could result in unilateral modification of concessions or contracts, increased taxation, or expropriation of assets. If this were to occur with respect to Newmont’s Indonesian Contracts of Work, Newmont’s financial condition and results of operations could be materially adversely affected. For additional information, see Note 10 to the Consolidated Financial Statements.
During the last several years, Minera Yanacocha, of which Newmont owns a 51.35% interest, has been the target of numerous local political protests, including ones that blocked the road between the Yanacocha mine complex and the city of Cajamarca in Peru. We cannot predict whether these incidents will continue, nor can we predict the government’s continuing positions on foreign investment, mining concessions, land tenure, environmental regulation or taxation. The continuation or intensification of protests or a change in prior governmental positions could adversely affect operations in Peru.
Recent violence committed by radical elements in Indonesia and other countries, and the presence of U.S. forces in Iraq and Afghanistan, may increase the risk that operations owned by U.S. companies will be the target of further violence. If any of Newmont’s operations were so targeted it could have an adverse effect on our business.
Our Success May Depend on Our Social and Environmental Performance
Newmont’s ability to operate successfully in communities around the world will likely depend on our ability to develop, operate and close mines in a manner that is consistent with the health and safety of our employees, the protection of the environment, and the creation of long-term economic and social opportunities in the communities in which we operate. Newmont has implemented a management system designed to promote continuous improvement in health and safety, environmental performance and community relations. However, our ability to operate may be adversely impacted by accidents or events detrimental (or perceived to be detrimental) to the health and safety of our employees or the communities in which we operate.
Remediation Costs for Environmental Liabilities May Exceed the Provisions We Have Made
Newmont has conducted extensive remediation work at two inactive sites in the United States. At one of these sites, remediation requirements have not been finally determined, and, therefore, the final cost cannot be determined. At a third site in the United States, an inactive uranium mine and mill formerly operated by a subsidiary of Newmont, remediation work at the mill is ongoing, but remediation at the mine is subject to dispute and has not yet commenced. The environmental standards that may ultimately be imposed at this site as a whole remain uncertain and there is a risk that the costs of remediation may exceed the provision Newmont’s subsidiary has made for such remediation by a material amount.
Whenever a previously unrecognized remediation liability becomes known or a previously estimated cost is increased, the amount of that liability or additional cost is expensed and this can materially reduce net income in that period.
The Use of Hedging Instruments May Prevent Gains Being Realized from Subsequent Price Increases
Consistent with Newmont’s unhedged philosophy, Newmont does not intend to enter into new material gold hedging positions and intends to continue to decrease hedge positions over time by opportunistically delivering gold into our existing hedge contracts, or by seeking to eliminate our hedge position when economically attractive. Nonetheless, Newmont currently has gold hedging positions and may, from time-to-time, enter into
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hedge contracts for other metals. If the gold or other metal price rises above the price at which future production has been committed under these hedge instruments, Newmont will have an opportunity loss. However, if the gold or other metal price falls below that committed price, Newmont’s revenues will be protected to the extent of such committed production. In addition, we may experience losses if a hedge counterparty defaults under a contract when the contract price exceeds the gold or other metal price.
For a more detailed description of the Newmont hedge positions, see the discussion in Hedging in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, and Note 15 to the Consolidated Financial Statements, below.
Our Level of Indebtedness May Affect Our Business
As of December 31, 2003, Newmont had debt of $1.1 billion, as compared to $1.8 billion as of December 31, 2002. Although Newmont was successful in reducing debt during 2003, there can be no assurance that it can continue to do so. Our level of indebtedness could have important consequences for our operations, including:
• Newmont may need to use a large portion of its cash flow to repay principal and pay interest on our debt, which will reduce the amount of funds available to finance our operations and other business activities;
• Newmont’s debt level may make us vulnerable to economic downturns and adverse developments in Newmont’s businesses and markets; and
• Newmont’s debt level may limit our ability to pursue other business opportunities, borrow money for operations or capital expenditures in the future or implement our business strategy.
Newmont expects to obtain the funds to pay our expenses and to pay principal and interest on our debt by utilizing cash flow from operations. Newmont’s ability to meet these payment obligations will depend on our future financial performance, which will be affected by financial, business, economic and other factors. Newmont will not be able to control many of these factors, such as economic conditions in the markets in which Newmont operates. Newmont cannot be certain that our future cash flow from operations will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If cash flow from operations is insufficient, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or issue additional equity. We cannot be sure that we will be able to do so on commercially reasonable terms, if at all.
Occurrence of Events for Which We Are Not Insured May Affect Our Cash Flow and Overall Profitability
We maintain insurance to protect ourselves against certain risks related to our operations. This insurance is maintained in amounts that we believe to be reasonable depending upon the circumstances surrounding each identified risk. However, Newmont may elect not to have insurance for certain risks because of the high premiums associated with insuring those risks or for various other reasons; in other cases, insurance may not be available for certain risks. Some concern always exists with respect to investments in parts of the world where civil unrest, war, nationalist movements, political violence or economic crisis are possible. These countries may also pose heightened risks of expropriation of assets, business interruption, increased taxation and a unilateral modification of concessions and contracts. Newmont does not maintain insurance against political risk. Occurrence of events for which Newmont is not insured may affect our cash flow and overall profitability.
Our Business Depends on Good Relations with Our Employees
Newmont may experience labor disputes, work stoppages or other disruptions in production that could adversely affect us. At December 31, 2003, unions represented approximately 23% of our worldwide work force. On that date, Newmont had 1,009 employees at its Carlin, Nevada operations, 191 employees in Canada at its
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Golden Giant operations, 3,150 employees in Indonesia at its Batu Hijau operations, 39 employees in New Zealand at its Martha operation, 169 employees in Bolivia at its Kori Kollo operation, 265 employees in Australia at its Golden Grove, Mt. Leyshon and Kalgoorlie operations, 390 employees in Peru at its Yanachocha operation, and 299 employees in Turkey at its Ovacik operation, working under a collective bargaining agreement or similar labor agreement. Currently there are labor agreements in effect for all of these workers.
Our Earnings Could Be Affected by the Prices of Other Commodities
The revenues and earnings of Newmont also could be affected by the prices of other commodities such as copper and zinc, although to a lesser extent than by the price of gold. The prices of copper and zinc are affected by numerous factors beyond Newmont’s control. For more information, see Item 1, Products, Copper and Zinc, above, and Item 2, Properties, below.
Title to Some of Our Properties May Be Defective or Challenged
Although we have conducted title reviews of our properties, title review does not necessarily preclude third parties from challenging our title. While Newmont believes that it has satisfactory title to its properties, some risk exists that some titles may be defective or subject to challenge. In addition, certain of our Australian properties could be subject to native title or traditional landowner claims, but such claims would not deprive us of the properties. For information regarding native title or traditional landowner claims, see the discussion under the Australia section of Item 2, Properties, below.
We Compete With Other Mining Companies
We compete with other mining companies to attract and retain key executives and other employees with technical skills and experience in the mining industry. We also compete with other mining companies for rights to mine properties containing gold and other minerals. There can be no assurance that Newmont will continue to attract and retain skilled and experienced employees, or to acquire additional rights to mine properties.
Newmont’s Anti-Takeover Provisions Could Limit Amounts Offered in a Takeover
Article Ninth of our certificate of incorporation and our shareholder rights plan may make it more difficult for various corporations, entities or persons to acquire control of us or to remove management. Article Ninth of our certificate of incorporation requires us to obtain the approval of holders of 80% of all classes of our capital stock who are entitled to vote in the election of directors, voting together as one class, to enter into certain types of transactions generally associated with takeovers, unless our Board of Directors approves the transaction before the other corporation, entity or person acquires 10% or more of our outstanding shares. In addition, we also have a shareholder rights plan, pursuant to which each share of our common stock also evidences one preferred share purchase right. The shareholder rights plan, in effect, imposes a significant penalty upon any person or group that acquires 15% or more of our outstanding common stock without the approval of the Board. While the anti-takeover provisions in our certificate of incorporation and our shareholder rights plan protect stockholders from coercive or otherwise unfair takeover tactics, they may also limit the premium over market price available to holders of common stock in a takeover situation.
Certain Factors Outside of Our Control May Affect Our Ability to Support the Carrying Value of Goodwill
At December 31, 2003, the carrying value of our goodwill was approximately $3.0 billion or 28% of our total assets. Such goodwill has been assigned to our Merchant Banking ($1,594 million) and Exploration ($1,130 million) Segments, and to various mine site reporting units ($320 million in the aggregate). As further described in Note 3 to the Consolidated Financial Statements, this goodwill primarily arose in connection with
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our February 15, 2002 acquisitions of Normandy and Franco-Nevada, and it represents the excess of the aggregate purchase price for those companies over the fair value of the identifiable net assets of Normandy and Franco-Nevada. Such goodwill was assigned to reporting units based on independent appraisals performed by Behre Dolbear and Company, Inc., an independent consulting and valuation firm (“Behre Dolbear”). We evaluate, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. This evaluation involves a comparison of the fair value of our reporting units to their carrying values.
Based on a valuation prepared by an independent valuation firm, the Company concluded that the fair values of the Merchant Banking and Exploration Segments as of December 31, 2003 significantly exceeded their respective carrying values. The fair values of the reporting units are based in part on certain factors that may be partially or completely outside of our control, such as the investing environment, the discovery of proven and probable reserves, commodity prices and other factors. In addition, certain of the assumptions underlying the December 31, 2003 Merchant Banking and Exploration valuations may not be easily achieved by the Company, even though such assumptions were based on historical experience and the Company considers such assumptions to be reasonable under the circumstances.
The fair value of the Company’s equity portfolio at December 31, 2002 was approximately $310 million. During 2003, the Company did not make any substantial new additions to the equity portfolio but did sell a substantial proportion of its investment in Kinross, which represented the majority of value of the equity portfolio at the time of sale. As discussed below, the December 31, 2003 discounted cash flow analysis for the equity portfolio sub-segment of the Merchant Banking Segment assumed an initial equity portfolio of approximately $140 million (approximate fair value of equity portfolio at December 31, 2003) and capital infusions of $120 million annually for the next three fiscal years. The assumed capital infusions are necessary to bring the equity portfolio to a level necessary to support the carrying value of the Merchant Banking Segment. The Company has both the ability and intention to meet these funding requirements, but no assurance can be given that it will be successful in this regard.
To perform its December 31, 2003 impairment testing, the Company revised the financial model used to support the valuation of the Merchant Banking Segment to take into account the evolving activities and objectives of the Merchant Banking Segment and to recognize the reduced investment level of the equity portfolio. Assumptions applicable to the equity portfolio sub-segment of the Merchant Banking Segment financial model included: (i) a discount rate of 9%; (ii) a time horizon of ten years; (iii) pre-tax returns on investment ranging from 35% starting in 2004 and gradually declining to 15% in 2011 through 2013; (iv) an initial equity portfolio investment of approximately $140 million; (v) capital infusions of $120 million annually for the next three fiscal years; and (vi) a terminal value of approximately $1.5 billion. With respect to the royalty portfolio sub-segment of the Merchant Banking Segment, such assumptions included: (i) a discount rate of 9%; (ii) a time horizon of ten years; (iii) an annual growth rate of 5% in the royalty portfolio; and (iv) a pre-tax rate of return on investment of 13%. With respect to the portfolio management sub-segment of the Merchant Banking Segment, such assumptions included: (i) a discount rate of 9%; (ii) a time horizon of ten years; and (iii) a pre-tax advisory fee of 5% on approximately $500 million of transactions and value-added activities in 2004, with the dollar amounts of such transactions and activities increasing by 5% annually thereafter. With respect to the downstream gold refining sub-segment of the Merchant Banking Segment, such assumptions included: (i) a discount rate of 9%; (ii) a time horizon of ten years; and (iii) a pre-tax annual return on investments of $4.2 million. The valuation analysis assumed a combined terminal value for the royalty portfolio, portfolio management and downstream gold refining sub-segments of approximately $900 million.
To perform its December 31, 2003 Exploration Segment impairment testing, the Company reviewed the segment’s performance during 2003 and prior years in generating additions to proven and probable reserves. Based on this review, the Company revised the financial model used to support the valuation of the Exploration Segment. The Exploration Segment financial model assumed the following: (i) the Exploration Segment would be responsible for adding 7.9 million ounces to proven and probable reserves in year one of
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the discount period; (ii) such additions would increase by 5% annually; and (iii) approximately 64%, 61%, 58% and 20% of additions in years 2004, 2005, 2006 and 2007 would represent ounces that had previously been valued in the Normandy purchase accounting. In addition, the discounted cash flow model for the Exploration Segment assumed, among other matters: (i) a sixteen-year time horizon, including a six-year time lapse between discovery and the initiation of production and a five-year production period; (ii) a 9% discount rate; (iii) a terminal value of approximately $3.9 billion; (iv) an average gold price of $360 per ounce during the time horizon; (v) cash operating costs per ounce produced of $201; and (vi) capital costs per ounce of $50.
In the absence of any mitigating valuation factors, the Company’s failure to achieve one or more of the December 31, 2003 valuation assumptions will over time result in an impairment charge. Accordingly, no assurance can be given that significant non-cash impairment losses will not be recorded in the future due to possible declines in the fair values of our reporting units. For a more detailed description of the estimates and assumptions involved in assessing the recoverability of the carrying value of goodwill, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Critical Accounting Policies, below.
Gold is extracted from naturally-oxidized ores by either heap leaching or milling, depending on the amount of gold contained in the ore and the amenability of the ore to treatment. Gold contained in ores that are not naturally oxidized can be directly milled if the gold is amenable to cyanidization, generally known as free milling ores. Ores that are not amenable to cyanidization, known as refractory ores, require more costly and complex processing techniques than oxide or free milling ore. Higher-grade refractory ores are processed through either roasters or autoclaves. Roasters heat finely ground ore with air and oxygen to a high temperature, burn off the carbon and oxidize the sulfide minerals that prevent efficient leaching. Autoclaves use heat, oxygen and pressure to oxidize sulfide minerals in the ore.
Some gold-bearing sulfide ores may be processed through a flotation plant or by bio-milling. In flotation, ore is finely ground, turned into slurry, then placed in a tank known as a flotation cell. Chemicals are added to the slurry causing the gold-containing sulfides to float in air bubbles to the top of the tank, where they can be separated from waste particles that sink to the bottom. The sulfides are removed from the cell and converted into a concentrate that can then be processed in an autoclave or roaster to recover the gold. Bio-milling incorporates patented technology that involves inoculation of suitable crushed ore on a leach pad with naturally occurring bacteria strains, which oxidize the sulfides over a period of time. The ore is then processed through an oxide mill.
Higher-grade oxide ores are processed through mills, where the ore is ground into a fine powder and mixed with water in slurry, which then passes through a cyanide leaching circuit. Lower grade oxide ores are processed using heap leaching. Heap leaching consists of stacking crushed or run-of-mine ore on impermeable pads, where a weak cyanide solution is applied to the top surface of the heaps to dissolve the gold. In both cases, the gold-bearing solution is then collected and pumped to facilities to remove the gold by collection on carbon or by zinc precipitation directly from leach solutions.
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Set forth below is a description of the significant production properties of Newmont and its subsidiaries. Total cash costs and total production costs for each operation are presented in a table in the next section of this Item 2. Total cash costs and total production costs represent measures of performance that are not calculated in accordance with generally accepted accounting principles (“GAAP”). Management uses these non-GAAP financial measures to analyze the cash generating capacities and performance of Newmont’s mining operations. For a reconciliation of these non-GAAP measures to Costs Applicable to Sales as calculated and presented under GAAP, see Item 2, Properties, Operating Statistics.
North America
Nevada. Newmont has been mining gold in Nevada since 1965. Newmont’s Nevada operations include Carlin, located west of Elko on the geologic feature known as the Carlin Trend, and the Winnemucca Region, located 80 miles (129 kilometers) to the west of Carlin. The Carlin Trend is the largest gold district discovered in North America in the last 50 years. The Winnemucca Region includes the Twin Creeks mine located near Winnemucca, the Lone Tree Complex located near Battle Mountain, and the Battle Mountain Complex, near Battle Mountain, where a large gold/copper deposit known as Phoenix is under development. Our Nevada operations also include the Midas underground mine, acquired in February 2002.
Gold sales from Newmont’s Nevada operations totaled approximately 2.5 million equity ounces for 2003. Ore was mined from 12 open pit deposits and five underground mines in 2003. Production began in 2003 at Section 30 at Twin Creeks and at the Gold Quarry South Layback on the Carlin Trend. Underground mine development is expected to continue in 2004 at the Leeville underground mine, with annual gold production of approximately 500,000 ounces expected to commence in late 2005. At the Phoenix project, full-scale annual production is expected to be between 400,000 to 450,000 ounces of gold and 18 to 20 million pounds of copper and is scheduled to begin in mid-2006.
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Newmont’s operations in Nevada have a number of different ore types and processing techniques. Newmont has developed a linear programming model to determine the best mix of ore types for each processing facility in order to optimize the value of the ore deposits. Approximately 71% of Newmont’s 2003 year-end proven and probable gold reserves in Nevada are refractory and the remainder are oxide. Refractory ores require more complex, higher cost processing methods. Refractory ore treatment facilities generated 71% of Nevada’s gold production in 2003, compared with 66% in 2002, and 65% in 2001. In 2004, the percentage of production from refractory treatment facilities is expected to be approximately 66% of Nevada’s gold production, as ore is processed from two new, predominantly oxide, ore laybacks at Gold Quarry and Twin Creeks. Over the next several years, however, the percentage of production from refractory treatment facilities is expected to increase.
Higher-grade oxide ores are processed at one oxide mill at Carlin, one at Twin Creeks and one at Lone Tree. Lower-grade oxide ores are processed using heap leaching. Higher-grade refractory ores are processed through either a roaster at Carlin or through autoclaves at Twin Creeks and Lone Tree. Lower-grade sulfide ores are processed through a flotation plant at Lone Tree and through bio-milling at Mill 5. Ore from the Midas mine is processed by conventional milling and Merrill-Crowe zinc precipitation. Gold-bearing activated carbon from Carlin’s milling and leaching facilities is processed on-site at a central carbon processing plant and adjacent refining facilities. Loaded carbon from the Twin Creeks and Lone Tree mines is processed at the Twin Creeks refinery. Zinc precipitate at Midas is refined on site.
Newmont owns, or controls through long-term mining leases and unpatented mining claims, all of the minerals and surface area within the boundaries of the present Carlin, Winnemucca Region and Midas mining operations (except for Turquoise Ridge and Getchell described below). The long-term leases extend for at least the anticipated mine life of those deposits. With respect to a significant portion of the Gold Quarry mine at Carlin, Newmont owns a 10% undivided interest in the mineral rights and leases the remaining 90%, on which Newmont pays a royalty equivalent to 18% of the mineral production. The remainder of the Gold Quarry mineral rights are wholly-owned or controlled by Newmont, in some cases subject to additional royalties. With respect to certain smaller deposits in the Winnemucca Region, Newmont is obligated to pay royalties on production to third parties that vary from 2% to 5% of production.
In 2003, Newmont formed a joint venture with a subsidiary of Placer Dome Inc. under which Newmont acquired a 25% interest in the Turquoise Ridge and Getchell mines, in return for providing up to 2,000 tons per day of milling capacity at Newmont’s Twin Creeks facility and the extinguishment of a 2% net smelter return royalty payable by Placer Dome as it relates to the joint venture property. Placer Dome operates the joint venture.
California. During most of 2003, Newmont had one mine in California, Mesquite. Mining operations at Mesquite ceased in the second quarter of 2001, with the depletion of the main ore body. Production from residual heap leaching resulted in gold sales of 49,200 ounces during Newmont’s ownership in 2003. Newmont sold the Mesquite operations to Western Goldfields, Inc. in November 2003.
Canada. Newmont’s Canadian operations include two underground mines. The Golden Giant mine (100% owned) is located approximately 25 miles (40 kilometers) east of Marathon in Ontario, Canada, and has been in production since 1985. The Holloway mine is located approximately 35 miles (56 kilometers) east of Matheson in Ontario, and about 400 miles (644 kilometers) northeast of Golden Giant, and has been in production since 1996. The Holloway mine is owned by a joint venture in which Newmont has an 84.65% interest. The remaining 15.35% interest is held by Teddy Bear Valley Mines. In 2003, the Golden Giant mine sold 229,700 ounces of gold, and the Holloway mine sold 65,100 equity ounces of gold.
During January 2003, Newmont owned an interest in the TVX Newmont Americas joint venture, which owned gold operations in Canada and South America. Newmont’s interest in TVX Newmont Americas was sold as of January 31, 2003. For additional information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, below.
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Mexico. Newmont has a 44% interest in the La Herradura mine, which is located in Mexico’s Sonora desert. La Herradura is operated by Industriales Peñoles, Mexico’s largest silver producer. The mine is an open pit operation with a two-stage crushing circuit and heap leach recovery. La Herradura sold 67,800 equity ounces of gold in 2003.
South America
Peru. The properties of Minera Yanacocha S.R.L. (“Yanacocha”) are located approximately 375 miles (604 kilometers) north of Lima and 30 miles (48 kilometers) north of the city of Cajamarca. Since the discovery of gold in 1986, the area has become the largest gold district in South America. Yanacocha began production in 1993. Newmont holds a 51.35% interest in Yanacocha. The remaining interests are held by Compañia de Minas Buenaventura, S.A.A. (43.65%) and the International Finance Corporation (5%).
Yanacocha has mining rights with respect to a large land position that includes multiple deposits as well as other prospects. Yanacocha’s mining rights were acquired through assignments of concessions granted by the Peruvian government to a related entity. The assignments have a term of 20 years, beginning in the early 1990s, renewable at the option of Yanacocha for another 20 years. In October 2000, Newmont and Buenaventura consolidated their land holdings in northern Peru, folding them into Yanacocha. The consolidation increased Yanacocha’s land position from 100 to 535 square miles.
Five open pit mines, four leach pads, and two processing plants are in operation at Yanacocha. Yanacocha’s gold sales for 2003 totaled 2.86 million ounces (1.47 million equity ounces).
Bolivia. The Kori Kollo open pit mine is on a high plain in northwestern Bolivia near Oruro, on government mining concessions issued to a Bolivian corporation, Empresa Minera Inti Raymi S.A., in which Newmont has an 88% interest. The remaining 12% is owned by Mrs. Beatriz Rocabado. Inti Raymi owns and operates the mine. In 2003, the mine sold 158,500 equity ounces of gold. As higher-grade ores have been exhausted at Kori Kollo, mining ceased in October 2003, with leach production to continue until stockpiles are depleted. Potential development of another pit, Kori Chaca, is currently being evaluated.
Other. During January 2003, Newmont owned an interest in the TVX Newmont Americas joint venture, which owned gold operations in Canada and South America. Newmont’s interest in TVX Newmont Americas was sold as of January 31, 2003. For additional information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Results of Operations, below.
Australia
Prior to the acquisition of Normandy, Newmont owned a 50% interest in the Pajingo mine discussed below. The remaining 50% interest in Pajingo, and all other Australian properties described in this report, were acquired as part of the acquisition of Normandy in February 2002.
In Australia, mineral exploration and mining titles are granted by the individual states or territories. Mineral titles may also be subject to native title legislation. In 1992, the High Court of Australia held that Aboriginal people who have maintained a continuing connection with their land according to their traditions and customs may hold certain rights in respect of the land, such rights commonly referred to as native title. Since the High Court’s decision, Australia has passed legislation providing for the protection of native title and established procedures for Aboriginal people to claim these rights. The fact that native title is claimed with respect to an area, however, does not necessarily mean that native title exists, and disputes may be resolved by the courts.
Generally, under native title legislation, all mining titles granted before January 1, 1994 are valid. Titles granted between January 1, 1994 and December 23, 1996, however, may be subject to invalidation if they were not obtained in compliance with applicable legislative procedures, though subsequent legislation has validated
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some of these titles. After December 23, 1996, mining titles over areas where native title is claimed to exist became subject to legislative processes that generally give native title claimants the “right to negotiate” with the title applicant for compensation and other conditions. Native title holders do not have a veto over the granting of mining titles, but if agreement cannot be reached, the matter will be referred to the National Native Title Tribunal for decision.
Newmont does not expect that native title claims will have a material adverse effect on any of its operations in Australia. The High Court of Australia determined in an August 2002 decision, which refined and narrowed the scope of native title, that native title does not extend to minerals in Western Australia and that the rights granted under a mining title would, to the extent inconsistent with asserted native title rights, operate to extinguish those native title rights. Generally, native title is only an issue for Newmont with respect to obtaining new mineral titles or moving from one form of title to another, for example, from an exploration title to a mining title. In these cases, the requirements for negotiation and the possibility of paying compensation may result in delay and increased costs for mining in the affected areas. Similarly, the process of conducting Aboriginal heritage surveys to identify and locate areas or sites of Aboriginal cultural significance can result in delay in gaining access to land for exploration and mining-related activities.
In Australia, various ad valorum royalties are paid to state and territorial governments and to traditional land owners, typically based on a percentage of gross revenues.
Pajingo. The Pajingo gold mine is an underground mine located approximately 93 miles (150 kilometers) southwest of Townsville, Queensland and 45 miles (72 kilometers) south of the local township of Charters Towers. Prior to the Normandy acquisition, Newmont owned a 50% interest in Pajingo. Following the Normandy acquisition, Newmont owns 100% of Pajingo. In 2003, Pajingo sold 330,300 ounces of gold.
Kalgoorlie. The Kalgoorlie operations comprise the Fimiston open pit (commonly referred to as the Super Pit) and Mt. Charlotte underground mine at Kalgoorlie-Boulder, 373 miles (600 kilometers) east of Perth. The mines are managed by Kalgoorlie Consolidated Gold Mines Pty Ltd for the joint venture owners, Newmont and Barrick Gold Corporation, each of which holds a 50% interest. The Super Pit is Australia’s largest gold mine, in terms of both gold production and total annual mining volume. During 2003, the Kalgoorlie operations sold 404,700 equity ounces.
Yandal. The Yandal operations consist of the Bronzewing, Jundee and Wiluna mines situated approximately 435 miles (700 kilometers) northeast of Perth in Western Australia. The three operations collectively sold 565,600 equity ounces of gold in 2003. Newmont owns a 100% interest in Newmont Yandal Operations Pty Ltd, which owns and operates the Bronzewing and Jundee mines. The Wiluna mine was sold in December 2003. Depletion of Bronzewing reserves is anticipated to occur in March 2004, at which time production will cease. For additional information, see Item 1, Business, Hedging Activities, above, and Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Results of Operations, Investing Activities, below.
Tanami. The Tanami operations include The Granites treatment plant and associated mining operations, which are located in the Northern Territory approximately 342 miles (550 kilometers) northwest of Alice Springs, adjacent to the Tanami highway, and the Dead Bullock Soak mining operations, approximately 25 miles (40 kilometers) west of The Granites. The Tanami operations also include the Groundrush deposit. The Tanami operations have been wholly-owned since April 2003, when Newmont acquired the minority interests in Newmont NFM by means of a scheme of arrangement and buy-back offer under Australian law.
The operations are predominantly focused on the Callie underground mine at Dead Bullock Soak, with mill feed supplemented by production from the Dead Bullock Soak open pit and the Bunkers and Quorn pits at The Granites. Ore from all of these operations is processed through The Granites plant. Ore from Groundrush is
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processed through the Tanami plant rather than The Granites plant. During 2003, the Tanami operations sold 588,600 equity ounces of gold.
Boddington. Boddington is located 81 miles (130 kilometers) southeast of Perth in Western Australia. Boddington is owned by Newmont (44.4%), AngloGold Limited (33.3%) and Newcrest Mining Limited (22.2%). Mining operations ceased in November 2001. A proposed expansion project is being optimized, and restructuring of current management arrangements is under discussion.
Golden Grove. Newmont owns 100% of the Golden Grove operation in Western Australia, approximately 217 miles (350 kilometers) north of Perth. The principal products are zinc and copper concentrates. A high precious metal lead concentrate is also produced. Golden Grove has two underground mines at the Scuddles and Gossan Hill deposits. Golden Grove sold 74.3 million pounds of copper and 104.7 million pounds of zinc during 2003.
New Zealand
Newmont acquired an interest in the Martha gold mine as part of the Normandy acquisition. This mine is located within the town of Waihi, located approximately 68 miles (110 kilometers) southeast of Auckland, New Zealand. Newmont acquired the minority interests in the Martha mine in April 2003, giving it 100% ownership. For additional information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Results of Operations, Investing Activities, below.
The operation sold 108,900 equity ounces of gold during 2003. The Martha mine does not currently pay royalties. Under new royalty arrangements, a royalty will apply to Favona, a new discovery. The royalty rate is the greater of 1% of gross revenues from silver and gold sales or 5% of accounting profit.
Indonesia
Newmont has two operating properties in Indonesia, Minahasa, a gold operation, and Batu Hijau, a producer of copper/gold concentrates.
Newmont owns 80% of Minahasa. The remaining 20% interest is a carried interest held by P.T. Tanjung Serapung, an unrelated Indonesian company. Prior to November 2001, 100% of Minahasa’s gold production was attributed to Newmont. As of November 2001, Newmont had recouped a sufficient amount of its investment in Minahasa to entitle the Indonesian shareholder to receive 6% of any dividends distributed after that date. As a result, only 94% of Minahasa’s gold production has been attributed to Newmont since November 2001.
Minahasa, on the island of Sulawesi, approximately 1,500 miles (2,414 kilometers) northeast of Jakarta, was a Newmont discovery and consisted of a multi-deposit operation. Production began in 1996 and mining was completed in late 2001. However, processing of stockpiled ore from this mine will continue until mid-2004. In 2003, Minahasa sold 92,200 equity ounces of gold.
Newmont has a 45% ownership interest in Batu Hijau. Newmont’s interest is held through a partnership with an affiliate of Sumitomo Corporation. Newmont owns 56.25% of the partnership and the Sumitomo affiliate holds the remaining 43.75%. The partnership, in turn, owns 80% of P.T. Newmont Nusa Tenggara (“PTNNT”), the subsidiary that owns Batu Hijau. The remaining 20% interest in PTNNT is a carried interest held by P.T. Pukuafu Indah, an unrelated Indonesian company. To date, PTTNT has recorded cumulative losses. Due to the cumulative losses, no dividends have yet been paid, although repayments of shareholder loans made by the Newmont/Sumitomo partnership to PTNNT have been made. Therefore, Newmont has historically reported a 56.25% economic interest in Batu Hijau. As a result of higher metal prices, improved operating and financial results, and increased life of mine expectations regarding production, costs and economics, PTNNT is expected to report positive retained earnings and begin paying dividends during 2004. Under existing shareholder agreements, the Indonesian shareholder is entitled to receive 6% of any dividends paid by PTNNT. Newmont
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will, therefore, decrease its reported interest in Batu Hijau to 52.875%, reflecting 56.25% of the 94% of PTNNT’s dividends payable to the Newmont/Sumitomo partnership. We account for our investment in Batu Hijau as an equity investment due to each PTNNT shareholder’s significant participating rights in Batu Hijau’s business. Newmont has identified the Batu Hijau operation as a VIE because of certain capital structures and contractual relationships. Newmont has also determined that it is the primary beneficiary of the Batu Hijau operation. Newmont therefore expects to consolidate Batu Hijau effective January 1, 2004. See Note 2 to the Consolidated Financial Statements for more information.
Batu Hijau is located on the island of Sumbawa, approximately 950 miles (1,529 kilometers) east of Jakarta. Batu Hijau is a large porphyry copper/gold deposit, which Newmont discovered in 1990. Development and construction activities began in 1997 and start-up took place in late 1999. In 2003, copper sales were 343.4 million equity pounds, while gold sales, treated as by-product credits, were 328,900 equity ounces.
In Indonesia, rights are granted to foreign investors to explore for and to develop mineral resources within defined areas through Contracts of Work entered into with the Indonesian government. In 1986, Newmont entered into separate Contracts of Work with the central government covering Minahasa and Batu Hijau, under which Newmont was granted the exclusive right to explore in the contract area, construct any required facilities, extract and process the mineralized materials, and sell and export the minerals produced, subject to certain requirements including Indonesian government approvals and payment of royalties to the government. Under the Contracts of Work, Newmont has the right to continue operating the projects for 30 years from operational start-up, or longer if approved by the Indonesian government.
Under Newmont’s Minahasa and Batu Hijau Contracts of Work, beginning in the fifth year after mining operations commenced, and continuing through the tenth year, a portion of each 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 Indonesian nationals (if such number is positive): 15%, by the end of the fifth year; 23%, by the end of the sixth year; 30%, by the end of the seventh year; 37%, by the end of the eighth year; 44%, by the end of the ninth year; and 51%, by the end of the tenth year. 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.
In accordance with its Contract of Work, and given that an Indonesian national owns a 20% interest in Minahasa, Newmont offered of a 3% interest in Minahasa in 2002 and a 10% interest in 2003, but received no interest in these offers due in large part, we believe, to the imminent closure of the operation. In the case of Batu Hijau, an Indonesian national currently owns a 20% interest, which would require Newmont and Sumitomo to offer a 3% interest in Batu Hijau to Indonesian nationals 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.
See Note 10 to the Consolidated Financial Statements for additional information regarding Newmont’s interest in the Indonesian operating properties.
Uzbekistan
Newmont has a 50% interest in the Zarafshan-Newmont Joint Venture in Uzbekistan. Ownership of the remaining 50% interest is divided between the State Committee for Geology and Mineral Resources and the Navoi Mining and Metallurgical Combine, each a state entity of Uzbekistan. The joint venture produces gold by crushing and leaching ore from existing stockpiles of low-grade oxide material from the nearby government-owned Muruntau mine, located in the Kyzylkum Desert. The gold produced by Zarafshan-Newmont is sold in international markets for U.S. dollars. Zarafshan-Newmont sold 218,100 equity ounces of gold in 2003.
The State Committee and Navoi furnish ore to Zarafshan-Newmont under an ore supply agreement. Under the agreement, the State Committee and Navoi are obligated to deliver 242.5 million tons of ore to Zarafshan-
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Newmont from various areas of the stockpiles designated into four different “Zones” under the agreement. As of December 31, 2003, approximately 124.3 million tons of ore have been delivered, leaving a balance of 118.2 million tons to be delivered (8.9 million tons from Zone 3 and 109.3 million tons from Zone 4). Initially, ore from all Zones was to be delivered regardless of the gold price and the price of the ore was dependent on the grade of ore delivered. In May 2003, the parties amended the grade and pricing structure of the ore supply agreement with respect to ore to be delivered from Zone 4. Under the May 2003 amendment the parties have agreed to a mine plan designed to achieve an average grade of at least 0.036 ounce of gold per ton for ore from Zone 4. The amount paid for this ore is dependent on the average grade of ore and the average gold price during the period in which the ore is processed. In the event the State Committee and Navoi supply ore from Zone 4 having an average grade less than 0.036 ounce per ton in a given month and the average gold price during such month is less than $320 per ounce, the price of such ore will be discounted. At certain combinations of low ore grade and at gold prices less than $320 per ounce, the computed price may result in a credit to Zarafshan-Newmont, which will be offset against free cash distributions or future ore purchase payments due to the State Committee and Navoi.
Turkey
The wholly-owned Ovacik mine, located in western Turkey 12 miles from the Aegean Sea and 66 miles (106 kilometers) north of the city of Izmir, commenced production in May 2001 and sold 168,200 ounces of gold during 2003. Newmont acquired the Ovacik mine as part of the Normandy acquisition. At Ovacik, ore is mined from open pit operations and transported for processing in a 600,000 ton per annum grinding circuit and modified carbon-in-leach recovery plant. The Ovacik mine has a long history of legal challenges to the operation of the mine and, in particular, for its use of cyanide in gold production, which could result in closure of the mine or interruption of mining activities. For additional information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Results of Operations, below.
Ghana
Newmont has two advanced development projects in Ghana. The Ahafo project, located in the Brong Ahafo Region of Ghana, is 100% owned by Newmont following the acquisition of the remaining 50% of the Ntotoroso property from Moydow Mines International, Inc. in December 2003. At year-end, the Ahafo project had reserves of 7.6 million ounces of gold. In December 2003, following the Government of Ghana’s approval of Newmont’s Investment Agreement (described below), Newmont announced that it was proceeding with development of the project. Development costs at Ahafo are estimated at approximately $350 million, with gold production expected to commence in the second half of 2006. The Ahafo project is anticipated to generate steady-state annual gold sales of approximately 500,000 ounces, with higher production in the initial years.
Newmont also has an 85% interest in the Akyem project, located in the Eastern Region of Ghana. At year-end, the Akyem project had 4.3 million equity ounces of gold reserves. The remaining 15% interest in the Akyem project is held by Kenbert Mines Limited. Newmont is currently updating and optimizing the feasibility study for Akyem with a view to making a development decision in late 2004.
In December 2003, Ghana’s Parliament unanimously ratified an Investment Agreement between Newmont and the Government of Ghana. The Agreement establishes a fixed fiscal and legal regime, including fixed royalty and tax rates, for the life of any Newmont project in Ghana. Under the Agreement, Newmont will pay corporate income tax at a fixed rate of 32.5% and fixed gross royalties on gold production of 3.0% (3.6% for any production from forest reserve areas). The Government of Ghana is also entitled to receive 10% of a project’s net cash flow after Newmont has recouped its investment and may acquire up to 20% of a project’s equity at fair market value on or after the 15th anniversary of such project’s commencement of production. The Investment Agreement also contains commitments with respect to job training for local Ghanaians, community development, purchasing of local goods and services and environmental protection.
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The following tables detail Newmont’s operating statistics related to gold production and sales.
North American Operations
North America Nevada Other North America Year Ended December 31,
2003 2002 2001 2003 2002 2001 Tons Mined (000 dry short tons):
Open Pit
176,254 139,985 139,000 11,696 11,774 19,030 Underground
1,733 1,538 1,123 1,191 1,621 1,607 Tons Milled/Processed (000):
Oxide
2,914 5,164 5,395 1,228 1,628 1,605 Refractory
9,129 9,201 8,844 n/a n/a n/a Leach
18,376 15,027 24,448 4,035 3,981 7,861 Average Ore Grade:
Oxide
0.140 0.119 0.108 0.260 0.230 0.236 Refractory
0.219 0.224 0.218 n/a n/a n/a Leach
0.028 0.031 0.033 0.026 0.026 0.028 Average Mill Recovery Rate:
Oxide
80.8 % 74.4 % 70.5 % 95.3 % 95.0 % 95.2 % Refractory
90.6 % 88.6 % 88.9 % n/a n/a n/a
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North America Nevada Other North America Total North America Year Ended December 31,
2003 2002 2001 2003 2002 2001 2003 2002 2001 Ounces Produced (000)
2,560.7 2,718.1 2,696.9 413.8 485.8 496.0 2,974.5 3,203.9 3,192.9 Equity Ounces Produced (000):
Oxide
336.0 474.8 433.2 297.8 364.5 348.7 633.8 839.3 781.9 Refractory
1,834.2 1,805.7 1,749.3 n/a n/a n/a 1,834.2 1,805.7 1,749.3 Leach
390.5 437.6 514.4 116.0 121.3 147.3 506.5 558.9 661.7 Total
2,560.7 2,718.1 2,696.9 413.8 485.8 496.0 2,974.5 3,203.9 3,192.9 Equity Ounces Sold (000)
2,490.8 2,723.5 2,703.2 411.8 500.5 520.4 2,902.6 3,224.0 3,223.6 Production Costs Per Ounce:
Direct mining and production costs
$ 248 $ 207 $ 207 $ 221 $ 192 $ 187 $ 244 $ 205 $ 204 Deferred stripping and other costs
(20 ) 11 11 –– (1 ) — (17 ) 9 9 Cash operating costs
228 218 218 221 191 187 227 214 213 Royalties and production taxes
7 7 4 4 2 5 6 6 4 Total cash costs
235 225 222 225 193 192 233 220 217 Reclamation and other costs
–– 2 4 5 4 8 1 2 5 Total costs applicable to sales
235 227 226 230 197 200 234 222 222 Depreciation, depletion and amortization
57 44 43 84 73 68 61 49 47 Total production costs
$ 292 $ 271 $ 269 $ 314 $ 270 $ 268 $ 295 $ 271 $ 269
Overseas Operations
South America Yanacocha, Peru Other South America Year Ended December 31,
2003 2002 2001 2003 2002 2001 Tons Mined (000 dry short tons):
Open Pit
204,889 203,720 155,707 7,638 18,676 18,444 Underground
n/a n/a n/a n/a n/a n/a Tons Milled/Processed (000):
Oxide
n/a n/a n/a n/a n/a n/a Refractory
n/a n/a n/a 5,599 7,675 7,582 Leach
145,275 148,297 84,738 3,696 6,479 3,853 Average Ore Grade:
Oxide
n/a n/a n/a n/a n/a n/a Refractory
n/a n/a n/a 0.036 0.047 0.059 Leach
0.027 0.023 0.030 0.017 0.018 0.021 Average Mill Recovery Rate:
Oxide
n/a n/a n/a n/a n/a n/a Refractory
n/a n/a n/a 61.7 % 60.7 % 61.8 %
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South America Yanacocha, Peru Other South America Total South America Year Ended December 31,
2003 2002 2001 2003 2002 2001 2003 2002 2001 Ounces Produced (000)
2,851.1 2,285.6 1,902.5 176.2 284.1 305.6 3,027.3 2,569.7 2,208.1 Equity Ounces Produced (000):
Oxide
n/a n/a n/a n/a n/a n/a n/a n/a n/a Refractory
n/a n/a n/a 112.9 195.9 247.4 112.9 195.9 247.4 Leach
1,464.1 1,173.6 976.9 42.1 54.1 21.6 1,506.2 1,227.7 998.5 Total
1,464.1 1,173.6 976.9 155.0 250.0 269.0 1,619.1 1,423.6 1,245.9 Equity Ounces Sold (000)
1,467.9 1,176.9 983.1 158.5 249.4 274.8 1,626.4 1,426.3 1,257.9 Production Costs Per Ounce:
Direct mining and production costs
$ 118 $ 123 $ 113 $ 197 $ 163 $ 163 $ 125 $ 130 $ 124 Deferred stripping and other costs
(4 ) (2 ) (1 ) (13 ) (7 ) (5 ) (4 ) (3 ) (2 ) Cash operating costs
114 121 112 184 156 158 121 127 122 Royalties and production taxes
6 4 3 — — — 5 4 3 Total cash costs
120 125 115 184 156 158 126 131 125 Reclamation and other costs
2 3 3 13 7 5 3 3 3 Total costs applicable to sales
122 128 118 197 163 163 129 134 128 Depreciation, depletion and amortization
62 57 48 38 48 62 60 55 51 Total production costs
$ 184 $ 185 $ 166 $ 235 $ 211 $ 225 $ 189 $ 189 $ 179
Australia Pajingo Other Australia Year Ended December 31,
2003 2002 2001 2003 2002 2001
Tons Mined (000 dry short tons):
Open Pit
n/a n/a n/a 68,198 66,328 n/a Underground
761 656 368 5,983 4,975 n/a Tons Milled/Processed (000):
Oxide
792 738 361 8,869 7,898 n/a Refractory
n/a n/a n/a 8,071 7,056 n/a Leach
n/a n/a n/a n/a n/a n/a Average Ore Grade:
Oxide
0.450 0.397 0.351 0.133 0.137 n/a Refractory
n/a n/a n/a 0.078 0.069 n/a Leach
n/a n/a n/a n/a n/a n/a Average Mill Recovery Rate:
Oxide
96.8 % 96.8 % 96.9 % 94.7 % 96.0 % n/a Refractory
n/a n/a n/a 85.1 % 82.2 % n/a
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Australia Pajingo Other Australia Total Australia Year Ended December 31,
2003 2002 2001 2003 2002 2001 2003 2002 2001 Ounces Produced (000)
340.5 290.7 123.8 1,641.6 1,457.3 n/a 1,982.1 1,748.0 123.8 Equity Ounces Produced (000):
Oxide
340.5 290.7 123.8 1,098.7 957.0 n/a 1,439.2 1,247.7 123.8 Refractory
n/a n/a n/a 523.7 426.2 n/a 523.7 426.2 n/a Leach
n/a n/a n/a n/a n/a n/a n/a n/a n/a Total
340.5 290.7 123.8 1,622.4 1,383.2 n/a 1,962.9 1,673.9 123.8 Equity Ounces Sold (000)
330.3 296.4 126.0 1,558.9 1,388.2 n/a 1,889.2 1,684.6 126.0 Production Costs Per Ounce:
Direct mining and production costs
$ 124 $ 90 $ 97 $ 245 $ 207 — $ 224 $ 186 $ 97 Deferred stripping and other costs
(6 ) (4 ) 1 (2 ) (7 ) — (3 ) (6 ) 1 Cash operating costs
118 86 98 243 200 — 221 180 98 Royalties and production taxes
11 9 7 15 12 — 15 11 7 Total cash costs
129 95 105 258 212 — 236 191 105 Reclamation and other costs
–– 4 1 2 5 — 1 6 1 Total costs applicable to sales
129 99 106 260 217 — 237 197 106 Depreciation, depletion and amortization
88 72 34 51 68 — 58 68 34 Total production costs
$ 217 $ 171 $ 140 $ 311 $ 285 — $ 295 $ 265 $ 140
Zarafshan-Newmont
UzbekistanOther International
OperationsYear Ended December 31,
2003 2002 2001 2003 2002 2001 Tons Mined (000 dry short tons):
Open Pit
n/a n/a n/a 11,245 10,345 5,586 Underground
n/a n/a n/a n/a 10 n/a Tons Milled/Processed (000):
Oxide
n/a n/a n/a 1,890 1,514 n/a Refractory
n/a n/a n/a 697 717 716 Leach
8,080 7,867 7,677 n/a n/a 1,572 Average Ore Grade:
Oxide
n/a n/a n/a 0.160 0.164 n/a Refractory
n/a n/a n/a 0.156 0.213 0.387 Leach
0.043 0.053 0.044 n/a n/a 0.080 Average Mill Recovery Rate:
Oxide
n/a n/a n/a 93.8 % 91.7 % n/a Refractory
n/a n/a n/a 91.0 % 90.9 % 91.4 %
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Zarafshan-Newmont
UzbekistanOther International
OperationsTotal Gold Year Ended December 31,
2003 2002 2001 2003 2002 2001 2003 2002 2001 Ounces Produced (000)
218.7 259.0 216.7 382.1 384.4 326.0 8,584.7 8,165.0 6,067.5 Equity Ounces Produced (000):
Oxide
n/a n/a n/a 281.1 230.3 n/a 2,354.1 2,317.3 905.7 Refractory
n/a n/a n/a 92.3 130.5 251.6 2,563.1 2,558.3 2,248.3 Leach
218.7 259.0 216.7 1.0 14.4 72.1 2,232.4 2,060.0 1,949.0 Total
218.7 259.0 216.7 374.4 375.2 323.7 7,149.6 6,935.6 5,103.0 Equity Ounces Sold (000)
218.1 255.8 222.0 369.3 380.7 341.5 7,005.6 6,971.4 5,171.0 Production Costs Per Ounce:
Direct mining and production costs
$ 145 $ 132 $ 133 $ 203 $ 177 $ 125 $ 205 $ 181 $ 173 Deferred stripping and other costs
2 2 3 (31 ) (13 ) 14 (10 ) 1 7 Cash operating costs
147 134 136 172 164 139 195 182 180 Royalties and production taxes
— — — 8 5 3 8 7 4 Total cash costs
147 134 136 180 169 142 203 189 184 Reclamation and other costs
4 (1 ) 1 2 9 3 2 3 3 Total costs applicable to sales
151 133 137 182 178 145 205 192 187 Depreciation, depletion and amortization
46 40 54 88 99 66 61 58 50 Total production costs
$ 197 $ 173 $ 191 $ 270 $ 277 $ 211 $ 266 $ 250 $ 237
Batu Hijau Copper Production
Year Ended December 31,
2003 2002 2001 Dry tons processed (000)
49,819 51,754 48,358 Average copper grade
0.72 % 0.72 % 0.75 % Average recovery rate
88.6 % 89.0 % 89.2 % Copper pounds produced (000)
634,123 657,664 656,954 Equity copper pounds produced (000)
356,694 369,936 369,537 Equity copper pounds sold (000)
343,378 362,253 359,955
Year Ended December 31, 2003
By-Product
MethodCo-Product Method Copper Gold Total Revenue
$ 294,029 $ 294,029 $ 117,898 $ 411,927 Cash production costs
$ 201,902 $ 144,115 $ 57,787 $ 201,902 By-product credits
(122,208 ) (3,076 ) (1,234 ) (4,310 ) Total Cash Costs
79,694 141,039 56,553 197,592 Noncash costs
67,127 47,914 19,213 67,127 Total Production Costs
$ 146,821 $ 188,953 $ 75,766 $ 264,719 Pounds of copper sold (000)
343,378 Ounces of gold sold (000)
328.9 Cash cost per lb./oz.
$ 0.23 $ 0.41 $ 172 Noncash cost per lb./oz.
0.20 0.14 58 Total costs per lb./oz.
$ 0.43 $ 0.55 $ 230
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Year Ended December 31, 2002
By-Product
MethodCo-Product Method Copper Gold Total Revenue
$ 260,670 $ 260,670 $ 85,840 $ 346,510 Cash production costs
$ 200,619 $ 150,920 $ 49,699 $ 200,619 By-product credits
(89,548 ) (2,789 ) (919 ) (3,708 ) Total Cash Costs
111,071 148,131 48,780 196,911 Noncash costs
63,975 48,127 15,848 63,975 Total Production Costs
$ 175,046 $ 196,258 $ 64,628 $ 260,886 Pounds of copper sold (000)
362,253 Ounces of gold sold (000)
278.0 Cash cost per lb./oz.
$ 0.31 $ 0.41 $ 175 Noncash cost per lb./oz.
0.17 0.13 57 Total costs per lb./oz.
$ 0.48 $ 0.54 $ 232
Year Ended December 31, 2001
By-Product
MethodCo-Product Method Copper Gold Total Revenue
$ 251,601 $ 251,601 $ 78,198 $ 329,799 Cash production costs
$ 214,417 $ 163,577 $ 50,840 $ 214,417 By-product credits
(81,709 ) (2,679 ) (832 ) (3,511 ) Total Cash Costs
132,708 160,898 50,008 210,906 Noncash costs
61,385 46,830 14,555 61,385 Total Production Costs
$ 194,093 $ 207,728 $ 64,563 $ 272,291 Pounds of copper sold (000)
359,955 Ounces of gold sold (000)
295.1 Cash cost per lb./oz.
$ 0.37 $ 0.45 $ 169 Noncash cost per lb./oz.
0.17 0.13 49 Total costs per lb./oz.
$ 0.54 $ 0.58 $ 219
Golden Grove Copper and Zinc Production
Year Ended December 31,
2003 2002 Dry tons processed
1,406,497 1,273,222 Average copper grade
4.6 % 4.7 % Average zinc grade
12.4 % 13.9 % Copper pounds produced (000)
57,799 60,973 Copper pounds sold (000)
74,303 44,754 Zinc pounds produced (000)
120,425 114,806 Zinc pounds sold (000)
104,711 111,177 Copper cash cost per pound
$ 0.59 $ 0.57 Zinc cash cost per pound
$ 0.19 $ 0.24
Reconciliation of Non-GAAP Measures
For all periods presented, total cash costs include charges for mining ore and waste associated with current period production, processing ore through milling and leaching facilities, by-product credits, production taxes, royalties and other cash costs. Certain gold mines produce silver as a by-product, and Batu Hijau produces gold as a by-product. Proceeds from the sale of by-products are reflected as credits to total cash costs. With the
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exception of Nevada, Yanacocha, Golden Grove and Batu Hijau, such by-product sales have not been significant to the economics or profitability of the Company’s mining operations. See Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition, Results of Operations. All of these charges and by-product credits are included in Costs applicable to sales. Charges for reclamation are also included in Costs applicable to sales, but are not included in total cash costs. Reclamation charges are included in total production costs, together with total cash costs and Depreciation, depletion and amortization. A reconciliation of total cash costs to Costs applicable to sales in total and by segment is provided below. Total production costs provide an indication of earnings before interest expense and taxes for Newmont’s share of mining properties, when taking into account the average realized price received for production sold, as this measure combines Costs applicable to sales plus Depreciation, depletion and amortization, net of minority interest.
Total cash costs per ounce is a measure intended to provide investors with information about the cash generating capacities of these mining operations. Newmont’s management uses this measure for the same purpose and for monitoring the performance of its mining operations. This information differs from measures of performance determined in accordance with GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with GAAP. This measure was developed in conjunction with gold mining companies associated with the Gold Institute, a non-profit industry group no longer in existence, in an effort to provide a level of comparability; however, Newmont’s measures may not be comparable to similarly titled measures of other companies.
Reconciliation of Costs applicable to sales to total cash costs and total production costs per ounce (unaudited):
For the Year Ended
December 31, 2003
Nevada Mesquite La
HerraduraGolden
GiantHolloway Total North
America
(dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 597.8 $ 9.3 $ 11.1 $ 53.4 $ 20.8 $ 692.4 Minority interest
— — — — — — Write-downs of stockpiles, ore on leach pads and inventories
(2.9 ) — — –– — (2.9 ) Reclamation and other
0.1 (0.2 ) (0.1 ) (1.3 ) (0.5 ) (2.0 ) Other
(32.1 ) — — — — (32.1 ) Total cash costs for per ounce calculation
562.9 9.1 11.0 52.1 20.3 655.4 Reclamation and other
(0.1 ) 0.2 0.1 1.3 0.5 2.0 Depreciation, depletion and amortization
137.7 3.9 3.4 22.0 5.3 172.3 Minority interest and other
— — — — — — Total production cost for per ounce calculation
$ 700.5 $ 13.2 $ 14.5 $ 75.4 $ 26.1 $ 829.7 Equity ounces sold (000)
2,490.8 49.2 67.8 229.7 65.1 2,902.6 Equity cash cost per ounce sold
$ 235 $ 184 $ 162 $ 227 $ 312 $ 233 Equity production cost per ounce sold
$ 292 $ 267 $ 214 $ 329 $ 402 $ 295
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For the Year Ended
December 31, 2003
Yanacocha Kori Kollo Total South
America
Pajingo Kalgoorlie Yandal (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 362.5 $ 35.6 $ 398.1 $ 42.9 $ 108.4 $ 158.7 Minority interest
(183.5 ) (4.2 ) (187.7 ) — — — Write-downs of stockpiles, ore on leach pads and inventories
— — — — (1.0 ) (3.0 ) Reclamation and other
(3.4 ) (2.1 ) (5.5 ) (0.1 ) (0.8 ) (1.5 ) Other
–– — — — — — Total cash costs for per ounce calculation
175.6 29.3 204.9 42.8 106.6 154.2 Reclamation and other
3.4 2.1 5.5 (0.3 ) 0.8 1.4 Depreciation, depletion and amortization
160.4 6.8 167.2 29.2 9.8 35.8 Minority interest and other
(70.1 ) (0.8 ) (70.9 ) — — — Total production cost for per ounce calculation
$ 269.3 $ 37.4 $ 306.7 $ 71.7 $ 117.2 $ 191.4 Equity ounces sold (000)
1,467.9 158.5 1,626.4 330.3 404.7 565.6 Equity cash cost per ounce sold
$ 120 $ 184 $ 126 $ 129 $ 263 $ 273 Equity production cost per ounce sold
$ 184 $ 235 $ 189 $ 217 $ 289 $ 339 For the Year Ended
December 31, 2003
NFM
TanamiTotal
AustraliaZarafshan-
Newmont,
UzbekistanMinahasa Martha Ovacik (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 148.9 $ 458.9 $ 32.9 $ 26.3 $ 24.9 $ 22.3 Minority interest
(4.2 ) (4.2 ) — — (0.3 ) — Write-downs of stockpiles, ore on leach pads and inventories
(2.0 ) (6.0 ) — (1.3 ) (2.6 ) (0.1 ) Reclamation and other
(1.2 ) (3.6 ) (0.7 ) (0.5 ) (0.4 ) (0.4 ) Other
— — — (1.6 ) — — Total cash costs for per ounce calculation
141.5 445.1 32.2 22.9 21.6 21.8 Reclamation and other
0.2 2.1 0.7 0.5 0.2 0.2 Depreciation, depletion and amortization
36.0 110.8 10.1 7.6 11.5 13.9 Minority interest and other
(1.0 ) (1.0 ) — (0.5 ) (0.1 ) — Total production cost for per ounce calculation
$ 176.7 $ 557.0 $ 43.0 $ 30.5 $ 33.2 $ 35.9 Equity ounces sold (000)
588.6 1,889.2 218.1 92.2 108.9 168.2 Equity cash cost per ounce sold
$ 240 $ 236 $ 147 $ 249 $ 199 $ 129 Equity production cost per ounce sold
$ 300 $ 295 $ 197 $ 332 $ 306 $ 213
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For the Year Ended
December 31, 2003
Total Other
InternationalTotal
GoldGolden
GroveOther
Non-
GoldConsolidated (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 106.4 $ 1,655.8 $ 43.5 $ 1.0 $ 1,700.3 Minority interest
(0.3 ) (192.2 ) — — (192.2 ) Write-downs of stockpiles, ore on leach pads and inventories
(4.0 ) (12.9 ) (7.2 ) — (20.1 ) Reclamation and other
(2.0 ) (13.1 ) — — (13.1 ) Other
(1.6 ) (33.7 ) (36.3 ) (1.0 ) (71.0 ) Total cash costs for per ounce calculation
98.5 1,403.9 — — 1,403.9 Reclamation and other
1.6 11.2 –– –– 11.2 Depreciation, depletion and amortization
43.1 493.4 29.1 42.0 564.5 Minority interest and other
(0.6 ) (72.5 ) (29.1 ) (42.0 ) (143.6 ) Total production cost for per ounce calculation
$ 142.6 $ 1,836.0 $ — $ — $ 1,836.0 Equity ounces sold (000)
587.4 7,005.6 n/a n/a 7,005.6 Equity cash cost per ounce sold
$ 168 $ 203 n/a n/a $ 203 Equity production cost per ounce sold
$ 243 $ 266 n/a n/a $ 266
For the Year Ended
December 31, 2002
Nevada Mesquite La
HerraduraGolden
GiantHolloway Total
North America(dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 657.1 $ 10.1 $ 11.5 $ 57.1 $ 20.4 $ 756.2 Minority interest
— — — — — — Write-downs of stockpiles, ore on leach pads and inventories
(37.0 ) — — (0.3 ) — (37.3 ) Reclamation and other
(7.0 ) — (0.2 ) (1.7 ) (0.5 ) (9.4 ) Non-cash inventory adjustment
(1.5 ) — — — — (1.5 ) Other
— — — — — –– Total cash costs for per ounce calculation
611.6 10.1 11.3 55.1 19.9 708.0 Reclamation and other
8.4 — 0.2 1.6 0.5 10.7 Depreciation, depletion and amortization
118.2 6.3 3.1 20.5 6.7 154.8 Minority interest and other
— — — — — — Total production cost for per ounce calculation
$ 738.2 $ 16.4 $ 14.6 $ 77.2 $ 27.1 $ 873.5 Equity ounces sold (000)
2,723.5 57.1 64.2 281.5 97.7 3,224.0 Equity cash cost per ounce sold
$ 225 $ 177 $ 176 $ 196 $ 204 $ 220 Equity production cost per ounce sold
$ 271 $ 287 $ 227 $ 274 $ 277 $ 271
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For the Year Ended
December 31, 2002
Yanacocha Kori
KolloTotal
South AmericaPajingo Kalgoorlie Yandal (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 302.0 $ 46.6 $ 348.6 $ 30.5 $ 85.0 $ 136.4 Minority interest
(151.6 ) (5.6 ) (157.2 ) — — — Write-downs of stockpiles, ore on leach pads and inventories
— (0.5 ) (0.5 ) — — (1.6 ) Reclamation and other
(3.0 ) (1.6 ) (4.6 ) (1.2 ) (1.7 ) (3.2 ) Non-cash inventory adjustment
— — — (1.0 ) (13.6 ) (0.1 ) Other
–– — –– — — — Total cash costs for per ounce calculation
147.4 38.9 186.3 28.3 69.7 131.5 Reclamation and other
3.0 1.6 4.6 1.8 15.3 3.1 Depreciation, depletion and amortization
121.5 13.8 135.3 20.6 9.0 43.5 Minority interest and other
(54.6 ) (1.7 ) (56.3 ) — — — Total production cost for per ounce calculation
$ 217.3 $ 52.6 $ 269.9 $ 50.7 $ 94.0 $ 178.1 Equity ounces sold (000)
1,176.9 249.4 1,426.3 296.4 324.7 611.1 Equity cash cost per ounce sold
$ 125 $ 156 $ 131 $ 95 $ 215 $ 215 Equity production cost per ounce sold
$ 185 $ 211 $ 189 $ 171 $ 289 $ 292 For the Year Ended
December 31, 2002
NFM
TanamiTotal
AustraliaZarafshan-
Newmont,
UzbekistanMinahasa Martha Ovacik (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 111.5 $ 363.4 $ 34.0 $ 41.2 $ 19.6 $ 17.5 Minority interest
(15.8 ) (15.8 ) — — — — Write-downs of stockpiles, ore on leach pads and inventories
— (1.6 ) — (4.6 ) — — Reclamation and other
(1.8 ) (7.9 ) 0.3 (2.4 ) (0.7 ) (0.7 ) Non-cash inventory adjustment
(0.9 ) (15.6 ) — — (2.1 ) (1.5 ) Other
— — — (2.1 ) — — Total cash costs for per ounce calculation
93.0 322.5 34.3 32.1 16.8 15.3 Reclamation and other
1.9 22.1 (0.3 ) 2.4 2.6 2.0 Depreciation, depletion and amortization
33.7 106.8 10.3 9.5 13.9 11.5 Minority interest and other
(4.5 ) (4.5 ) — (0.6 ) — — Total production cost for per ounce calculation
$ 124.1 $ 446.9 $ 44.3 $ 43.4 $ 33.3 $ 28.8 Equity ounces sold (000)
452.4 1,684.6 255.8 147.2 107.8 125.7 Equity cash cost per ounce sold
$ 205 $ 191 $ 134 $ 218 $ 156 $ 122 Equity production cost per ounce sold
$ 273 $ 265 $ 173 $ 294 $ 309 $ 229
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For the Year Ended
December 31, 2002
Total Other
InternationalTotal
GoldGolden
GroveKasese Other
Non-GoldConsolidated (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 112.3 $ 1,580.5 $ 27.7 $ 7.8 $ 0.4 $ 1,616.4 Minority interest
— (173.0 ) — — — (173.0 ) Write-downs of stockpiles, ore on leach pads and inventories
(4.6 ) (44.0 ) (0.4 ) — — (44.4 ) Reclamation and other
(3.5 ) (25.4 ) — — — (25.4 ) Non-cash inventory adjustment
(3.6 ) (20.7 ) — — — (20.7 ) Other
(2.1 ) (2.1 ) (27.3 ) (7.8 ) (0.4 ) (37.6 ) Total cash costs for per ounce calculation
98.5 1,315.3 — — — 1,315.3 Reclamation and other
6.7 44.1 –– — –– 44.1 Depreciation, depletion and amortization
45.2 442.1 22.9 — 40.6 505.6 Minority interest and other
(0.6 ) (61.4 ) (22.9 ) — (40.6 ) (124.9 ) Total production cost for per ounce calculation
$ 149.8 $ 1,740.1 $ — $ — $ — $ 1,740.1 Equity ounces sold (000)
636.5 6,971.4 n/a n/a n/a 6,971.4 Equity cash cost per ounce sold
$ 155 $ 189 n/a n/a n/a $ 189 Equity production cost per ounce sold
$ 235 $ 250 n/a n/a n/a $ 250 For the Year Ended
December 31, 2001
Nevada Mesquite La
HerraduraGolden
GiantHolloway Total
North America(dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 627.1 $ 20.4 $ 9.6 $ 55.0 $ 19.1 $ 731.2 Minority interest
— — — — — — Write-downs of stockpiles, ore on leach pads and inventories
(16.2 ) — — (0.2 ) — (16.4 ) Reclamation
(10.3 ) (1.5 ) (0.2 ) (1.7 ) (0.4 ) (14.1 ) Other
— — — — — — Total cash costs for per ounce calculation
600.6 18.9 9.4 53.1 18.7 700.7 Reclamation
10.3 1.5 0.2 1.7 0.4 14.1 Depreciation, depletion and amortization
117.4 7.5 3.2 18.3 6.5 152.9 Minority interest and other
— — — — — — Total production cost for per ounce calculation
$ 728.3 $ 27.9 $ 12.8 $ 73.1 $ 25.6 $ 867.7 Equity ounces sold (000)
2,703.2 92.6 54.7 283.7 89.4 3,223.6 Equity cash cost per ounce sold
$ 222 $ 205 $ 173 $ 187 $ 209 $ 217 Equity production cost per ounce sold
$ 269 $ 301 $ 233 $ 257 $ 288 $ 269
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For the Year Ended
December 31, 2001
Yanacocha Kori
KolloTotal
South AmericaPajingo Zarafshan-
Newmont,
UzbekistanMinahasa (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 238.0 $ 50.9 $ 288.9 $ 13.4 $ 30.9 $ 53.7 Minority interest
(117.6 ) (6.1 ) (123.7 ) — — — Write-downs of stockpiles, ore on leach pads and inventories
(4.1 ) (0.1 ) (4.2 ) — (0.5 ) (4.0 ) Reclamation
(2.9 ) (1.4 ) (4.3 ) (0.2 ) (0.2 ) (1.0 ) Other
— — — — — — Total cash costs for per ounce calculation
113.4 43.3 156.7 13.2 30.2 48.7 Reclamation
2.9 1.4 4.3 0.2 0.2 1.0 Depreciation, depletion and amortization
82.3 19.5 101.8 4.3 11.9 22.8 Minority interest and other
(35.7 ) (2.3 ) (38.0 ) — — — Total production cost for per ounce calculation
$ 162.9 $ 61.9 $ 224.8 $ 17.7 $ 42.3 $ 72.5 Equity ounces sold (000)
983.1 274.8 1,257.9 126.0 222.0 341.5 Equity cash cost per ounce sold
$ 115 $ 158 $ 125 $ 105 $ 136 $ 142 Equity production cost per ounce sold
$ 166 $ 225 $ 179 $ 140 $ 191 $ 211
For the Year Ended December 31, 2001
Total gold Other non-gold Consolidated (dollars in millions except
per ounce amounts)Costs applicable to sales per financial statements
$ 1,118.1 $ (0.2 ) $ 1,117.9 Minority interest
(123.7 ) — (123.7 ) Write-downs of stockpiles, ore on leach pads and inventories
(25.1 ) — (25.1 ) Reclamation
(19.8 ) — (19.8 ) Other
— 0.2 0.2 Total cash costs for per ounce calculation
$ 949.5 $ — $ 949.5 Reclamation
19.8 — 19.8 Depreciation, depletion and amortization
293.7 7.9 301.6 Minority interest and other
(38.0 ) (7.9 ) (45.9 ) Total production cost for per ounce calculation
$ 1,225.0 $ — $ 1,225.0 Equity ounces sold (000)
5,171.0 n/a 5,171.0 Equity cash cost per ounce sold
$ 184 n/a $ 184 Equity production cost per ounce sold
$ 237 n/a $ 237
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Reconciliation of PTNNT Costs applicable to sales to total cash costs and total production costs per pound or ounce, as applicable (unaudited):
For the Year Ended December 31,
2003 2002 2001 (dollars in millions except
per ounce amounts)
Costs applicable to sales per financial statements
$ 58,646 $ 107,355 $ 145,559 Smelting and refining
98,045 103,727 101,892 Minority interest
(72,813 ) (96,923 ) (112,970 ) Reclamation and other
(4,184 ) (3,088 ) (1,773 ) Total cash costs for per pound or ounce calculation
79,694 111,071 132,708 Reclamation
4,184 3,088 1,773 Depreciation, depletion and amortization
62,943 60,887 59,612 Total production cost for per pound or ounce calculation
$ 146,821 $ 175,046 $ 194,093 Equity copper pounds sold (000)
343,378 362,253 359,955 Equity cash cost per pound or ounce
$ 0.23 $ 0.31 $ 0.37 Equity total production cost per pound
$ 0.43 $ 0.48 $ 0.54
Reconciliation of Golden Grove Costs applicable to sales (“CAS”) to total copper and zinc cash costs per pound (unaudited):
For the Year Ended December 31,
2003 2002 Total Copper Zinc Total Copper Zinc (dollars in millions except per ounce amounts) Costs applicable to sales per financial statements
$ 43,460 $ 37,437 $ 6,023 $ 27,673 $ 18,367 $ 9,306 Write-downs of stockpiles, ore on leach pads and inventories
(7,181 ) (3,931 ) (3,250 ) (418 ) (253 ) (165 ) Purchased concentrate cost
(6,135 ) –– (6,135 ) –– –– –– Reclamation expense
(358 ) (196 ) (162 ) –– –– –– Smelting and refining
33,551 10,570 22,981 24,744 7,512 17,232 Total cash costs for per pound calculation
$ 63,337 $ 43,880 $ 19,457 $ 51,999 $ 25,626 $ 26,373 Equity pounds sold (000)
n/a 74,303 104,711 n/a 44,754 111,177 Equity cash cost per pound sold
n/a $ 0.59 $ 0.19 n/a $ 0.57 $ 0.24
The following is a description of Newmont’s principal royalty interests, all of which were acquired as a result of the Franco-Nevada acquisition. Newmont’s royalty interests are generally in the form of a net smelter return (“NSR”) royalty, which provides for the payment either in cash or physical metal (“in kind”) of a specified percentage of production, less certain specified transportation and refining costs. In some cases, Newmont owns a net profit interest (“NPI”) pursuant to which Newmont is entitled to a specified percentage of the net profits, as defined in each case, from a particular mining operation. The majority of NSR royalty revenue and NPI revenue can be received in kind (generally in the form of gold bullion) at the option of Newmont. In 2003, Newmont’s royalty revenues were $56.3 million.
Nevada-Goldstrike. Newmont holds various NSR and NPI royalties at the Goldstrike properties (Betze-Post and Meikle mines) located on the Carlin Trend in northern Nevada. The Betze-Post and Meikle mines are owned and operated by a subsidiary of Barrick Gold Corporation. Newmont received $25.4 million in royalty revenues from the Goldstrike properties in 2003.
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The Betze-Post mine is a conventional open pit operation. The Betze-Post property consists of various claim blocks and Newmont’s royalty interest in each claim block is different, ranging from 0% to 4% for the NSRs and 0% to 6% for the NPIs.
The Meikle mine is an underground operation comprising the Meikle, Rodeo and Griffin deposits, located one mile north of the Betze-Post mine, with which it shares the Goldstrike processing facilities. Newmont holds a 4% NSR and a 5% NPI over 1,280 acres of the claims that cover most of the Meikle, Rodeo and Griffin deposits. Newmont is not obligated to fund any portion of the cost associated with the Betze-Post or the Meikle mines.
Barrick’s mining sequence from various claim areas will cause fluctuations in Newmont’s royalty receipts. The NSR royalties are based upon gross production from the mine reduced only by ancillary smelter charges and transportation costs of about $2 per ounce. Revenue received from the NSRs covering the Betze-Post and Meikle mines is dependent on the number of ounces of gold produced, the spot price of gold and the cost of shipping and smelting. The Betze-Post NPI began paying in October 1993, the month that the cumulative net profit from the Betze-Post claims exceeded capital invested in those claims. The Meikle mine NPI began paying in the fourth quarter of 1996. Net profits are calculated as proceeds less costs. Proceeds equal the number of ounces of gold produced from the Betze-Post claims and the Meikle mine, multiplied by the spot price of gold on the date gold is credited to Barrick’s account at the refinery. Costs include operating and capital costs as incurred.
Montana-Stillwater. Newmont holds a 5% NSR royalty on a portion of the Stillwater mine and all of the East Boulder mine, both located near Nye, Montana. The Stillwater and East Boulder mines are owned and operated by Stillwater Mining Company. Newmont received $5.8 million in royalty revenues from the Stillwater properties in 2003. Stillwater produces palladium, platinum, and associated metals (platinum group metals or PGMs) from a geological formation known as the J-M Reef. Stillwater is the only significant producer of PGMs outside of South Africa and Russia. The J-M Reef is an extensive mineralized zone containing PGMs, which has been traced over a strike length of approximately 28 miles. Newmont’s royalty covers more than 80% of the combined reserves and mineralized material of the aggregate deposit, but does not cover a portion of the deposit at the Stillwater mine. The majority of production to date has been from the Stillwater mine. For that reason, the percentage of ore mined from the royalty lands has been lower than the 80% reserve percentage. For the year 2003, an average of 63.9% of the total production of the Stillwater mine was subject to Newmont’s royalty. The percentage of future production from the royalty lands will vary from year to year. The royalty encompasses all of the reserves at the East Boulder mine, which commenced production during 2001 and is located approximately thirteen miles to the west of the Stillwater mine.
Canada-Oil and Gas Interests. Newmont’s oil and gas royalty portfolio covers 1.8 million gross acres of producing and non-producing lands located in western Canada and the Canadian Arctic. The average royalty on these lands is 6%. Newmont received $18.8 million in royalty revenues from these properties in 2003.
Echo Bay Mines Ltd. On January 31, 2003, Kinross Gold Corporation, Echo Bay Mines Ltd. and TVX Gold Inc. were combined, and TVX Gold acquired Newmont’s 49.9% interest in the TVX Newmont Americas joint venture. Under the terms of the combination and acquisition, Newmont received a 13.8% interest in the restructured Kinross in exchange for its 45.67% interest in Echo Bay, and $180 million for its interest in TVX Newmont Americas.
Kinross Gold Corporation. During the third quarter of 2003, Newmont sold approximately 28 million Kinross shares representing 66% of its investment in Kinross for total cash proceeds of $224.6 million, and recorded a net loss of $7.4 million.
Australian Magnesium Corporation. At December 31, 2002, Newmont’s interest in Australian Magnesium Corporation (“AMC”) was composed of a 22.8% equity and voting interest and a loan receivable in the amount
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of A$38 million (approximately $20.1 million) including interest. In addition, Newmont subsidiaries had obligations to contribute to AMC A$100 million in equity by January 31, 2003 and a further A$90 million in equity, contingent upon the Stanwell Magnesium Project not achieving certain specified production and operating criteria by December 2006. On January 3, 2003, Newmont purchased an additional 167 million AMC shares at A$0.60 per share for a total of A$100 million (approximately $56.2 million) increasing its ownership to 40.9%, thereby satisfying its January 2003 equity contribution obligation. However, due to additional equity contributions by other shareholders on January 31, 2003, Newmont’s interest was diluted to 27.8%. As a result of this equity dilution of its interest in AMC, Newmont recorded an increase of $7.0 million to Additional paid-in-capital during 2003.
AMC’s primary asset was the Stanwell Magnesium Project (the “Project”). The original funding arrangements for the Project amounted to approximately A$1.5 billion (approximately $1.0 billion), including contingencies and cost overrun reserves. On April 17, 2003, AMC announced that it was unlikely that it would reach agreement with its independent engineering firm for a fixed price contract for the development of the Project. Following this announcement, AMC’s share price declined substantially to A$0.24 per share on May 8, 2003. As a result, Newmont wrote down the carrying value of its investment at March 31, 2003 to the quoted market price of the AMC shares at that date of A$0.43 per share, and recorded a loss in Equity loss and impairment of Australian Magnesium Corporation for an other-than-temporary decline in market value of $11.0 million.
On June 5, 2003, AMC requested suspension of its securities on the ASX. Subsequently, on June 13, 2003, AMC announced a restructuring agreement with the project’s major creditors, including Newmont (the “Agreement”). The Agreement was designed to give AMC time to assess the project’s development options and to search for either a corporate or project partner. Work on the Project has ceased and the site is in care and maintenance status. It is not known if or when the Project or any other magnesium project will be developed by AMC. In addition, as part of the Agreement, AMC (i) settled outstanding obligations to its outside creditors from existing cash reserves; (ii) cancelled the senior debt facilities associated with the Project and the associated foreign exchange and interest rate hedging contracts; and (iii) agreed to release Newmont from the above-mentioned A$90 million (approximately $60.1 million) contingent funding commitment. Newmont agreed to forgive its then A$38 million (approximately $24.8 million) loan receivable, provide support in the form of an A$10 million (approximately $6.6 million) contingent, subordinated credit facility and to maintain the existing guarantee in relation to the QMC Finance Pty Ltd (“QMC”) finance facilities, as described below. In September 2003, Newmont made available to AMC A$5 million ($3.3 million) under the credit facility. Newmont had guaranteed a $30.0 million obligation payable by AMC to Ford Motor Company (“Ford”) in the event the Project did not meet certain specified production and operating criteria by November 2005. AMC agreed to indemnify Newmont for this obligation, but this indemnity was unsecured. As of June 30, 2003, Newmont and Ford agreed to settle the liability in relation to the guarantee for $10.0 million in exchange for a release of the guarantee. Newmont has agreed not to seek recovery of this amount from AMC.
As a result of the foregoing Agreement, Newmont recorded an additional write-down in the second quarter of 2002 of $107.8 million in Equity loss and impairment of Australian Magnesium Corporation reducing the carrying value of its investment in AMC to zero. The write-down was attributable to the following: (i) $72.7 million representing the book value of its investment at June 30, 2003; (ii) $24.8 million for the forgiven loan receivable from AMC; (iii) $10.0 million charge to settle Newmont’s guarantee of the Ford contract (see discussion above); (iv) $6.6 million relating to the contingent credit facility; and (v) $1.1 million for various other items, offset by a $7.4 million income tax benefit.
During the third quarter of 2003, AMC issued additional shares to a shareholder other than Newmont. As a result, Newmont’s interest in AMC was diluted to 26.9%. Subsequently, in October 2003, AMC issued additional shares to a shareholder other than Newmont. As a result, Newmont’s interest in AMC was diluted to 26.7%. During the fourth quarter of 2003, Newmont sold its entire interest in AMC, for a nominal amount to Deutsche Bank AG and to Magtrust Pty Ltd, a company owned and controlled by the directors of AMC.
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Magtrust purchased approximately 19.9% of the AMC ordinary shares held by Newmont, with Deutsche Bank purchasing the remaining approximately 6.8% of the AMC ordinary shares held by Newmont. If Deutsche Bank sells its interest in AMC to a third party in the future, it must pay Newmont 90% of the sales proceeds.
Newmont is also the guarantor of a A$71.0 million (approximately $53.2 million) amortizing loan facility of QMC, of which A$65.2 million (approximately $48.9 million) was outstanding as of December 31, 2003. The QMC loan facility, which is collateralized by the assets of Queensland Magnesium Project (“QMAG” see below), expires in November 2006. QMC is also a party to hedging contracts that have been guaranteed by Newmont. The contracts include a series of foreign exchange forward contracts and bought put options, the last of which expire in June 2006. As of December 31, 2003, the fair value of these contracts was positive A$4.7 million (approximately $3.5 million).
The guarantees under the QMC loan facility and hedging contracts could be called in the event of a default by QMC. Newmont’s liability under QMC loan facility guarantee is limited to the total amount of outstanding borrowings under the facility at the time the guarantee is called. Newmont’s maximum potential liability under its guarantee of the QMC hedging contracts, however, would depend on the market value of the hedging contracts at the time the guarantee is called upon. The principal lender and counterparty under the QMC loan and hedging facilities, respectively, also have security interests over the assets of QMAG. In the event the guarantees are called, Newmont would have a right of subrogation to the lender under Australian law.
During the fourth quarter of 2003, Newmont recorded a $30.0 million charge in Loss on guarantee of QMC debt and established a corresponding reserve in Other current liabilities. Newmont reduced the amount accrued for this contingent obligation by the estimated fair value of the QMAG assets that would be subrogated to Newmont in the event the guarantee is called.
Newmont has a significant reserve base, having steadily increased its reserves over the past decade through a combination of exploration success, acquisitions and mine optimization and development work. Newmont had worldwide equity gold reserves of 91.3 million ounces as of December 31, 2003.
Gold reserves for 2003 were calculated at a $325, A$545 or NZD$665 per ounce gold price, except at Boddington, where gold reserves were calculated using a gold price of A$425 per ounce. Newmont’s 2003 reserves would decline by approximately 5%, or 4.4 million ounces, if calculated at a $300 per ounce gold price, while an increase in the gold price to $350 per ounce would increase reserves by approximately 4% or 3.8 million ounces.
At year-end 2003, Newmont’s North American equity gold reserves were 35.2 million ounces (including 33.7 million equity ounces in Nevada). Outside of North America, year-end equity gold reserves were 56.1 million ounces, including 16.9 million ounces in Australia/New Zealand, 16.3 million ounces in Peru and 11.9 million ounces in Ghana.
Newmont’s equity copper reserves at year-end 2003 were 7.5 billion pounds. Except at Boddington, copper reserves were calculated at a price of $0.75 or A$1.35 per pound.
Newmont’s equity zinc reserves at year-end 2003 were 480 million pounds. Zinc reserves were calculated at a price of A$0.71 per pound.
Under Newmont’s current mining plans, all reserves are located on fee property or mining claims or will be depleted during the terms of existing mining licenses or concessions, or where applicable, any assured renewal or extension periods for the licenses or concessions.
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Proven and probable reserves are based on extensive drilling, sampling, mine modeling and metallurgical testing from which economic feasibility has been determined. The price sensitivity of reserves depends upon several factors including grade, metallurgical recovery, operating cost, waste-to-ore ratio and ore type. Metallurgical recovery rates vary depending on the metallurgical properties of each deposit and the production process used. The reserve tables below list the average metallurgical recovery rate for each deposit, which takes into account the several different processing methods to be used. The cut-off grade, or lowest grade of mineralized material considered economic to process, varies with material type, metallurgical recoveries and operating costs.
The proven and probable reserve figures presented herein are estimates based on information available at the time of calculation. No assurance can be given that the indicated levels of recovery of gold and copper will be realized. Ounces of gold or pounds of copper or zinc in the proven and probable reserves are calculated without regard to any losses during metallurgical treatment. Reserve estimates may require revision based on actual production experience. Market price fluctuations of gold, copper and zinc, as well as increased production costs or reduced metallurgical recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves.
Reserves are published once each year and will be recalculated as of December 31, 2004, for the entire company, taking into account divestments and depletion as well as any acquisitions and additions to reserves based on results of exploration, mine optimization and development work performed during 2004.
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The following tables detail Newmont’s gold proven and probable reserves(1) reflecting only those reserves owned by Newmont on December 31, 2003 and 2002:
December 31, 2003 Newmont
Share (%)Proven Reserves Probable Reserves Proven and Probable Reserves Deposits/Districts
Tonnage(2)
(000 tons)
Grade
(oz/ton)Ounces(3)
(000)
Tonnage(2)
(000 tons)Grade
(oz/ton)Ounces(3)
(000)Tonnage(2)
(000 tons)Grade
(oz/ton)Ounces(3)
(000)Metallurgical(3)
RecoveryNorth America
Nevada
Carlin Open Pit(4)
100.00 % 17,500 0.052 920 205,300 0.044 8,950 222,800 0.044 9,870 68 % Twin Creeks
100.00 % 14,000 0.085 1,190 48,200 0.074 3,580 62,200 0.077 4,770 84 % Lone Tree Complex
100.00 % 3,300 0.092 300 13,000 0.084 1,090 16,300 0.086 1,390 79 % Phoenix(5)
100.00 % — — — 175,700 0.035 6,150 175,700 0.035 6,150 84 % Carlin Underground(6)
100.00 % 2,700 0.67 1,800 6,100 0.50 3,040 8,800 0.55 4,840 94 % Midas(7)
100.00 % 700 0.83 590 2,700 0.51 1,360 3,400 0.58 1,950 97 % Turquoise Ridge(8)
25.00 % 1,500 0.57 850 600 0.62 370 2,100 0.59 1,220 93 % Stockpiles and In-Process
100.00 % 57,000 0.059 3,350 3,700 0.055 200 60,700 0.059 3,550 80 % Total Nevada(9)
96,700 0.093 9,000 455,300 0.054 24,740 552,000 0.061 33,740 Other North America(10)
Golden Giant, Ontario(11)
100.00 % — — — 1,100 0.30 330 1,100 0.30 330 96 % Holloway, Ontario(12)
91.50 % 800 0.17 140 1,100 0.20 220 1,900 0.19 360 93 % La Herradura, Mexico(13)
44.00 % 11,000 0.029 320 15,000 0.031 460 26,000 0.030 780 68 % Total Other North America
11,800 0.039 460 17,200 0.059 1,010 29,000 0.051 1,470 Total North America
108,500 0.087 9,460 472,500 0.055 25,750 581,000 0.061 35,210 South America
Yanacocha, Peru(14)
51.35 % 87,600 0.028 2,450 450,000 0.031 13,830 537,600 0.030 16,280 71 % Kori Kollo, Bolivia(15)
88.00 % 3,000 0.012 40 15,000 0.022 330 18,000 0.020 370 66 % Total South America
90,600 0.027 2,490 465,000 0.030 14,160 555,600 0.030 16,650 Australia/New Zealand
Boddington, Western Australia(16)
44.44 % 61,000 0.027 1,670 129,900 0.025 3,180 190,900 0.025 4,850 82 % Golden Grove, Western Australia(17)
100.00 % 1,700 0.024 40 1,800 0.045 80 3,500 0.035 120 60 % Kalgoorlie, Western Australia(18)
50.00 % 37,800 0.054 2,040 59,200 0.065 3,850 97,000 0.061 5,890 86 % Pajingo, Queensland(19)
100.00 % 100 0.43 60 2,400 0.32 770 2,500 0.33 830 97 % Tanami, Northern Territory(20)
100.00 % 6,600 0.18 1,180 13,100 0.12 1,540 19,700 0.14 2,720 96 % Jundee, Western Australia(21)
100.00 % 3,100 0.07 210 6,800 0.22 1,490 9,900 0.17 1,700 90 % Bronzewing, Western Australia(21)
100.00 % 300 0.11 30 –– –– –– 300 0.11 30 97 % Martha, New Zealand(22)
100.00 % — — — 5,300 0.14 760 5,300 0.14 760 91 % Total Australia/New Zealand
110,600 0.047 5,230 218,600 0.053 11,670 329,200 0.051 16,900 Asia and Europe
Batu Hijau, Indonesia- Gold(23)
52.875 % 227,700 0.012 2,650 387,600 0.011 4,450 615,300 0.012 7,100 80 % Minahasa, Indonesia(24)
94.00 % 400 0.14 50 — — — 400 0.14 50 90 % Ovacik, Turkey(25)
100.00 % 300 0.35 100 200 0.30 70 500 0.33 170 94 % Perama, Greece(26)
80.00 % — — — 9,700 0.11 1,050 9,700 0.11 1,050 90 % Zarafshan-Newmont, Uzbekistan(27)
50.00 % 61,500 0.037 2,260 — — — 61,500 0.037 2,260 57 % Total Asia and Europe
289,900 0.017 5,060 397,500 0.014 5,570 687,400 0.015 10,630 Africa
Akyem, Ghana(28)
85.00 % — — — 80,000 0.054 4,280 80,000 0.054 4,280 89 % Ahafo, Ghana(29)
100.00 % — — — 108,600 0.070 7,630 108,600 0.070 7,630 89 % Total Africa
— — — 188,600 0.063 11,910 188,600 0.063 11,910 Total Newmont Worldwide—Gold
599,600 0.037 22,240 1,742,200 0.040 69,060 2,341,800 0.039 91,300
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December 31, 2002 Newmont
Share (%)Proven Reserves Probable Reserves Proven and Probable Reserves Deposits/Districts
Tonnage(2)
(000 tons)
Grade
(oz/ton)Ounces(3)
(000)
Tonnage(2)
(000 tons)Grade
(oz/ton)Ounces(3)
(000)Tonnage(2)
(000 tons)Grade
(oz/ton)Ounces(3)
(000)Metallurgical(3)
RecoveryNorth America
Nevada
Carlin Open Pit
100.00 % 20,200 0.059 1,180 161,600 0.040 6,430 181,800 0.042 7,610 73 % Twin Creeks
100.00 % 3,600 0.092 340 44,000 0.081 3,540 47,600 0.081 3,880 86 % Lone Tree Complex
100.00 % 2,800 0.080 230 18,200 0.067 1,220 21,000 0.069 1,450 76 % Phoenix(5)
100.00 % — — — 174,200 0.034 5,990 174,200 0.034 5,990 82 % Carlin Underground
100.00 % 3,600 0.69 2,520 6,400 0.50 3,200 10,000 0.57 5,720 94 % Midas(7)
100.00 % 200 0.70 110 3,200 0.65 2,050 3,400 0.65 2,160 97 % Stockpiles and In-Process
100.00 % 67,600 0.057 3,860 1,000 0.039 40 68,600 0.057 3,900 77 % Total Nevada(9)
98,000 0.084 8,240 408,600 0.055 22,470 506,600 0.061 30,710 Other North America
Mesquite, California(10)
100.00 % 5,200 0.014 70 — — — 5,200 0.014 70 71 % Golden Giant, Ontario
100.00 % 600 0.251 160 1,700 0.297 510 2,300 0.285 670 96 % Holloway, Ontario(12)
90.62 % 900 0.184 170 1,900 0.191 370 2,800 0.189 540 94 % La Herradura, Mexico
44.00 % 11,800 0.029 340 16,400 0.029 470 28,200 0.029 810 71 % Total Other North America
18,500 0.040 740 20,000 0.067 1,350 38,500 0.054 2,090 Total North America
116,500 0.077 8,980 428,600 0.056 23,820 545,100 0.060 32,800 South America
Yanacocha, Peru(14)
51.35 % 96,800 0.028 2,710 467,600 0.030 14,030 564,400 0.030 16,740 73 % Kori Kollo, Bolivia(15)
88.00 % 8,000 0.023 180 14,600 0.025 360 22,600 0.024 540 65 % Total South America
104,800 0.028 2,890 482,200 0.030 14,390 587,000 0.029 17,280 Australia/New Zealand
Boddington, Western Australia(16)
44.44 % 61,000 0.027 1,670 129,900 0.025 3,180 190,900 0.025 4,850 82 % Golden Grove, Western Australia(17)
100.00 % 2,600 0.036 90 2,600 0.037 100 5,200 0.036 190 59 % Kalgoorlie, Western Australia(18)
50.00 % 34,600 0.052 1,790 62,300 0.06 3,760 96,900 0.057 5,550 86 % Pajingo, Queensland
100.00 % 200 0.48 110 2,500 0.35 850 2,700 0.36 960 97 % Tanami, Northern Territory(20)
85.86 % 7,100 0.18 1,270 12,600 0.11 1,450 19,700 0.14 2,720 96 % Yandal, Western Australia(21)
100.00 % 5,800 0.07 420 10,200 0.17 1,700 16,000 0.13 2,120 90 % Martha, New Zealand(22)
92.28 % — — — 6,100 0.13 790 6,100 0.13 790 92 % Total Australia/New Zealand
111,300 0.048 5,350 226,200 0.052 11,830 337,500 0.051 17,180 Asia and Europe
Batu Hijau, Indonesia-Gold(23)
56.25 % 175,300 0.012 2,130 394,800 0.012 4,790 570,100 0.012 6,920 78 % Minahasa, Indonesia(24)
94.00 % 900 0.14 130 — — — 900 0.14 130 89 % Ovacik, Turkey
100.00 % 500 0.47 230 300 0.38 110 800 0.44 340 95 % Perama, Greece
80.00 % — — — 9,700 0.11 1,050 9,700 0.11 1,050 90 % Zarafshan-Newmont, Uzbekistan
50.00 % 69,300 0.037 2,600 — — — 69,300 0.037 2,600 57 % Total Asia and Europe
246,000 0.021 5,090 404,800 0.015 5,950 650,800 0.017 11,040 Africa
Akyem, Ghana
85.00 % — — — 25,800 0.061 1,570 25,800 0.061 1,570 89 % Ahafo, Ghana(29)
85.60 % — — — 44,900 0.074 3,330 44,900 0.074 3,330 90 % Total Africa
— — — 70,700 0.070 4,900 70,700 0.070 4,900 Total Newmont Worldwide—Gold
578,600 0.039 22,310 1,612,500 0.038 60,890 2,191,100 0.038 83,200 Equity Interests(30)
TVX Newmont Americas
49.9 % 94,100 0.018 1,740 16,600 0.027 440 110,700 0.020 2,180 Echo Bay Mines Ltd.
45.3 % 21,800 0.021 460 30,200 0.036 1,080 52,000 0.030 1,540 Total Equity Interests
115,900 0.019 2,200 46,800 0.033 1,520 162,700 0.023 3,720 Total Newmont Reportable
694,500 0.035 24,510 1,659,300 0.038 62,410 2,353,800 0.037 86,920
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(1) The term “reserve” means that part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination.
The term “economically,” as used in the definition of reserve, means that profitable extraction or production has been established or analytically demonstrated in a full feasibility study to be viable and justifiable under reasonable investment and market assumptions.
The term “legally,” as used in the definition of reserve, does not imply that all permits needed for mining and processing have been obtained or that other legal issues have been completely resolved. However, for a reserve to exist, the Company must have a justifiable expectation, based on applicable laws and regulations, that issuance of permits or resolution of legal issues necessary for mining and processing at a particular deposit will be accomplished in the ordinary course and in a timeframe consistent with the Company’s current mine plans.
The term “proven reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and (c) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established.
The term “probable reserves” means reserves for which quantity and grade are computed from information similar to that used for proven reserves, but the sites for sampling are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
Proven and probable reserves were calculated using different cut-off grades depending on each deposit’s properties. The term “cut-off grade” means the lowest grade of mineralized material that can be included in the reserves in a given deposit. Cut-off grades vary between deposits depending upon prevailing economic conditions, mineability of the deposit, amenability of the ore to gold extraction, and type of milling or leaching facilities available.
2003 reserves were calculated at a U.S.$325, A$545 or NZD$665 per ounce gold price unless otherwise noted. 2002 reserves were calculated at a U.S.$300, A$545 or NZD$665 per ounce gold price unless otherwise noted.
(2) Tonnages are after allowances for losses resulting from mining methods. Tonnages are rounded to the nearest hundred thousand.
(3) Ounces or pounds are estimates of metal contained in ore tonnages and are before allowances for processing losses. Metallurgical recovery rates represent the estimated amount of metal to be recovered through metallurgical extraction processes. Ounces are rounded to the nearest ten thousand.
(4) Includes undeveloped reserves at Castle Reef, Crow, North Lantern and Emigrant deposits for combined total undeveloped reserves of 1,560,000 ounces.
(5) Cut-off grade utilized in 2003 of not less than 0.018 ounce per ton. 2002 reserves were calculated at a U.S.$250 per ounce gold price. Deposit is undeveloped.
(6) Includes reserves at Leeville, containing a total reserve of 2,570,000 ounces. Leeville is in development.
(7) Also contains reserves of over 24 million and 26 million ounces of silver at December 31, 2003 and 2002, respectively, with a metallurgical recovery rate of 93% at the end of each period.
(8) Reserves estimates were provided by Placer Dome, which operates the Turquoise Ridge Joint Venture.
(9) These reserves are approximately 70.9% (66.4% in 2002) refractory in nature. Refractory ores are not amenable to the direct cyanidation recovery processes currently used for oxide material. Such ore must be oxidized before it is subjected to recovery processes or concentrated for shipment to smelters. Cut-off grades utilized in 2003 reserves were as follows: oxide leach material not less than 0.006 ounce per ton; oxide mill material not less than 0.059 ounce per ton; refractory leach material not less than 0.026 ounce per ton; refractory mill material not less than 0.018 ounce per ton.
(10) In 2002, included the Mesquite mine where mining was completed in 2001. Mesquite was sold in 2003.
(11) Cut-off grade utilized in 2003 of not less than 0.150 ounce per ton.
(12) Cut-off grade utilized in 2003 of not less than 0.132 ounce per ton. Percentage reflects Newmont’s weighted equity interest of 84.65% in the Holloway Joint Venture and 100% in remaining reserves. Property includes undeveloped reserves at the Blacktop deposit of 90,000 equity ounces.
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(13) Cut-off grade utilized in 2003 of not less than 0.010 ounce per ton.
(14) Reported reserves are based on Newmont’s 51.35% equity interest. Yanacocha is consolidated on a 100% basis for accounting purposes, then the minority interest of our partners is recognized. 2003 reserves calculated using variable cut-off grades of not less than 0.006 ounce per ton. The cut-off grade is a function of both gold and silver content. 2003 reserves include undeveloped deposits at Corimayo, Cerro Quilish, Cerro Negro, Quecher, Chaquicocha Sur, and Antonio, for combined total undeveloped reserves of 5,320,000 equity ounces.
(15) Cut-off grade utilized in 2003 of not less than 0.010 ounce per ton. Mining was completed in 2003. Reserves include ounces on leach pads and in stockpiles, and undeveloped reserves at Kori Chaca containing 300,000 equity ounces.
(16) As in 2002, reserves calculated at a A$425 per ounce gold price and treated on an equity basis and not consolidated for accounting purposes. Cut-off grade utilized in 2003 of not less than 0.011 ounce per ton. Deposit is undeveloped.
(17) Gold reported in reserves is contained within zinc and copper ore bodies. Cut-off grade and recoveries vary depending on the copper, gold and zinc content. The cut-off grades used for reserve reporting in 2003 were equivalent to 2.2% copper and 4.5% zinc.
(18) Cut-off grade utilized in 2003 of not less than 0.026 ounce per ton. Newmont applies pro-rata consolidation for accounting purposes.
(19) Cut-off grade utilized in 2003 of not less than 0.117 ounce per ton.
(20) Became wholly-owned after purchase of minority interests in 2003. At December 31, 2002, Newmont’s equity interest was 85.86%. Cut-off grade utilized in 2003 of not less than 0.036 ounce per ton.
(21) Previously combined in Yandal, which included Jundee, Bronzewing and Wiluna mines. Wiluna was sold in 2003. Cut-off grade utilized in 2003 of not less than 0.021 ounce per ton at Jundee and 0.020 ounce per ton at Bronzewing.
(22) Became wholly-owned after purchase of minority interests in 2003. At December 2002, this percentage was 92.28%. Includes undeveloped reserves at the Favona deposit containing 350,000 ounces. Cut-off grade utilized in 2003 of not less than 0.022 ounce per ton.
(23) Production is in the form of a copper-gold concentrate. Cut-off grade and recoveries vary depending on the gold and copper content. The cut-off grade used for reserve reporting in 2003 was equivalent to 0.33% copper. Percentage reflects Newmont’s adjusted economic interest for purposes of reserve reporting. At December 31, 2002 Newmont’s economic interest was 56.25%.
(24) Mining was completed in 2001 and remaining reserves are in stockpiles.
(25) Cut-off grade utilized in 2003 of not less than 0.080 ounce per ton.
(26) Cut-off grade utilized in 2003 of not less than 0.042 ounce per ton. Sale pending, contingent on buyer financing. Deposit is undeveloped.
(27) Material made available to Zarafshan-Newmont for processing from designated stockpiles or other designated sources. Tonnage and gold content of material available to Zarafshan-Newmont for processing from such designated stockpiles or other specified sources are guaranteed by state entities of Uzbekistan.
(28) Cut-off grade utilized in 2003 of not less than 0.015 ounce per ton. Deposit is undeveloped.
(29) Become wholly-owned after Newmont’s acquisition of remaining 50% of Ntotoroso in 2003. At December 31, 2002, Newmont’s weighted equity interest was 85.6%. Deposit is undeveloped. Cut-off grade utilized in 2003 of not less than 0.016 ounce per ton.
(30) Interests in Echo Bay and TVX Newmont Americas were exchanged and sold, respectively, as of January 31, 2003. 2002 reserve estimates were provided by Kinross Gold Corporation.
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The following tables detail Newmont’s base metal proven and probable reserves(1) reflecting only those reserves owned by Newmont on December 31, 2003 and 2002:
December 31, 2003 Newmont
Share (%)Proven Reserves Probable Reserves Proven and Probable Reserves Deposits/Districts
Tonnage(2)
(000 tons)
Grade
(%)
Millions of
Pounds(3)Tonnage(2)
(000 tons)
Grade
(%)
Millions of
Pounds(3)Tonnage(2)
(000 tons)Grade
(%)Millions of
Pounds(3)Metallurgical(3)
RecoveryCopper
Phoenix, Nevada(4)
100.00 % — — — 159,600 0.13 420 159,600 0.13 420 63 % Batu Hijau, Indonesia(5)
52.875 % 227,700 0.52 2,350 387,600 0.51 3,940 615,300 0.51 6,290 89 % Boddington, Western Australia(6)
44.44 % 61,000 0.12 140 129,700 0.13 330 190,700 0.12 470 84 % Golden Grove, Western Australia(7)
100.00 % 1,900 2.6 100 5,900 2.1 250 7,800 2.2 350 88 % Total Newmont Copper
290,600 0.43 2,590 682,800 0.37 4,940 973,400 0.39 7,530 Zinc
Golden Grove, Western Australia(7)
100.00 % 600 10.8 140 1,200 13.8 340 1,800 12.8 480 91 % Total Newmont Zinc
600 10.8 140 1,200 13.8 340 1,800 12.8 480 December 31, 2002 Newmont
Share (%)Proven Reserves Probable Reserves Proven and Probable Reserves Deposits/Districts
Tonnage(2)
(000 tons)
Grade
(%)
Millions of
Pounds(3)Tonnage(2)
(000 tons)
Grade
(%)
Millions of
Pounds(3)Tonnage(2)
(000 tons)Grade
(%)Millions of
Pounds(3)Metallurgical(3)
RecoveryCopper
Phoenix, Nevada(4)
100.00 % — — — 156,300 0.16 520 156,300 0.16 520 85 % Batu Hijau, Indonesia(5)
56.25 % 175,300 0.54 1,890 394,800 0.55 4,330 570,100 0.55 6,220 93 % Boddington, Western Australia(6)
44.44 % 61,000 0.12 140 129,700 0.13 330 190,700 0.12 470 84 % Golden Grove, Western Australia
100.00 % 2,500 2.0 100 5,500 2.8 300 8,000 2.5 400 88 % Total Newmont Copper
238,800 0.45 2,130 686,300 0.40 5,480 925,100 0.41 7,610 Zinc
Golden Grove, Western Australia
100.00 % 1,700 11.6 390 1,000 15.4 300 2,700 13.0 690 91 % Total Newmont Zinc
1,700 11.6 390 1,000 15.4 300 2,700 13.0 690
(1) See footnote (1) to the Gold Proven and Probable Reserves Tables above. 2003 copper reserves were calculated at a U.S.$0.75 or A$1.35 per pound copper price unless otherwise noted. 2002 reserves were calculated at a U.S.$0.75 or A$1.36 per pound copper price unless otherwise noted. 2003 zinc reserves were calculated at a A$1.71 per pound zinc price and in 2002 a price of $A0.85 per pound zinc was used.
(2) See footnote (2) to the Gold Proven and Probable Reserves Tables above.
(3) See footnote (3) to the Gold Proven and Probable Reserves Tables above. Pounds are rounded to the nearest ten thousand.
(4) Cut-off grade and recoveries vary depending on the gold and copper content. The cut-off grade used for reserve reporting in 2003 was equivalent to 0.018 ounce of gold per ton. 2002 reserves were calculated at $0.95 per pound copper price. Deposit is undeveloped.
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(5) Percentage reflects Newmont’s adjusted economic interest for purposes of reserve reporting. At December 31, 2002 Newmont’s economic interest was 56.25%. Cut-off grade and recoveries vary depending on the gold and copper content. The cut-off grade used for reserve reporting in 2003 was equivalent to 0.33% copper.
(6) As in 2002, reserves were calculated at a A$425 per ounce gold price and A$1.25 per pound copper price and accounted for on an equity basis. Cut-off grade varies depending on the gold and copper content. The cut-off grade used for reserve reporting in 2003 was equivalent to 0.011 ounce of gold per ton. Deposit is undeveloped.
(7) Cut-off grade and recoveries vary depending on the copper, zinc and gold content. The cut-off grades used for reserve reporting in 2003 were not less than 2.2% copper and 4.5% zinc.
The following table details Newmont’s reconciliation of December 2002 and December 2003 Gold Proven and Probable Reserves:
Newmont Equity
Contained Ounces(in millions) December 31, 2002
86.9 Depletion(1)
(8.8 ) Divestments(2)
(4.2 ) Acquisitions(3)
2.3 Revisions and Additions(4)
15.1 December 31, 2003
91.3
(1) Depletion represents reserves processed in 2003.
(2) Equity divestments include 3,650,000 ounces from the sale of Newmont’s interest in the TVX Newmont Americas joint venture and the exchange of Newmont’s interest in Echo Bay Mines Ltd. for a non-equity accounted interest in Kinross Gold Corporation, 80,000 ounces combined from the sale of the Mesquite and Wiluna mines, and 420,000 ounces from the adjustment to Newmont’s economic interest in Batu Hijau.
(3) Equity acquisitions include 1,200,000 ounces from the Turquoise Ridge joint venture, 550,000 ounces from the purchase of the remaining 50% of Ntotoroso and 510,000 ounces from the purchases of minority interests at Tanami and Martha.
(4) Revisions and additions due to reserve conversions, optimizations, model updates and updated unit costs and recoveries.
For a discussion of legal proceedings, see Note 27 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2003.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Newmont’s executive officers as of March 2, 2004 were:
Name
Age Office
Wayne W. Murdy
59 Chairman and Chief Executive Officer
Pierre Lassonde
56 President
David H. Francisco
54 Executive Vice President, Operations
John A. S. Dow
58 Executive Vice President and Managing Director, Newmont Australia Limited
Bruce D. Hansen
46 Senior Vice President and Chief Financial Officer
Britt D. Banks
42 Vice President, General Counsel and Secretary
Thomas L. Enos
52 Vice President, International Operations
Robert J. Gallagher
53 Managing Director, Newmont Indonesia Limited
David Harquail
47 Vice President and Managing Director, Newmont Capital Limited
Donald G. Karras
50 Vice President, Taxes
Thomas P. Mahoney
49 Vice President and Treasurer
David W. Peat
51 Vice President and Global Controller
Richard M. Perry
45 Vice President and Managing Director, Newmont USA Limited
Carlos Santa Cruz
48 Vice President and Managing Director, Newmont Peru Limited
There are no family relationships by blood, marriage or adoption among any of the above executive officers of Newmont. All executive officers are elected annually by the Board of Directors of Newmont to serve for one year or until his respective successor is elected and qualified. The Arrangement Agreement between Newmont and Franco-Nevada provided that Mr. Lassonde would become the President of Newmont upon our acquisition of Franco-Nevada. There is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an executive officer.
Mr. Murdy has been Chairman of the Board of Newmont since January 2002 and Chief Executive Officer thereof since January 2001. Mr. Murdy was President of Newmont from July 1999 to February 2002. He served as Executive Vice President and Chief Financial Officer from July 1996 to July 1999, and Senior Vice President and Chief Financial Officer from December 1992 to July 1996. Mr. Murdy was elected to the Board of Directors of Newmont in September 1999.
Mr. Lassonde became President of Newmont in February 2002 and was elected a director in March 2002. Previously he served as President and Co-Chief Executive Officer of Franco-Nevada from September 1999 to February 2002 and as President of Franco-Nevada from October 1982 to February 2002. He also served as President and Chief Executive Officer of Euro-Nevada Mining Corporation from 1985 to September 1999, when it amalgamated with Franco-Nevada. He has served as a director of Franco-Nevada since October 1982 and was a director of Normandy Mining Limited from May 2001 to March 2002.
Mr. Francisco was elected Executive Vice President, Operations of Newmont in July 1999. He served as Senior Vice President, International Operations from May 1997 to July 1999. Previously, he served as Vice President, International Operations from July 1995 to May 1997.
Mr. Dow was elected Executive Vice President of Newmont and Managing Director, Newmont Australia Limited in March 2002. Previously he served as Executive Vice President and Group Executive, Latin America of Newmont from January 2001 to March 2002. He served as Executive Vice President, Exploration from July 1999 to January 2001, as Senior Vice President, Exploration from July 1996 to July 1999, and Vice President, Exploration from April 1992 to July 1996.
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Mr. Hansen was elected Senior Vice President and Chief Financial Officer of Newmont in July 1999. He served as Vice President, Project Development from May 1997 to July 1999. Previously, he served as Senior Vice President, Corporate Development of Santa Fe Pacific Gold Corporation from April 1994 to May 1997.
Mr. Banks was elected Vice President and General Counsel in May 2001. He was elected Secretary in April 2001. He served as Associate General Counsel of Newmont from July 1996 to May 2001.
Mr. Enos was elected Vice President, International Operations of Newmont in December 2002. Previously, he served as Vice President of Newmont and Managing Director of Newmont Indonesia Limited from May 2002 to November 2002. He served as Vice President, Indonesian Operations from July 1998 to May 2002. He served as Vice President and General Manager of Newmont’s Carlin operations from May 1996 to July 1998.
Mr. Gallagher has served as Managing Director, Newmont Indonesia Limited since November 2002. He served as General Manager of Newmont’s Batu Hijau operations in Indonesia from April 2001 to November 2002 and Director of Operations thereof from August 2000 to April 2001. Previously, he served as Vice President Operations at Vengold Inc. from 1993 to August 2000.
Mr. Harquail was elected Managing Director of Newmont Capital Limited in May 2002 and Vice President of Newmont in September 2003. Previously, he served as Senior Vice President of Franco-Nevada Mining Corporation Limited from May 1998 to February 2002. Prior to May 1998, Mr. Harquail was a Vice President of Franco-Nevada.
Mr. Karras has served as Vice President, Taxes of Newmont since November 1992.
Mr. Mahoney was elected Vice President and Treasurer of Newmont in May 2002. He served as Treasurer of Newmont from May 2001 to May 2002. Previously, he served as Assistant Treasurer from March 1997 to May 2001. He served as Assistant Treasurer, International from April 1994 to March 1997.
Mr. Peat was elected Vice President and Global Controller of Newmont in May 2002. He served as Vice President, Finance and Chief Financial Officer for Homestake Mining Company from 1999 to 2002, and as Vice President and Controller of Homestake from 1996 to 1998.
Mr. Perry was elected Vice President of Newmont and Managing Director of Newmont USA Limited in May 2002. Previously, he served as Vice President, North American Operations of Newmont from April 2001 to May 2002. He served as General Manager of Newmont’s Batu Hijau copper and gold mine in Sumbawa, Indonesia from October 1998 to April 2001.
Mr. Santa Cruz was elected Vice President of Newmont and Managing Director of Newmont Peru Limited in May 2002. Previously, he served as Vice President, Peruvian Operations of Newmont from August 2001 to May 2002. He served as General Manager of Minera Yanacocha S.R.L. from 1997 to 2001, and as Assistant General Manager thereof from 1995 to 1997.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Newmont’s common stock is listed and principally traded on the New York Stock Exchange (under the symbol “NEM”) and is also listed in the form of CHESS Depositary Interests (“CDIs”) (under the symbol “NEM”) on the Australian Stock Exchange (“ASX”). In Australia, Newmont is referred to as “Newmont Mining Corporation ARBN 099 065 997 organized in Delaware with limited liability.” Since July 1, 2002, Newmont CDIs have traded on the ASX as a Foreign Exempt Listing granted by the ASX, which provides an ancillary trading facility to Newmont’s primary listing on NYSE. Newmont Mining Corporation of Canada Limited’s exchangeable shares (“Exchangeable Shares”) are listed on the Toronto Stock Exchange (under the symbol “NMC”). The Exchangeable Shares were issued in connection with the acquisition of Franco-Nevada. The following table sets forth, for the periods indicated, the high and low sales prices per share of Newmont’s common stock as reported on the New York Stock Exchange Composite Tape.
2003 2002 High Low High Low First quarter
$ 30.60 $ 24.23 $ 28.24 $ 18.70 Second quarter
$ 34.40 $ 24.80 $ 32.00 $ 26.33 Third quarter
$ 42.50 $ 31.01 $ 29.87 $ 22.21 Fourth quarter
$ 50.28 $ 37.25 $ 29.98 $ 23.10
On March 2, 2004, there were outstanding 400,563,988 shares of Newmont’s common stock (including shares represented by CDIs), which were held by approximately 19,500 stockholders of record. A dividend of $0.04 per share of common stock outstanding was declared in each of the first three quarters of 2003, and $0.05 per share of common stock outstanding was declared in the fourth quarter of 2003, for a total of $0.17 during the year. A dividend of $0.03 per share of common stock outstanding was declared in each quarter of 2002, for a total of $0.12 per share during that year.
On March 2, 2004, there were outstanding 42,252,191 Exchangeable Shares, which were held by 53 holders of record. The Exchangeable Shares are exchangeable at the option of the holders into Newmont common stock. Holders of Exchangeable Shares are therefore entitled to receive dividends equivalent to those that Newmont declares on its common stock.
The determination of the amount of future dividends will be made by Newmont’s Board of Directors from time to time and will depend on Newmont’s future earnings, capital requirements, financial condition and other relevant factors.
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ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, 2003 2002 2001 2000 1999 (in millions, except per share) Revenues
$ 3,214.1 $ 2,657.9 $ 1,666.7 $ 1,819.6 $ 1,627.9 Income (loss) before cumulative effect of a change in accounting principle, net of preferred stock dividend
$ 510.2 $ 146.6 $ (54.1 ) $ (84.6 ) $ (119.3 ) Net income (loss) applicable to common shares(1)
$ 475.7 $ 154.3 $ (54.1 ) $ (97.2 ) $ (119.3 ) Basic income (loss) per common share:
Before cumulative effect of a change in accounting principle
$ 1.24 $ 0.40 $ (0.28 ) $ (0.45 ) $ (0.62 ) Net income (loss)
$ 1.16 $ 0.42 $ (0.28 ) $ (0.51 ) $ (0.62 ) Diluted income (loss) per common share:
Before cumulative effect of a change in accounting principle
1.23 0.39 (0.28 ) (0.45 ) (0.62 ) Net income (loss))
1.15 0.41 (0.28 ) (0.51 ) (0.62 ) Dividends declared per common share
$ 0.17 $ 0.12 $ 0.12 $ 0.12 $ 0.12 At December 31,
Total assets
$ 11,050.2 $ 10,147.4 $ 4,141.7 $ 4,024.2 $ 4,043.2 (2) Long-term debt, including current portion
$ 1,077.5 $ 1,816.6 $ 1,426.9 $ 1,354.8 $ 1,391.8 (2) Stockholders’ equity
$ 7,384.9 $ 5,419.2 $ 1,499.8 $ 1,540.7 $ 1,605.8 (2)
(1) Net income (loss) includes the cumulative effect of a change in accounting principle related to a net expense for reclamation and remediation of $34.5 million ($0.08 per share), net of tax, in 2003, a net gain for depreciation of property, plant and mine development of $7.7 million ($0.02 per share), net of tax, in 2002, and a net expense for revenue recognition of $12.6 million ($0.06 per share), net of tax, in 2000.
(2) As a result of the restatement of the Company’s Consolidated Financial Statements, the Consolidated Financial Statements as of December 31, 1999 are derived from unaudited Consolidated Financial Statements.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Newmont Mining Corporation and its subsidiaries (collectively, “Newmont” or the “Company”). References to “A$” refer to Australian currency, “CDN$” to Canadian currency, “CHF” to Swiss currency, “NZD$” to New Zealand currency and “U.S.$” or “$” to United States currency.
This discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three years ended December 31, 2003, as well as our future results. It consists of the following subsections:
• “Overview,” which provides a brief summary of our consolidated results and financial position and the primary factors affecting those results, as well as a summary of our expectations for 2004;
• “Accounting Changes,” which provides a discussion of recent changes to our accounting policies that have affected how we account for reclamation and remediation costs and for depreciation, depletion and amortization of property, plant and mine development;
• “Restructuring” and “Acquisitions,” which provide information regarding our 2002 restructuring and our 2002 and 2003 acquisitions;
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• “Critical Accounting Policies,” which provides an analysis of the accounting policies we consider critical because of their effect on the reported amounts of assets, liabilities, income and/or expenses in our consolidated financial statements and because they require difficult, subjective or complex judgments by our management;
• “Consolidated Financial Results,” which includes a discussion of our consolidated financial results for the last three years;
• “Results of Operations,” which sets forth an analysis of the operating results for the last three years of Newmont’s gold operations, the Base Metals Segment engaged in copper and zinc production, the Exploration Segment and the Merchant Banking Segment;
• “Recent Accounting Pronouncements,” which summarizes recently published authoritative accounting guidance, how it might apply to us and how it might affect our future results; and
• “Liquidity and Capital Resources,” which contains a discussion of our cash flows and liquidity, investing activities and financing activities, contractual obligations and off-balance sheet arrangements.
This item should be read in conjunction with our consolidated financial statements and the notes thereto included in this annual report.
Newmont’s original predecessor corporation was incorporated in 1921. Newmont is the world’s largest gold producer and is the only gold company included in the S&P 500 Index. We are also engaged in the exploration for and acquisition of gold properties and are the world’s largest private sector precious metals royalty owner. We have mining operations in the United States, Australia, Peru, Indonesia, Canada, Uzbekistan, Turkey, Bolivia, New Zealand and Mexico. We have an advanced development project in Ghana, which is expected to become our next core operating district. During the last few years we have expanded our global footprint through our exploration efforts and through the acquisition of operating and development assets. We believe that Newmont is positioned to remain a gold industry leader capable of achieving further profitable growth as we discover and develop new projects.
Newmont faces key risks associated with our business. One of the most significant risks is the fluctuation in the price of gold and other metals, which is affected by numerous factors beyond our control. Other challenges we face are production cost increases and potential social and environmental issues. Operating costs at our operations are subject to great variation from one year to the next due to a number of factors, such as changing ore grades, metallurgy and revisions to mine plans in response to the physical shape and location of the ore bodies. At foreign locations, such costs are also influenced by currency fluctuations that may affect our U.S. dollar operating costs. In addition, we must continually replace gold reserves depleted by production. Depleted reserves must be replaced by expanding known ore bodies or by locating new deposits in order to maintain production levels over the long term.
Our financial results for 2003 improved compared to 2002 and 2001, largely due to increased margins related to the higher gold prices received during the year. The Company strengthened its balance sheet by raising approximately $1.0 billion through an equity offering in November, by substantially eliminating the Australian gold hedge books and by reducing outstanding debt. Newmont had worldwide gold reserves of 91.3 million equity ounces as of December 31, 2003, reflecting a 5% increase over the 86.9 million equity ounces as of December 31, 2002, despite Newmont’s sale during 2003 of certain non-core operations with reserves of 4.2 million equity ounces.
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Summary of Consolidated Financial and Operating Performance
The table below highlights key financial and operating results:
Years ended December 31, 2003 2002 2001 Net income (loss) applicable to common shares (in millions)
$ 475.7 $ 154.3 $ (54.1 ) Net income (loss) per share, basic
$ 1.16 $ 0.42 $ (0.28 ) Revenues (in millions)
$ 3,214.1 $ 2,657.9 $ 1,666.7 Equity gold sales (in thousands of ounces)
7,383.6 7,631.7 5,466.1 Average price received per ounce of gold
$ 366 $ 313 $ 271 Total cash costs ($/ounce)(1)
$ 203 $ 189 $ 184 Total production costs ($/ounce)(1)
$ 266 $ 250 $ 237
(1) Total cash costs and total production costs are non-GAAP measures of performance that we use to determine the cash generating capacities of our mining operations and to monitor the performance of our mining operations. For a reconciliation of Costs applicable to sales to total cash costs and total production costs per ounce (unaudited), see Item 2, Properties, above.
Consolidated Financial Performance
Primarily as a result of the factors discussed below, our net income applicable to common shares increased to $475.7 million ($1.16 per share, basic) for the year ended December 31, 2003, an increase of 208% compared with net income applicable to common shares of $154.3 million ($0.42 per share, basic) for the year ended December 31, 2002. In 2001, we incurred a net loss of $54.1 million ($0.28 per share, basic). Newmont’s revenues of $3.2 billion in 2003 grew 21% from $2.7 billion in 2002, which in turn increased $1.0 billion, or 59%, from 2001. Higher revenues and net income in 2003 and 2002, as compared to 2001, were a direct result of higher production resulting from the acquisitions of Normandy and Franco-Nevada in early 2002, and increased margins on gold sales resulting from higher average realized gold prices.
During 2003 and 2002, the weakening U.S. dollar and other factors helped strengthen gold prices and as a result, our average realized gold price increased significantly from $271 per ounce in 2001, to $313 per ounce in 2002 and to $366 in 2003. At December 31, 2003, we assumed a long-term gold price of $360 per ounce for purposes of impairment testing of goodwill and the carrying value of long-lived assets, compared to an assumed gold price of $320 per ounce at December 31, 2002. The increase in the assumed gold price for impairment testing in 2003 reflects the Company’s improved view of long-term gold prices based on the improvement in gold market fundamentals.
The average realized gold price increases over the last few years were partially offset by higher total production costs per ounce. During the past three years, Newmont has seen significant increases in the cost of fuel, power and other bulk consumables. In addition, our production costs were affected by the increase in foreign currency exchange rates in relation to the U.S. dollar. While a weaker U.S. dollar generally benefits the gold price, which is quoted in U.S. dollars, it also results in higher costs quoted in U.S. dollars at certain of our foreign operations. Since the Company’s acquisition of Normandy, the Australian dollar/U.S. dollar exchange rate has had the greatest impact on costs. We experienced an appreciation of 17% in the average Australian dollar/U.S. dollar exchange rate between 2003 and 2002.
Our equity gold sales in 2003 of 7.4 million ounces were slightly lower than the 7.6 million ounces in 2002 because of the Company’s divestiture of non-core equity investments. Equity gold sales in 2002 were approximately 40% higher than the 5.5 million ounces sold in 2001, as a result of the Normandy and Franco-Nevada acquisitions.
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In addition, our financial and operating results for the year ended December 31, 2003 were impacted by the following significant items:
• Our 2003 results reflect the full-year impact of our acquisitions of Normandy and Franco-Nevada;
• we recognized a net $83.2 million gain on investments in 2003 primarily relating to a gain on the exchange of certain securities;
• we recognized net gains relating to Newmont Yandal Operations Pty Ltd (“NYOL”) of $114.0 million as the result of the extinguishment of NYOL’s debt, and $106.5 million as a result of the extinguishment of NYOL gold hedge contracts;
• we incurred losses in 2003 of $119.5 million relating to Australian Magnesium Corporation, and a $30.0 million charge relating to a Newmont guarantee of a loan to QMC Finance Pty Ltd;
• we recognized foreign currency gains of $97.0 million;
• we spent significantly higher amounts on exploration, research and development; and
• income tax expense was $206.9 million in 2003, compared to $19.9 million in 2002. The 2003 increase in tax expense was primarily attributable to significantly higher pre-tax income.
Equity Accounted Investment
Our results of operations and financial condition also include non-consolidated or equity accounted affiliates, the most significant of which is P.T. Newmont Nusa Tenggara, which owns the Batu Hijau mine in Indonesia. Equity income from Batu Hijau was $82.9 million for 2003 compared to $42.1 million in 2002. The increase in equity income at Batu Hijau over prior years primarily resulted from higher copper prices, increased gold by-product credits and lower smelting and refining costs.
Newmont expects to consolidate Batu Hijau effective January 1, 2004, following the adoption of FASB Interpretation No. 46R (“FIN 46R”). We expect this will have a material impact on our consolidated operating and financial results reported in the future.
Liquidity
During 2003, Newmont’s balance sheet strengthened significantly, primarily from the equity offering completed in November, from positive operating cash flows and from the sale of non-core assets. The Company’s financial position at December 31, 2003 and 2002 was as follows:
At December 31, 2003 2002 (in millions) Long-term debt (including current portion)
$ 1,077.5 $ 1,816.6 Total stockholders’ equity
$ 7,384.9 $ 5,419.2 Cash and cash equivalents
$ 1,314.0 $ 401.7
During 2003, our debt and liquidity positions were affected by several events. We made net repayments of long-term debt of $669.3 million, primarily reflecting early debt extinguishments. In November 2003, we completed an offering of 25 million shares of common stock, which raised gross proceeds of approximately $1.0 billion. As a result of the proceeds received from the offering, our cash and cash equivalents and stockholders’ equity both increased significantly. We also received $224.6 million from the sale of marketable securities of Kinross, $180.0 million from the sale of shares of TVX Newmont Americas and $162.5 million from the issuance of common stock on the exercise of Franco-Nevada Class B warrants. Earnings of $146.0 million were distributed to the minority partners of Yanacocha during 2003. In addition, during 2003 we spent $176.3 million buying back gold derivative instruments, almost completely eliminating the portfolio of gold commodity derivative instruments obtained as part of the acquisition of Normandy.
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Looking Forward
Certain key factors that have affected our financial and operating results in the past will affect our future financial and operating results. These include, but are not limited to the following:
• Gold prices, and to a lesser extent, copper prices;
• Given the increase in reserves and the progress made on development projects, production is anticipated to range between 7.0 million and 7.5 million equity ounces per year through 2006. Newmont is currently developing its next generation of lower cost mines. We anticipate that our Ahafo advanced development project in Ghana, West Africa, will generate steady-state annual gold sales of approximately 500,000 ounces commencing in 2006, with higher production in the initial years. We expect to make an investment decision on the Akyem project, also in Ghana, by the end of 2004. In Nevada, the Leeville underground project is approximately 42% complete with annual gold production of approximately 500,000 ounces expected to commence at the end of 2005, while annual production from the Phoenix development project, anticipated to begin operating in 2006, is expected to be between 400,000 to 450,000 ounces of gold and 18 to 20 million pounds of copper;
• Changes in foreign currency exchange rates in relation to the U.S. dollar will continue to affect our future profitability and cash flow. Fluctuations in local currency exchange rates in relation to the U.S. dollar can increase or decrease profit margins and total cash costs per ounce to the extent costs are paid in local currency at foreign operations. Historically, such fluctuations have not had a material impact on the Company’s revenue since gold is sold throughout the world principally in U.S. dollars. The Company’s total cash costs are most significantly impacted by variations in the Australian dollar/U.S. dollar exchange rate. However, variations in the Australian dollar/U.S. dollar exchange rate historically have been strongly correlated to variations in the U.S. dollar gold price over the long-term. Increases or decreases in costs at Australian locations due to exchange rate changes have therefore tended to be mitigated by changes in sales reported in U.S. dollars at Australian locations in the Company’s consolidated financial statements. No assurance, however, can be given that the Australian dollar/U.S. dollar exchange rate will continue to be strongly correlated to the U.S. dollar gold price in the future;
• Capital expenditures in 2003 were $501.4 million. We expect to increase capital expenditures in 2004 to between $700 million and $750 million, including costs related to the Ahafo project in Ghana and the Leeville and Phoenix projects in Nevada; and
• Due to the strengthening of the gold market, and consistent with our exploration growth strategy, we expect 2004 exploration, research and development expenditures will total between $140 million and $150 million.
Reclamation and Remediation (Asset Retirement Obligations)
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which established a uniform methodology for accounting for estimated reclamation and abandonment costs. Newmont adopted SFAS No. 143 as required on January 1, 2003. See Note 14 to the Consolidated Financial Statements for complete disclosure of the impact of adopting SFAS 143.
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On a pro forma basis, the liabilities for asset retirement obligations would have been $420.0 million and $422.9 million at January 1, 2002 and December 31, 2002, respectively, if SFAS No. 143 had been applied at the beginning of 2002. The table below presents the impact of the accounting change for 2003 and the pro forma effect for 2002 as if the change had been in effect for that period (in thousands, except per share data):
Year ended December 31, (Decrease) increase to income
2003
Impact2002
(pro forma)2001
(pro forma)Costs applicable to sales (exclusive of depreciation, depletion and amortization shown separately below)
Gold
$ 21,597 $ 10,548 $ 9,779 Base metals
358 — — Depreciation, depletion and amortization
(13,607 ) (13,228 ) (11,359 ) Income tax (expense) benefit
(2,922 ) 938 553 Minority interest
(4,567 ) 1,938 1,451 Equity income of affiliate
(1,309 ) 36 (1,656 ) (Decrease) increase to income before cumulative effect of a change in accounting principle
$ (450 ) $ 232 $ (1,232 ) (Decrease) increase to income before cumulative effect of a change in accounting principle per common share, basic and diluted
$ 0.00 $ 0.00 $ 0.00
The table below presents pro forma income (loss) and income (loss) per common share before cumulative effect of a change in accounting principle for years ended December 31, 2002 and 2001 as if the Company had adopted the SFAS No. 143 as of January 1, of each year (in thousands, except per share data):
2002 2001 Income
applicable to
common shares
before cumulative
effect of a change
in accounting
principleIncome per
common share
before cumulative
effect of a change
in accounting
principle, basicIncome per
common share
before cumulative
effect of a change
in accounting
principle, dilutedNet loss
applicable to
common
sharesNet loss
per common
share,
basic and
dilutedAs reported
$ 146,622 $ 0.40 $ 0.39 $ (54,119 ) $ (0.28 ) Effects of SFAS No. 143 accounting method
232 — — (1,232 ) — Pro forma
$ 146,854 $ 0.40 $ 0.39 $ (55,351 ) $ (0.28 )
Depreciation, Depletion and Amortization
During the third quarter of 2002, Newmont changed its accounting policy, retroactive to January 1, 2002, with respect to Depreciation, depletion and amortization (“DD&A”) of Property, plant and mine development, net to exclude future estimated development costs expected to be incurred for certain underground operations. Previously, the Company had included these costs and associated reserves in its DD&A calculations at certain of its underground mining operations. In addition, the Company further revised its policy such that costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are depreciated, depleted or amortized over the reserves associated with the specific ore area. These changes were made to better match DD&A with the associated ounces of gold sold and to remove the inherent uncertainty in estimating future development costs in arriving at DD&A rates. The cumulative effect of this change in accounting principle through December 31, 2001 increased net income in 2002 by $7.7 million, net of tax of $4.1 million, and increased net income per share by $0.02. The effect of the change in 2002 was to increase DD&A expense by $1.3 million and decrease net income by $0.8 million for the year. If the change had been in effect for 2001, the
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pro forma effect of the change would have reduced DD&A expense by $2.0 million in 2001, and would have decreased the net loss by $1.3 million for the same period, or $0.01 per common share, basic and diluted.
On February 13, 2002, Newmont stockholders approved adoption of an Agreement and Plan of Merger that provided for a restructuring of Newmont to facilitate the February 2002 acquisitions described below and to create a flexible corporate structure. Newmont merged with an indirect, wholly-owned subsidiary that resulted in Newmont (or “Old Newmont”) becoming a direct, wholly-owned subsidiary of a newly formed holding company. The new holding company, previously a direct, wholly-owned subsidiary of Old Newmont, was renamed Newmont Mining Corporation. There was no impact to the consolidated financial statements of Newmont as a result of this restructuring and former stockholders of Old Newmont became stockholders of the new holding company. Old Newmont was subsequently renamed Newmont USA Limited.
Newmont NFM Limited Scheme of Arrangement
On April 2, 2003, the shareholders of Normandy NFM Limited (an Australian corporation trading at that time as “Newmont NFM” on the Australian Stock Exchange or “ASX”) voted to approve a proposed scheme of arrangement under which Newmont NFM would become a wholly-owned subsidiary of Newmont Australia Limited, a wholly-owned subsidiary of Newmont Mining Corporation, through the acquisition of the remaining minority interest of Newmont NFM. The scheme became effective on April 14, 2003. Under the terms of the scheme, Newmont NFM shareholders could elect to receive 4.40 ASX listed Newmont Mining Corporation CHESS Depositary Interests (“CDIs”), with each CDI equivalent to 0.1 Newmont Mining Corporation share of common stock. As an alternative to receiving Newmont Mining Corporation CDIs, shareholders could sell their Newmont NFM shares back to Newmont NFM under a concurrent buy-back offer of A$16.50 per Newmont NFM share. On April 29, 2003, Newmont Mining Corporation issued 4,437,506 shares of common stock to the CHESS Depository Nominees Pty Ltd, and in turn, 44,375,060 CDIs were issued to former Newmont NFM shareholders. The market value of the newly issued Newmont Mining Corporation shares was approximately $105 million, based on the average quoted value of the shares of common stock of $23.58 per share two days before and after November 28, 2002, the date the terms of the transaction were agreed upon and announced. The market value of the issued equity securities, together with the cash consideration paid to those shareholders who elected to accept the buy-back offer of approximately $10 million (including transaction costs), resulted in a total purchase price of approximately $115 million. The transaction was accounted for as a purchase of minority interest in accordance with SFAS No. 141, “Business Combinations,” in the second quarter of 2003. Newmont NFM was delisted from the ASX in April 2003. Newmont performed a purchase price allocation that gave rise to goodwill of $93.3 million arising from the acquired interest.
Normandy Mining Limited and Franco-Nevada Mining Corporation Limited
On February 16, 2002, pursuant to a Canadian Plan of Arrangement, Newmont acquired 100% of Franco-Nevada Mining Corporation Limited (“Franco-Nevada”) in a stock-for-stock transaction in which Franco-Nevada common stockholders received 0.8 of a share of Newmont common stock, or 0.8 of a Canadian exchangeable share (exchangeable for Newmont common shares), for each common share of Franco-Nevada. The exchangeable shares are substantially equivalent to Newmont common shares. On February 20, 2002, Newmont obtained control of Normandy Mining Limited (“Normandy”) through a tender offer for all of the ordinary shares of Normandy. For accounting purposes, the effective date of the Normandy acquisition was the close of business on February 15, 2002, when Newmont received an irrevocable tender from shareholders for more than 50% of the outstanding shares of Normandy. Accordingly, the results of operations of Normandy and Franco-Nevada have been included in the accompanying Consolidated Financial Statements from February 16, 2002 forward. On February 26, 2002, when the tender offer for Normandy expired, Newmont controlled more than 96% of Normandy’s outstanding shares. Newmont exercised its rights to acquire the remaining shares of Normandy in April 2002.
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Consideration paid for Normandy included 3.85 shares of Newmont common stock for every 100 ordinary shares of Normandy (including ordinary shares represented by American depository receipts) plus A$0.50 per Normandy share, or the U.S. dollar equivalent of that amount for Normandy stockholders outside Australia.
Normandy was Australia’s largest gold company with interests in 16 development-stage or operating mining properties worldwide. Franco-Nevada was the world’s leading precious minerals royalty company and had other investments in the mining industry. Following the February 2002 acquisitions, Normandy was renamed Newmont Australia Limited and Franco-Nevada was renamed Newmont Mining Corporation of Canada Limited.
The purchase price for these acquisitions totaled $4.3 billion, composed of 197.0 million Newmont shares (or share equivalents), $461.7 million in cash and approximately $90.3 million of direct costs. The value of Newmont shares (or share equivalents) was $19.01 per share based on the average market price of the shares over the two-day period before and after January 2, 2002, the last trading day before the final and revised terms for the Normandy and Franco-Nevada acquisitions were announced.
The combination of Newmont, Normandy and Franco-Nevada was designed to create a platform for growth and for delivering superior returns to shareholders. With a larger global operating base, a broad and balanced portfolio of development projects and a stable income stream from mineral royalties and investments, the combined company has opportunities to optimize returns, realize synergies through rationalization of corporate overhead and exploration programs, realize operating efficiencies, reduce operating and procurement costs and reduce interest expense and income taxes.
The acquisitions were accounted for using the purchase method of accounting whereby assets acquired and liabilities assumed were recorded at their fair market values as of the date of acquisition. The excess of the purchase price over such fair value was recorded as goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill, was assigned to specific reporting units. The acquisitions resulted in approximately $3.0 billion of goodwill primarily related to the merchant banking business, the Normandy global exploration programs and expertise, and expected synergies.
Battle Mountain Gold Company
On January 10, 2001, the Company completed the acquisition of Battle Mountain pursuant to an agreement and plan of acquisition, dated as of June 21, 2000, under which each share of common stock of Battle Mountain and each exchangeable share of Battle Mountain Canada Ltd. (a wholly-owned subsidiary of Battle Mountain) was converted into the right to receive 0.105 shares of common stock of Newmont, resulting in the issuance of approximately 24.1 million shares of common stock. The Company also exchanged 2.3 million shares of $3.25 convertible preferred stock for all outstanding shares of Battle Mountain $3.25 convertible preferred stock. In April 2002, Newmont announced the redemption of all issued and outstanding shares of its $3.25 convertible preferred stock as of May 15, 2002. The acquisition was accounted for as a pooling of interests, and as such, the Consolidated Financial Statements include Battle Mountain’s financial data as if Battle Mountain had always been part of Newmont.
Listed below are the accounting policies that the Company believes are critical to its financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.
Carrying Value of Goodwill
At December 31, 2003 and 2002, the carrying value of the Company’s goodwill was approximately $3.0 billion. Such goodwill was assigned to the Company’s Merchant Banking (approximately $1.6 billion) and
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Exploration (approximately $1.1 billion) Segments and to various mine site reporting units (approximately $300 million in the aggregate). As further described in Note 3 to the Consolidated Financial Statements, this goodwill primarily arose in connection with the Company’s February 15, 2002 acquisitions of Normandy and Franco-Nevada, and it primarily represents the excess of the aggregate purchase price over the fair value of the identifiable net assets of Normandy and Franco-Nevada. Such goodwill was assigned to reporting units in a reasonable, supportable and consistent manner based on independent valuations performed by Behre Dolbear and Company, Inc., an independent consulting and valuation firm (“Behre Dolbear”). The Company’s approach to allocating goodwill was to identify those reporting units of the Company that the Company believed had contributed to such excess purchase price. The Company then engaged Behre Dolbear to perform valuations to measure the incremental increases in the fair values of such reporting units that were attributable to the acquisitions, and that were not already captured in the fair values assigned to such units’ identifiable net assets. In the case of the Merchant Banking and Exploration Segments, these valuations were based on each reporting unit’s potential for future growth, and in the case of the mine site reporting units, the valuation was based on the synergies that were expected to be realized by each mine site reporting unit.
The Company evaluates, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, the Company compares the fair values of its reporting units to their carrying amounts. If the carrying value of a reporting unit were to exceed its fair value at the time of the evaluation, the Company would perform the second step of an impairment test. In the second step, the Company would compare the implied fair value of the reporting unit’s goodwill to its carrying amount and any shortfall would be charged to income. Assumptions underlying fair value estimates are subject to risks and uncertainties. Newmont performed its annual impairment tests of goodwill during the fourth quarter of 2003 and determined that goodwill was not impaired at December 31, 2003. To the extent the assumptions used in the Company’s valuation models laid out below for such impairment tests are not achieved in the future, it is reasonably possible that the Company will record charges for impairment of goodwill in future periods. The specific application of the Company’s goodwill impairment policy with respect to the Merchant Banking Segment, Exploration Segment and mine site reporting units are separately discussed below.
Merchant Banking Segment Goodwill
Purchase Price Allocation at February 15, 2002 and Impairment Testing at December 31, 2002. The assignment of goodwill to the Merchant Banking Segment was based on the assumption that, following the Franco-Nevada acquisition, the Merchant Banking Segment would continue to earn long-term investment returns consistent with the historical returns on capital earned by Franco-Nevada during the eleven years prior to the acquisition. It was further assumed that the Merchant Banking Segment, which is led by former senior executives of Franco-Nevada, would seek to earn such returns from various transactions such as mergers, acquisitions, joint ventures, investments in royalty interests, the disposal of interests in mining projects and other investing and financing related transactions. The amount of goodwill assigned to the Merchant Banking Segment as of the acquisition date was intended to represent the incremental increase in the value of the Merchant Banking Segment as a result of the acquisition, and was based on a discounted cash flow analysis that assumed (i) an initial investment of $300 million; (ii) additional annual investments of $50 million commencing in year two of a seven-year time horizon; (iii) an average long-term after-tax return of 37.3%; (iv) the immediate reinvestment of average annual returns; and (v) discount rates ranging from 8% to 9%. The assumed initial and additional investments were based on Franco-Nevada’s historical asset base and investing experience, and management’s judgment as to what investment levels could be expected to continue in the future. While the Company expected the actual investments of the Merchant Banking Segment to be made on a sporadic basis as investment opportunities presented themselves, the Company assumed an additional annual investment level of $50 million for valuation modeling purposes. The Company believed that the $50 million additional annual investment level assumed for modeling purposes was reasonable given the equivalent probability of investing more or less than that average amount in any given period based upon the timing of attractive investment opportunities. The February 15, 2002 valuation model assumed that the investments and related returns thereon would ultimately
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increase to a value of approximately $3.8 billion at the end of the seven-year period. Such value would have represented 34% of the Company’s total assets at December 31, 2003. Asset growth of this magnitude is consistent with Franco-Nevada’s historical experience. The 37.3% long-term after-tax return assumed for this analysis represented the average return on capital deployed by the merchant banking unit of Franco-Nevada during the eleven years prior to its acquisition by the Company. For purposes of this return calculation, the denominator excluded capital associated with Franco-Nevada’s cash and gold bullion balances and the numerator excluded the interest income generated by such cash balances due to the fact that Franco-Nevada’s cash and gold bullion balances did not represent amounts invested by Franco-Nevada’s merchant banking unit. Throughout the eleven-year historical valuation period, Franco-Nevada’s cash and gold bullion balances represented a significant portion of Franco-Nevada’s total assets. Accordingly, if cash and gold bullion balances and interest income had been included, the calculated return would have been 15%, a significantly lower return than the 37.3% return that was in fact used to value the goodwill of the Merchant Banking Segment. In order to assess future returns in relation to the 37.3% return assumed for goodwill allocation purposes, the Company will track annualized returns on investments, on an individual and aggregate basis, based upon realized and unrealized value changes from inception of each investment.
The Company expects to fund investments as opportunities arise and, therefore, it is likely that investments in the Merchant Banking Segment will fall short of or exceed the February 15, 2002 valuation model’s assumed annual investment level of $50 million in any given year. Under this valuation model, since revised and updated for purposes of impairment testing at December 31, 2003, as described below, to the extent that the Company were to have fallen short of the assumed annual additional investment of $50 million per year or otherwise were to have fallen short of the targeted portfolio value, the Company would have needed to achieve increases in its future investment levels, returns and/or other factors impacting the valuation sufficient to offset fully any such shortfalls in invested capital and returns thereon in order to replicate the value assigned to the Merchant Banking Segment goodwill on February 15, 2002. The Company would have needed to invest an average of approximately $82 million annually in years three through seven if the Company failed to make any new investments in year two assuming all other valuation assumptions were held constant. Similarly, to the extent that the Company failed to realize and reinvest investment returns that are at least equal to the 37.3% annual returns assumed for purposes of the February 15, 2002 valuation, the Company would have needed to achieve increases in future returns, investment levels and/or other factors impacting the valuation in order to replicate the value assigned to the Merchant Banking Segment goodwill on February 15, 2002. For example, if the Company had decreased its return assumption by one percentage point to 36.3% or by ten percentage points to 27.3% in the February 15, 2002 valuation, the $1.625 billion value assigned to the Merchant Banking Segment goodwill at February 15, 2002 would have decreased by approximately $96 million or $805 million, respectively, from the value determined in the February 15, 2002 valuation, assuming all other valuation assumptions were held constant. Moreover, as the expected period between the initial investment and the ultimate realization of a return by the Merchant Banking Segment is generally greater than one year, and given that the February 15, 2002 model assumes that returns are realized and reinvested on an annual basis, the Merchant Banking Segment will likely need to achieve returns in excess of the assumed 37.3% return in order to replicate the value assigned to the Merchant Banking Segment goodwill on February 15, 2002 assuming all other valuation assumptions are held constant. Changes to other valuation assumptions, such as the amount of the initial investment, discount rates, tax rates and the time horizon also would have impacted the value determined by the February 15, 2002 valuation. Although the Company believes that the February 15, 2002 valuation provided a reasonable and supportable basis for the allocation of goodwill to the Merchant Banking Segment, the Company recognizes that, due to the opportunistic nature of the Merchant Banking Segment’s business, future returns and investment levels are not easily predicted. Accordingly, future results may vary significantly from the investments and returns assumed for purposes of this discounted cash flow analysis.
For purposes of performing its annual goodwill impairment test, the Company will perform an analysis to determine the fair value of the Merchant Banking Segment. The fair value derived from this valuation process, together with the fair value of the identifiable net assets of the Merchant Banking Segment, will be considered by the Company in the first step of its impairment test, which test requires the Company to compare the aggregate
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carrying value of the identifiable net assets and goodwill of the Merchant Banking Segment to the aggregate fair value of such identifiable net assets and goodwill. For every 10% reduction in the valuation of goodwill below the amount assigned to the Merchant Banking Segment at the acquisition date, the Company would expect to record a non-cash goodwill impairment charge of approximately $160 million.
Impairment Testing at December 31, 2003. The fair value of the equity portfolio at December 31, 2002 was approximately $310 million. During 2003, the Company did not make any substantial new capital additions to the equity portfolio but did sell a substantial proportion of its investment in Kinross, which represented the majority of value of the equity portfolio at the time of sale. As discussed below, the December 31, 2003 discounted cash flow analysis for the equity portfolio sub-segment of the Merchant Banking Segment assumed an initial equity portfolio of approximately $140 million (approximate fair value of equity portfolio at December 31, 2003) and capital infusions of $120 million annually for the next three fiscal years. The assumed capital infusions are necessary to bring the equity portfolio to a level necessary to support the carrying value of the Merchant Banking Segment. While the Company has both the ability and intention to meet these funding requirements, no assurance can be given that it will be successful in this regard.
At December 31, 2003, the $1.6 billion carrying value of the Merchant Banking Segment goodwill represented approximately 74% of the carrying value of the total assets of the Merchant Banking Segment. Based on a December 31, 2003 valuation of the Merchant Banking Segment prepared by an independent valuation firm, the Company concluded that the fair value of the Merchant Banking Segment was significantly in excess of its carrying value at December 31, 2003, and accordingly, that it was not necessary to perform the second step of the goodwill impairment test with respect to its Merchant Banking Segment. Although the Company considers both the February 15, 2002 and December 31, 2003 valuations to be reasonable and both were based on discounted cash flow models, the December 31, 2003 valuation incorporated assumptions and approaches that were designed to (i) take into account the evolving activities and objectives of the Merchant Banking Segment; (ii) recognize the reduced investment level of the equity portfolio; (iii) increase the sophistication of the financial model used to support the valuation of the Merchant Banking Segment; and (iv) value all the sub-segments of the Merchant Banking Segment, including the equity portfolio sub-segment, the royalty portfolio sub-segment, the portfolio management sub-segment, and the downstream gold refining sub-segment. As a result, certain of the assumptions underlying the December 31, 2003 valuation model are not directly comparable to the assumptions used in the February 15, 2002 valuation. The December 31, 2003 discounted cash flow analysis for the equity portfolio sub-segment of the Merchant Banking Segment assumed: (i) a discount rate of 9%; (ii) a time horizon of ten years; (iii) pre-tax returns on investment ranging from 35% starting in 2004 and gradually declining to 15% in 2011 through 2013; (iv) an initial equity portfolio investment of approximately $140 million; (v) capital infusions of $120 million annually for the next three fiscal years; and (vi) a terminal value of approximately $1.5 billion. The December 31, 2003 discounted cash flow analysis for the royalty portfolio sub-segment of the Merchant Banking Segment assumed: (i) a discount rate of 9%; (ii) a time horizon of ten years; (iii) an annual growth rate of 5% in the royalty portfolio; and (iv) a pre-tax rate of return on investment of 13%. The December 31, 2003 discounted cash flow analysis for the portfolio management sub-segment of the Merchant Banking Segment assumed: (i) a discount rate of 9%; (ii) a time horizon of ten years; and (iii) a pre-tax advisory fee of 5% on approximately $500 million of transactions and value-added activities in 2004, with the dollar amount of such transactions and activities increasing by 5% annually thereafter. The December 31, 2003 discounted cash flow analysis for the downstream gold refining sub-segment of the Merchant Banking Segment assumed: (i) a discount rate of 9%; (ii) a time horizon of ten years; and (iii) a pre-tax annual return on investments of $4.2 million. The December 31, 2003 discounted cash flow analysis assumed a combined terminal value for the royalty portfolio, portfolio management and downstream gold refining sub-segments of approximately $900 million.
Future Goodwill Valuations. For purposes of valuing the Merchant Banking Segment at future fiscal year ends, the Company expects that the valuation model will continue to be reevaluated and enhanced to acknowledge the evolving activities and objectives of the Merchant Banking Segment. The key drivers of such future valuations are expected to include (i) expected future long-term investment returns, adjusted for Company specific and market driven factors; (ii) expected economic value to be added by the Merchant Banking Segment
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in addition to such investment returns; (iii) the level of capital accessible by the Merchant Banking Segment; and (iv) other relevant facts and circumstances. To determine the appropriate returns, investment levels and other assumptions for purposes of this analysis, the Company will (i) review the expected or actual returns from transactions that were initiated and/or completed since the last impairment test; (ii) assess the actual economic values added by other Merchant Banking Segment activities since the last impairment test; and (iii) assess the ongoing appropriateness of all assumptions impacting the valuation based on then current conditions and expectations. The Company believes that any model used to value the Merchant Banking Segment will need to take into account the relatively long time horizon required to evaluate the investment returns and other economic value added activities of the Merchant Banking Segment. As such, in the absence of any mitigating valuation factors or “triggering events” (events that would give rise to a requirement to perform an impairment test), which are described below, the Company believes that a sustained period of approximately three years in which the Merchant Banking Segment’s actual investment levels, returns or economic values added fall significantly below those levels necessary to support the carrying value of the Merchant Banking Segment would likely result in a reduction of the value assigned to the Merchant Banking Segment’s growth potential and, in the absence of any offsetting increase in the aggregate fair value of the Merchant Banking Segment’s other net assets, an impairment of the Merchant Banking Segment goodwill.
A high degree of judgment is involved in determining the assumptions and estimates that are used to determine the fair value of the Merchant Banking Segment. Accordingly, no assurance can be given that actual results will not differ significantly from the corresponding assumptions and estimates. If a triggering event were to occur that could reasonably be expected to result in an impairment of the carrying value of the Merchant Banking Segment, the Company would be required to test the goodwill assigned to the Merchant Banking Segment as of the end of the reporting period in which any such event occurred. The Company believes that triggering events with respect to the Merchant Banking Segment could include, but are not limited to: (i) the Company’s partial or complete withdrawal of financial support for the Merchant Banking Segment; (ii) a significant reduction in management’s long-term expectation of the price of gold, given the adverse effect such a development could have on the fair values of the Merchant Banking Segment’s investment and royalty interest portfolios and the Merchant Banking Segment’s prospects for future growth; (iii) the divestiture of a significant portion of the Merchant Banking Segment’s investment portfolio together with management’s determination to not fund the replenishment of such portfolio for the foreseeable future; and (iv) any other event that might adversely affect the ability of the Merchant Banking Segment to consummate transactions that create value for the Company. The Company currently has no plans to withdraw financial support for the Merchant Banking Segment. For a discussion of the results of operations of the Merchant Banking Segment, see Results of Operations, Merchant Banking Segment, below.
Exploration Segment Goodwill
Purchase Price Allocation at February 15, 2002 and Impairment Testing at December 31, 2002. The Exploration Segment’s primary responsibilities are to (i) discover new gold deposits globally and regionally outside of the vicinity of any of the Company’s existing mining operations or development projects; (ii) discover new deposits in existing operating districts or project development areas; and (iii) provide exploration advice for the purpose of optimizing reserve extensions in areas surrounding existing mines and advancing non-reserve mineralization into economically mineable reserves. The assignment of goodwill to the Exploration Segment was based on the assumption that, following the acquisition of Normandy, the Exploration Segment would continue Normandy’s historical level of increasing proven and probable reserves through new discoveries by combining Normandy’s exploration culture, philosophy, expertise and methodologies with those of Newmont. The amount of goodwill assigned to the Exploration Segment as of the acquisition date was intended to represent the incremental increase in the value of the Exploration Segment as a result of the acquisition, and was based on a discounted cash flow analysis that assumed (i) 1.6 million recoverable ounces of gold of additions to proven and probable reserves through new discoveries in the first year following the acquisition; (ii) an annual growth rate for such reserve additions of 23.1% over a ten-year period; (iii) a fair value for each recoverable ounce of gold of
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reserve additions of approximately $58; and (iv) a discount rate of 15%. The assumed additions to reserves in the first year and the growth rate were based on Normandy’s historical annual reserve additions and Normandy’s average 33% historical growth rate in reserve additions during the 11-year period prior to the acquisition, and management’s expectation of the growth rate and levels of reserve additions that could be expected to continue in the future as a result of the Normandy acquisition. The February 15, 2002 valuation assumed that the incremental effect of the Normandy acquisitions would be to add approximately 49 million ounces to proven and probable reserves during the ten-year period following the acquisition. This compares to 20 million and 56 million ounces added to proven and probable reserves by Normandy and Newmont, respectively, during the ten years prior to the acquisition. Assuming exploration costs of $13 per ounce of gold, the Company would need to spend approximately $637 million over the next ten years to discover the 49 million incremental ounces that the February 15, 2002 valuation assumed would be added to proven and probable reserves. Subject to any significant adverse change in the Company’s long-term view of gold prices, the Company has both the ability and intent to provide at least $637 million of funding to the Exploration Segment over the next ten years. The fair value of the reserve additions was based in part on an assumed gold price of $300 per ounce, which represented Newmont’s assessment of the long-term price of gold as of the acquisition date. Although the Company believes that this discounted cash flow analysis provided a reasonable and supportable basis for the allocation of goodwill to the Exploration Segment, the Company recognizes that, due to the nature of the Exploration Segment’s business, the timing, quantity and value of future reserve additions are not easily predicted. Decreasing the assumed 23.1% growth rate for reserve additions by one percentage point to 22.1% and by ten percentage points to 13.1% would have resulted in a decrease of approximately $45 million and $365 million, respectively, in the value determined by the February 15, 2002 valuation assuming all other valuation assumptions were held constant. In addition, decreasing the long-term gold price assumption from $300 by one percentage point to $297 and by 10% to $270 would have resulted in a decrease of approximately $45 million and $444 million, respectively, in the value determined by the February 15, 2002 valuation assuming all other valuation assumptions were held constant. Changes to other valuation assumptions, such as annual reserve additions, discount rates, tax rates, operating costs, capital expenditures and the time horizon also would have impacted the value determined by the February 15, 2002 valuation. Accordingly, future results may vary significantly from the reserve additions, values and other assumptions underlying the February 15, 2002 valuation.
For purposes of performing its annual goodwill impairment test, the Company will perform an analysis to determine the fair value of the Exploration Segment. The fair value derived from this valuation process, together with the fair value of the identifiable net assets of the Exploration Segment, will be considered by the Company in the first step of its impairment test, which test requires the Company to compare the aggregate carrying value of the identifiable net assets and goodwill of the Exploration Segment to the aggregate fair value of such identifiable net assets and goodwill. For every 10% reduction in the valuation of such goodwill below the amount assigned to the Exploration Segment at the acquisition date, the Company would expect to record a non-cash goodwill impairment charge of approximately $113 million.
Impairment Testing at December 31, 2003. At December 31, 2003, the $1.1 billion carrying value of the Exploration Segment goodwill represented approximately 95% of the carrying value of the total assets of the Exploration Segment. Based on a December 31, 2003 valuation of the Exploration Segment prepared by an independent valuation firm, the Company concluded that the fair value of the Exploration Segment was significantly in excess of its carrying value at December 31, 2003, and accordingly, that it was not necessary to perform the second step of the goodwill impairment test with respect to its Exploration Segment. Although the Company considers both the February 15, 2002 and December 31, 2003 valuations to be reasonable and both were based on discounted cash flow models, the December 31, 2003 valuation incorporated assumptions and approaches that were designed to increase the sophistication of the financial model used to support the valuation of the Exploration Segment. As a result, certain assumptions underlying the December 31, 2003 valuation model are not directly comparable to the assumptions used in the February 15, 2002 valuation. In connection with the December 31, 2003 valuation, the Company reviewed the Exploration Segment’s performance during 2003 and prior years in generating additions to proven and probable reserves. The Exploration Segment is responsible for all activities, regardless of location, associated with the Company’s efforts to discover new mineralized material
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that will advance into proven and probable reserves. Internally generated proven and probable reserve additions are attributed to the Exploration Segment to the extent that such additions are derived from (i) a discovery made by the Company or Normandy; or (ii) a discovery made on previously acquired properties (whether acquired by the Company or by Normandy, prior to their acquisition by the Company) as a result of exploration efforts conducted subsequent to the acquisition date. All reserves known as of the acquisition date were assigned to operating mines and/or development stage properties and as such were excluded from the valuation of the Exploration Segment. In addition, the value of expected reserve additions that were assigned a value in purchase accounting were also excluded from the Exploration Segment’s valuation. During 2003, the Company replaced approximately 12.9 million gold ounces of depletion and divestments, with a total of 17.3 million ounces of additions to proven and probable reserves, of which 87% were non-acquisition and attributable to the Exploration Segment. Of the 2003 gold ounces attributable to the Exploration Segment, 57% were not previously valued in the Normandy purchase accounting. Based on this review of historical additions to proven and probable reserves and on management’s expectation of the growth rate and levels of reserve additions that could be expected to continue in the future, the discounted cash flow model developed to value the Exploration Segment at December 31, 2003 assumed that (i) the Exploration Segment would be responsible for 7.9 million ounces of additions to proven and probable reserves in year one of the discount period; (ii) such additions would increase by 5% annually; and (iii) approximately 64%, 61%, 58% and 20% of additions in years 2004, 2005, 2006 and 2007, respectively, would represent ounces that had previously been valued in the Normandy purchase accounting. In addition, the discounted cash flow model for the Exploration Segment assumed, among other matters: (i) a 16-year time horizon, including a six-year time lapse between discovery and the initiation of production and a five-year production period; (ii) a 9% discount rate; (iii) a terminal value of approximately $3.9 billion; (iv) an average gold price of $360 per ounce during the time horizon; (v) total cash costs per ounce produced of $201; and (vi) capital costs per ounce of $50. The Company believes that any model used to value the Exploration Segment will need to take into account the relatively long time horizon required to evaluate the activities of the Exploration Segment. As such, in the absence of any mitigating valuation factors, or triggering events which are described below, the Company believes that a sustained period of approximately three years in which additions to proven and probable reserves, or the values associated therewith, fall short of those levels that reasonably could be expected to support the carrying value of the Exploration Segment would likely result in a reduction of the value assigned to the Exploration Segment’s growth potential and, accordingly, in an impairment of the Exploration Segment goodwill. The Company believes that triggering events with respect to the Exploration Segment could include, but are not limited to: (i) the Company’s partial or complete withdrawal of financial support for the Exploration Segment; (ii) a significant decrease in the Company’s long-term expectation of the price of gold; and (iii) a significant increase in long-term capital and operating cost estimates. The Company currently has no plans to withdraw financial support for the Exploration Segment. For a discussion of the results of operations of the Exploration Segment, see Results of Operations, Exploration Segment, below.
Mine Site Goodwill. The assignment of goodwill to mine site reporting units was based on synergies that were expected to be achieved at each operation. Such synergies are expected to be incorporated into the Company’s operations and business plans over time. The amount of goodwill assigned to each segment or reporting unit was based on discounted cash flow analyses that assumed risk-adjusted discount rates over the remaining lives of the applicable mining operations. The Company believes that triggering events with respect to the goodwill assigned to mine site reporting units could include, but are not limited to: (i) a significant decrease in the Company’s long-term expectation of the price of gold; (ii) a decrease in reserves; and (iii) any event that might otherwise adversely affect mine site production levels or costs. The Company performed its annual impairment test of mine site goodwill and determined that there were no impairments at December 31, 2003. For more information on the discounted cash flows used to value mine site reporting units, see Carrying value of long-lived assets, below.
Depreciation, Depletion and Amortization
Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated future lives of such facilities or equipment. These lives do not exceed
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the estimated mine life based on proven and probable reserves as the useful lives of these assets are considered to be limited to the life of the relevant mine.
Costs incurred to develop new properties are capitalized as incurred, where it has been determined that the property can be economically developed based on the existence of proven and probable reserves. At the Company’s surface mines, these costs include costs to further delineate the ore body and remove overburden to initially expose the ore body. At the Company’s underground mines, these costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development. All such costs are amortized using the units-of-production (“UOP”) method over the estimated life of the ore body based on recoverable ounces to be mined from proven and probable reserves.
Major development costs incurred after the commencement of production are amortized using the UOP method based on estimated recoverable ounces to be mined from proven and probable reserves. Depending upon whether the development is expected to benefit the entire remaining ore body, or specific ore blocks or areas only, the UOP basis is either the life of the entire ore body, or the life of the specific ore block or area.
The calculation of the UOP rate of amortization, and therefore the annual amortization charge to operations, could be materially impacted to the extent that actual production in the future is different from current forecasts of production based on proven and probable reserves. This would generally occur to the extent that there were significant changes in any of the factors or assumptions used in determining reserves. These factors could include: (i) an expansion of proven and probable reserves through exploration activities; (ii) differences between estimated and actual cash costs of mining, due to differences in grade, metal recovery rates and foreign currency exchange rates; and (iii) differences between actual commodity prices and commodity price assumptions used in the estimation of reserves. Such changes in reserves could similarly impact the useful lives of assets depreciated on a straight-line basis, where those lives are limited to the life of the mine, which in turn is limited to the life of the proven and probable reserves.
The expected useful lives used in depreciation, depletion and amortization calculations are determined based on applicable facts and circumstances, as described above and in Note 2 to the Consolidated Financial Statements. Significant judgment is involved in the determination of useful lives, and no assurance can be given that actual useful lives will not differ significantly from the useful lives assumed for purpose of depreciation, depletion and amortization calculations.
Intangible assets related to mineral interests represent mineral use rights for parcels of land not owned by the Company. The Company’s intangible assets include mineral use rights related to production, development or exploration stage properties (each as defined in Note 2 to the Consolidated Financial Statements) and the value of such intangible assets is primarily driven by the nature and amount of mineralized material believed to be contained, or potentially contained, in such properties. The amount capitalized related to a mineral interest represents its fair value at the time it was acquired, either as an individual asset purchase or as a part of a business combination. The straight-line amortization of the Company’s exploration stage mineral interests is calculated after deducting applicable residual values. At December 31, 2003, such residual values aggregated approximately $341.9 million. Residual values are determined for each individual property based on the fair value of the exploration stage mineral interest, and the nature of, and the Company’s relative confidence in, the mineralized material believed to be contained, or potentially contained, in the underlying property. Such values are based on (i) discounted cash flow analyses for those properties characterized as other mineralized material and around-mine exploration potential; and (ii) recent transactions involving similar properties for those properties characterized as other mine-related exploration potential and greenfields exploration potential. Based on its knowledge of the secondary market that exists for the purchase and sale of mineral properties, the Company believes that both methods result in a residual value that is representative of the amount that the Company could expect to receive if the property were sold to a third party. Residual values range from zero to 90% of the gross carrying value of the respective exploration stage mineral interests. Significant judgment is
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involved in the determination of residual values, and no assurance can by given that actual values will not differ significantly from estimated residual values.
Refer to Note 2 to the Consolidated Financial Statements under “Mineral Interests and Other Intangible Assets” for definitions of each class of the Company’s mineral interest and other intangible assets.
Carrying Value of Long-Lived Assets
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate the related carrying amounts may not be recoverable. An asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on estimated quantities of recoverable minerals, expected gold and other commodity prices (considering current and historical prices, price trends and related factors), production levels and cash costs of production, capital and reclamation costs, all based on detailed engineering life-of-mine plans. The significant assumptions in determining the future discounted cash flows for each mine site reporting unit at December 31, 2003, apart from production cost and capitalized expenditure assumptions unique to each operation, included a long-term gold price of $360 per ounce and Australian and Canadian dollar exchange rates of $0.65 and $0.71, respectively per U.S.$1.00. The term “recoverable minerals” refers to the estimated amount of gold or other commodities that will be obtained from proven and probable reserves and all related exploration stage mineral interests, except for other mine-related exploration potential and greenfields exploration potential discussed separately below, after taking into account losses during ore processing and treatment. Estimates of recoverable minerals from such exploration stage mineral interests are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. With the exception of other mine-related exploration potential and greenfields exploration potential, all assets at a particular operation are considered together for purposes of estimating future cash flows. In the case of mineral interests associated with other mine-related exploration potential and greenfields exploration potential, cash flows and fair values are individually evaluated based primarily on recent exploration results and recent transactions involving sales of similar properties.
Refer to Note 2 to the Consolidated Financial Statements under “Mineral Interests and Other Intangible Assets” for definitions of each class of the Company’s mineral interest and other intangible assets.
As discussed above under Depreciation, Depletion and Amortization, various factors could impact the Company’s ability to achieve its forecasted production schedules from proven and probable reserves. Additionally, commodity prices, capital expenditure requirements and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material can ultimately be mined economically. Assets classified as other mine-related exploration potential and greenfields exploration potential have the highest level of risk that the carrying value of the asset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.
Material changes to any of these factors or assumptions discussed above could result in future impairment charges to operations.
Deferred Stripping Costs
At open pit mines that have diverse grades and waste-to-ore ratios over the life of the mine, the Company defers and amortizes certain stripping costs, normally associated with the removal of waste rock. The
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amortization of deferred amounts is determined using the UOP method based on estimated recoverable ounces from proven and probable reserves, using a stripping ratio calculated as the total tons to be moved over total proven and probable ore reserves. The charge to operations for the amortization of deferred stripping costs could differ materially between reporting periods to the extent that there were material changes to proven and probable reserves as discussed above under Depreciation, Depletion and Amortization. In addition, to the extent that the average ratio of tons of waste that were required to be removed for each ounce of gold differed materially from that which was estimated in the stripping ratio, the actual amortization charged to operations could differ materially between reporting periods.
Stockpiles, Ore on Leach Pads and Inventories
Costs that are incurred in or benefit the productive process are accumulated as stockpiles, ore on leach pads and inventories. The Company records stockpiles, ore on leach pads and inventories at the lower of average cost or net realizable value (“NRV”), and carrying values are evaluated at least quarterly. NRV represents the estimated future sales price of the product based on prevailing and long-term metals prices, less estimated costs to complete production and bring the product to sale. The primary factors that influence the need to record write-downs of stockpiles, ore on leach pads and inventories include prevailing short-term and long-term metals prices and prevailing costs for production inputs such as labor, fuel and energy, materials and supplies, as well as realized ore grades and actual production levels. During the years ended December 31, 2003, 2002 and 2001, write-downs of stockpiles, ore on leach pads and inventories to NRV aggregated $24.9 million, $44.4 million, and $25.1 million, respectively.
Stockpiles represent coarse ore that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile, the number of contained ounces based on assay data, and the estimated recovery percentage based on the expected processing method. Stockpile tonnages are verified by periodic surveys. Stockpiles are valued based on mining costs incurred up to the point of stockpiling the ore, including applicable depreciation, depletion and amortization relating to mining operations. Costs are added to a stockpile based on current mining costs and removed at the average cost per recoverable ounce of gold in the stockpile. Stockpiles are reduced as material is removed and fed to mills or placed on leach pads. At December 31, 2003 and 2002, the Company’s stockpiles had carrying values of $260.6 million and $241.1 million, respectively.
Ore on leach pads represents ore that is placed on pads where it is permeated with a chemical solution that dissolves the gold contained in the ore. The resulting pregnant solution is further processed in a leach plant where the gold is recovered. Costs are attributed to the carrying value of leach pads based on current mining costs, including applicable depreciation, depletion and amortization relating to mining operations. Costs are removed from the carrying value of the leach pad as ounces are recovered in circuit at the leach plant based on the average cost per recoverable ounce of gold on the leach pad. Estimates of recoverable gold on the leach pads are calculated from the quantities of ore placed on the pads, the grade of ore placed on the leach pads based on assay data and a recovery percentage. Ultimate recovery of gold contained on leach pads can vary from approximately 50% to 95% of the placed recoverable ounces in the first year of leaching, declining each year thereafter until the leaching process is complete. Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the grades of ore placed on pads to the quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor recoverability levels. As a result, the metallurgical balancing process is constantly monitored and the engineering estimates are refined based on actual results over time. Historically, the Company’s operating results have not been materially impacted by variations between the estimated and actual recoverable quantities of gold on its leach pads. Assuming a one percent variation from the Company’s current estimates of gold quantities on its leach pads at December 31, 2003, the Company would experience a production variance of approximately 21,500 ounces, assuming that none of the variations for individual leach pads offset one another on a consolidated basis. At December 31, 2003, the weighted-average cost per recoverable ounce of gold on leach pads was $136 per ounce.
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Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis. The ultimate recovery of gold from a pad will not be known until the leaching process is terminated. Based on current mine plans, the Company expects to place the last ton of ore on its current leach pads at dates ranging from 2007 to 2019. Including the estimated time required for residual leaching, rinsing and reclamation activities, the Company expects that its leaching operations will terminate within approximately nine years following the date that the last ton of ore is placed on the leach pad. At December 31, 2003 and 2002, the Company’s ore on leach pads had carrying values of $293.8 million and $287.6 million, respectively.
In-process inventories represent materials that are currently in the process of being converted to a saleable product. Conversion processes vary depending on the nature of the ore and the specific mining operation, but include mill in-circuit, leach in-circuit, flotation and column cells and carbon in-pulp inventories. In-process material is measured based on assays of the material fed to process and the projected recoveries of the respective plants. In-process inventories are valued at the average cost of the material fed to process attributable to the source material coming from mines, stockpiles or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facility, incurred to that point in the process. At December 31, 2003 and 2002, the Company’s in-process inventories had carrying values of $64.0 million and $46.4 million, respectively.
Precious metals inventories include gold doré and/or gold bullion. Precious metals that are received as in kind payments of royalties are valued at fair value on the date title is transferred to the Company. Precious metals that result from the Company’s mining and processing activities are valued at the average cost of the respective in-process inventories incurred prior to the refining process, plus applicable refining costs.
The allocation of costs to stockpiles, ore on leach pads and inventories and the determination of NRV involves the use of estimates and assumptions unique to each mining operation regarding current and future costs, production levels, commodity prices, proven and probable reserve quantities, engineering data and other factors. A high degree of judgment is involved in determining such assumptions and estimates and no assurance can be given that actual results will not differ significantly from the corresponding estimates and assumptions.
Financial Instruments
All financial instruments that meet the definition of a derivative are recorded on the balance sheet at fair market value, with the exception of contracts that qualify for the normal purchases and normal sales exemption. Changes in the fair market value of derivatives recorded on the balance sheet are recorded in the statements of consolidated operations, except for the effective portion of the change in fair market value of derivatives that are designated as a cash flow hedge and qualify for cash flow hedge accounting. The Company’s portfolio of derivatives includes various complex instruments that are linked to gold prices and other factors. Management applies significant judgment in estimating the fair value of instruments that are highly sensitive to assumptions regarding gold and other commodity prices, gold lease rates, market volatilities, foreign currency exchange rates and interest rates. Variations in these factors could materially affect amounts credited or charged to operations to reflect the changes in fair market value of derivatives. In addition, certain derivative contracts are accounted for as cash flow hedges, whereby the effective portion of changes in fair market value of these instruments are deferred in Other comprehensive income and will be recognized in the statements of consolidated operations when the underlying production designated as the hedged item is sold. All derivative contracts qualifying for hedge accounting are designated against the applicable portion of future production from proven and probable reserves, where management believes the forecasted transaction is probable of occurring. To the extent that management determines that such future production is no longer probable of occurring due to changes in the factors impacting the determination of reserves, as discussed above under Depreciation, depletion and amortization, gains and losses deferred in Other comprehensive income would be reclassified to the statements of consolidated operations immediately.
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Reclamation and Remediation Obligations (Asset Retirement Obligations)
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. In August 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which established a uniform methodology for accounting for estimated reclamation and abandonment costs. The statement was adopted January 1, 2003, when the Company recorded the estimated present value of reclamation liabilities and increased the carrying amount of the related asset, which resulted in a cumulative effect of a change in accounting principle of $34.5 million. See Note 14 to the Consolidated Financial Statements. The reclamation costs will be allocated to expense over the life of the related assets and will be adjusted for changes resulting from the passage of time and revisions to either the timing or amount of the original present value estimate.
Prior to adoption of SFAS No. 143, estimated future reclamation costs were based principally on legal and regulatory requirements. Such costs related to active mines were accrued and charged over the expected operating lives of the mines using the UOP method based on proven and probable reserves. Future remediation costs for inactive mines were accrued based on management’s best estimate at the end of each period of the undiscounted costs expected to be incurred at a site. Such cost estimates included, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates were reflected in earnings in the period an estimate was revised.
Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs the Company will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required to be performed by the Company. Any such increases in future costs could materially impact the amounts charged to operations for reclamation and remediation.
Carrying Value of Investments
Investments in incorporated entities in which the Company’s ownership interest is greater than 20% and less than 50%, or which the Company does not control, are accounted for using the equity method and are included in long term assets. See Note 10 to the Consolidated Financial Statements for a complete description of the Company’s equity method investments, and Note 2 to the Consolidated Financial Statements for a description of the Company’s policy for accounting for its equity method investments. The Company periodically reviews its equity method investments to determine whether a decline in fair value below the carrying amount is other than temporary. In making this determination, the Company considers a number of factors related to the financial condition and prospects of the investee including (i) a decline in the stock price or valuation of the equity investee for an extended period of time; (ii) an inability to recover the carrying amount of the investment or inability of the equity investee to sustain an earnings capacity which would justify the carrying amount of the investment; and (iii) the period of time over which the Company intends to hold the investment. If the decline in fair value is deemed to be other than temporary, the carrying value is written down to fair value. In situations where the fair value of an investment is not evident due to a lack of a public market price or other factors, the Company uses its best estimates and assumptions to arrive at the estimated fair value of such investment, based on future cash flows of the equity investee and other relevant factors. As significant judgment is required in assessing these factors, together with the fact that the underlying mining operations are subject to uncertainties similar to those discussed above in relation to the Company, it is possible that changes in any of these factors in the future could result in an other than temporary decline in value of an equity investment and could require the Company to record an impairment charge to operations in future periods.
Deferred Tax Assets
The Company recognizes the future tax benefit expected to be obtained from deferred tax assets when the tax benefit is not considered to be more likely than not incapable of being realized. Assessing the recoverability
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of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. Refer above under Carrying Value of Long-Lived Assets for a discussion of the factors that could cause future cash flows to differ from estimates. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the balance date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company operates could limit the Company’s ability to obtain the future tax benefits represented by its deferred tax assets recorded at the balance date.
Consolidated Financial Results
Sales—gold were $3.1 billion, $2.6 billion and $1.7 billion for the years ended December 31, 2003, 2002 and 2001, respectively. The 2003 increase from 2002 was primarily due to an increase in the average realized gold price. The 2002 increase from 2001 was primarily due to an increase in the average realized gold price and the incremental impact of the acquired Newmont Australia Limited (formerly Normandy) operations. The following analysis demonstrates the increase in consolidated gold sales revenue year over year:
Years ended December 31, 2003 2002 2001 Consolidated gold sales (in millions)
$ 3,082.9 $ 2,566.9 $ 1,666.1 Consolidated production ounces sold (in thousands)
8,455.9 8,217.9 6,141.8 Average price received per ounce
$ 366 $ 313 $ 271 Average market price per ounce
$ 362 $ 310 $ 271
2003 vs.
20022002 vs.
2001Increase in consolidated sales due to (in millions):
Consolidated production
$ 75.8 $ 4.8 Average gold price received
440.2 246.1 Acquisition of Normandy
N/A 649.9 Total
$ 516.0 $ 900.8
Sales—base metals, net totaled $74.8 million in 2003, and included $53.0 million from copper sales and $21.8 million from zinc sales at Golden Grove in Australia, both net of smelting and refining charges, compared to $55.3 million in 2002, which included $27.6 million from copper sales and $23.3 million from zinc sales, both net of smelting and refining charges, and $4.4 million from cobalt sales. Newmont had no base metals sales from consolidated operations in 2001.
Royalties totaled $56.3 million, $35.7 million and $0.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. The 2003 increase compared to 2002 is primarily attributable to higher gold and oil and gas prices. The 2002 increase compared to 2001 is primarily related to the acquisition of Franco-Nevada in February 2002.
Costs applicable to sales—gold, which includes total cash costs, accretion of reclamation and remediation liabilities related to consolidated gold production and write-downs of stockpiles, ore on leach pads and inventories, increased to $1.7 billion from $1.6 billion in 2002 and $1.1 billion in 2001. The 2003 increase primarily reflects higher total cash costs per ounce at Nevada and in Australia, partially offset by a decrease in total cash costs per ounce at Yanacocha. See Results of Operations below. The increase in costs in the same period of 2002 primarily related to the incremental impact of the mining operations acquired from Normandy, as well as an increase in the average total cash costs per ounce for the year ended December 31, 2002. Total cash costs per ounce increased in the same period of 2002 primarily at Nevada and Yanacocha.
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The following is a summary of Costs applicable to sales by operation:
Years ended December 31, 2003 2002 2001 (in millions) North America:
Nevada
$ 597.8 $ 657.1 $ 627.1 Mesquite, California
9.3 10.1 20.4 La Herradura, Mexico
11.1 11.5 9.6 Golden Giant, Canada
53.4 57.1 55.0 Holloway, Canada
20.8 20.4 19.1 Total North America
692.4 756.2 731.2 South America:
Yanacocha, Peru
362.5 302.0 238.0 Kori Kollo, Bolivia
35.6 46.6 50.9 Total South America
398.1 348.6 288.9 Australia:
Pajingo
42.9 30.5 13.4 Kalgoorlie
108.4 85.0 — Yandal
158.7 136.4 — Tanami
148.9 111.5 — Total Australia
458.9 363.4 13.4 Other Operations:
Zarafshan-Newmont, Uzbekistan
32.9 34.0 30.9 Minahasa, Indonesia
26.3 41.2 53.7 Martha, New Zealand
24.9 19.6 — Ovacik, Turkey
22.3 17.5 — Total Other Operations
106.4 112.3 84.6 Other:
Merchant Banking
0.8 0.5 — Base Metals Operations
43.5 35.5 — Exploration
— — — Corporate and Other
0.2 (0.1 ) (0.2 ) Total Other
44.5 35.9 (0.2 ) Total Newmont
$ 1,700.3 $ 1,616.4 $ 1,117.9
Nevada’s Costs applicable to sales decreased for the year ended December 31, 2003 from the same period in 2002 as a result of a 232,700 decrease in ounces sold, partially offset by a $10 increase in total cash costs per ounce. Nevada’s Costs applicable to sales increased for the year ended December 31, 2002 from the same period in 2001 as a result of a 20,300 increase in ounces sold and a $3 increase in total cash costs per ounce. At Yanacocha, Costs applicable to sales increased in 2003 from 2002 and 2001 primarily due to increases in sales volumes of 291,000 equity ounces and 193,800 equity ounces in 2003 and 2002, respectively. Total cash costs decreased $5 per equity ounce in 2003 after an increase in total cash costs per equity ounce of $10 in 2002. Kori Kollo’s Costs applicable to sales decreased in 2003 from 2002 and 2001. The 2003 variance from 2002 resulted from a decrease in equity ounces sold of 90,900 and an increase in total cash costs per equity ounce of $28. The decrease in 2002 from 2001 was attributable to a decrease in equity ounces sold of 25,400. At Minahasa, Costs applicable to sales decreased in 2003 from 2002 and 2001 as a result of a decrease in equity ounces sold of 55,000 in 2003 and 194,300 in 2002, partially offset by an increase in total cash costs per equity ounce of $31
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and $76 in 2003 and 2002, respectively. Costs applicable to sales increased at all Australian sites as a result of the following: (i) Pajingo had an increase in ounces sold of 33,900 and an increase in total cash costs per ounce of $34; (ii) Kalgoorlie had an increase in equity ounces sold of 80,000 and an increase in total cash costs per equity ounce of $48; (iii) Yandal had a decrease in ounces sold of 45,500, offset by an increase of $58 in total cash costs per ounce; and (iv) Tanami’s equity ounces sold increased 136,200 and total cash costs per equity ounce increased $35. For a complete discussion regarding reasons for variation in ounces sold and total cash costs per ounce, see Results of Operations, below.
Costs applicable to sales—base metals were $44.3 million and $36.0 million in the years ended December 31, 2003 and 2002, respectively. The year ended December 31, 2003 costs primarily consisted of $37.4 million for copper and $6.0 million for zinc. The year ended December 31, 2002, costs primarily consisted of $18.3 million for copper, $9.3 million for zinc and $7.8 million for cobalt. The Ity cobalt operation was sold in 2002.
Deferred stripping. In general, mining costs are charged to Costs applicable to sales as incurred. However, at open pit mines, which have diverse grades and waste-to-ore ratios over the mine life, the Company defers and amortizes certain mining costs on a units-of-production basis over the life of the mine. These mining costs, which are commonly referred to as “deferred stripping” costs, are incurred in mining activities that are normally associated with the removal of waste rock. The deferred stripping accounting method is generally accepted in the mining industry where mining operations have diverse grades and waste-to-ore ratios; however, industry practice does vary. Deferred stripping matches the costs of production with the sale of such production at the Company’s operations where it is employed, by assigning each ounce of gold with an equivalent amount of waste removal cost. If the Company were to expense stripping costs as incurred, there might be greater volatility in the Company’s period-to-period results of operations.
Details of deferred stripping with respect to certain of the Company’s open pit mines are as follows (unaudited):
Nevada(3) Mesquite(4) 2003 2002 2001 2003 2002 2001 Life-of-mine Assumptions Used as Basis For Deferred Stripping Calculations
– Stripping ratio(1)
125.0 125.1 138.4 n/a n/a 237.6 – Average ore grade (ounces of gold per ton)
0.049 0.073 0.066 n/a n/a 0.023 Actuals for Year
– Stripping ratio(2)
124.9 72.2 88.9 n/a n/a 155.5 – Average ore grade (ounces of gold per ton)
0.075 0.081 0.060 n/a n/a 0.031 Remaining Mine Life (years)
9 10 11 n/a n/a — La Herradura(5) Minahasa(6) 2003 2002 2001 2003 2002 2001 Life-of-mine Assumptions Used as Basis For Deferred Stripping Calculations
– Stripping ratio(1)
146.4 141.3 177.0 n/a n/a 14.5 – Average ore grade (ounces of gold per ton)
0.030 0.031 0.035 n/a n/a 0.172 Actuals for Year
– Stripping ratio(2)
157.4 158.5 200.0 n/a n/a 15.9 – Average ore grade (ounces of gold per ton)
0.026 0.026 0.025 n/a n/a 0.131 Remaining Mine Life (years)
5 6 7 n/a n/a —
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Tanami(7) Kalgoorlie(8) Martha(9) Ovacik(10) 2003 2002 2003 2002 2003 2002 2003 2002 Life-of-mine Assumptions Used as Basis For Deferred Stripping Calculations
– Stripping ratio(1)
48.8 68.2 114.8 111.5 32.1 31.7 34.9 28.9 – Average ore grade (ounces of gold per ton)
0.160 0.113 0.065 0.065 0.103 0.093 0.356 0.362 Actuals for Year
– Stripping ratio(2)
63.5 86.4 112.2 131.0 29.5 36.6 40.4 32.1 – Average ore grade (ounces of gold per ton)
0.108 0.107 0.063 0.054 0.089 0.100 0.374 0.358 Remaining Mine Life (years)
1 2 13 14 3 4 2 3
(1) Total tons to be mined in future divided by total ounces of gold to be recovered in future, based on proven and probable reserves.
(2) Total tons mined divided by total ounces of gold recovered.
(3) The actual stripping ratio increased in 2003 from 2002 due to increased waste removal for the Gold Quarry South Layback at Carlin and Section 30 at Twin Creeks. The life-of-mine grade decreased in 2003 due to the inclusion of several low grade deposits previously excluded. The life-of-mine stripping ratio decreased in 2002 from 2001 due to the deferral of open pit projects in response to lower gold prices. The actual stripping ratio in 2002 decreased from 2001 due to mining higher-grade ore zones in the Twin Creeks pit.
(4) Mesquite is included in the Company’s Other North America operating segment. Mesquite ceased mining operations in the second quarter of 2001 and was sold in December 2003.
(5) The life-of-mine stripping ratios decreased in 2002 from 2001 due to an increase in proven and probable reserve ounces. The actual stripping ratio decreased in 2002 from 2001 due to waste removal in 2001 in preparation for 2002 mining activities. La Herradura is included in the Company’s Other North America operating segment.
(6) Minahasa is included in the Company’s Other International operating segment. Minahasa ceased mining operations in the fourth quarter of 2001.
(7) The life-of-mine and actual stripping ratios decreased in 2003 from 2002 due to the completion of a higher stripping ratio pit during September 2002. The life-of-mine grade increased in 2003 as several low grade pits were completed during 2002. The one year mine life is for open pit operations only. The underground mine life is six years. Tanami is included in the Company’s Other Australia operating segment.
(8) The actual stripping ratio decreased in 2003 as a direct result of higher-grade material being mined. Kalgoorlie is included in the Company’s Other Australia operating segment.
(9) The actual stripping ratio decreased in 2003 due to lower waste removal during the period. Martha is included in the Company’s Other International operating segment.
(10) The life-of-mine stripping ratio increased in 2003 due to a shift from mining underground reserves to open pit reserves. The actual stripping ratio increased in 2003 from 2002 due to accelerated waste removal required to maintain higher mill throughput. Ovacik is included in the Company’s Other International segment.
Depreciation, depletion and amortization (DD&A) was $564.5 million, $505.6 million and $301.6 million in 2003, 2002 and 2001, respectively. The increase in 2003 is attributable to a decrease in the estimated useful lives of certain assets (primarily in Nevada) and an increase in the depreciable base due to the adoption of SFAS 143 (see Accounting Changes). The increase in 2002 is primarily from the incremental impact of the acquired Newmont Australia Limited (formerly Normandy) operating sites, the amortization of mining royalty interests acquired from Franco-Nevada as part of the February 2002 acquisitions and increased production. DD&A expense fluctuates as capital expenditures increase or decrease and as production levels increase or decrease in addition to the items previously mentioned. Newmont expects DD&A to be approximately $580 million to $600 million in 2004.
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The following is a summary of Depreciation, depletion and amortization by operation:
Years ended December 31, 2003 2002 2001 (in millions) North America:
Nevada
$ 137.7 $ 118.2 $ 117.4 Mesquite, California
3.9 6.3 7.5 La Herradura, Mexico
3.4 3.1 3.2 Golden Giant, Canada
22.0 20.5 18.3 Holloway, Canada
5.3 6.7 6.5 Total North America
172.3 154.8 152.9 South America:
Yanacocha, Peru
160.4 121.5 82.3 Kori Kollo, Bolivia
6.8 13.8 19.5 Total South America
167.2 135.3 101.8 Australia:
Pajingo
29.2 20.6 4.3 Kalgoorlie
9.8 9.0 — Yandal
35.8 43.5 — Tanami
36.0 33.7 — Other
5.3 3.4 — Total Australia
116.1 110.2 4.3 Other Operations:
Zarafshan-Newmont, Uzbekistan
10.1 10.3 11.9 Minahasa, Indonesia
7.6 9.5 22.8 Martha, New Zealand
11.5 13.9 — Ovacik, Turkey
13.9 11.5 — Other
2.7 0.8 — Total Other Operations
45.8 46.0 34.7 Other:
Merchant Banking
26.5 22.6 — Base Metals Operations
29.1 22.9 — Exploration
3.3 7.7 1.6 Corporate and Other
4.2 6.1 6.3 Total Other
63.1 59.3 7.9 Total Newmont
$ 564.5 $ 505.6 $ 301.6
Nevada’s DD&A increased in 2003 primarily due to capital expenditures of $109.7 million and a decrease in the estimated useful lives of certain assets. Yanacocha had capital expenditures of $194.2 million and $146.2 million in 2003 and 2002, respectively, resulting in an increase in DD&A. At Kori Kollo and Minahasa, DD&A decreased in 2003 from 2002 and 2001 as a result of fewer ounces produced. At Pajingo, DD&A increased as a result of an increase in capital expenditures and ounces produced. For a complete discussion, see Results of Operations, below.
Exploration, research and development was $115.2 million, $88.9 million and $55.5 million during 2003, 2002 and 2001, respectively. The 2003 increase over 2002 was primarily as a result of increased spending on advanced projects. The increase in 2002, as compared to 2001, resulted from the Newmont integration of the
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former Normandy and Franco-Nevada exploration programs and from the increase in available capital to fund exploration activities due to higher prevailing gold prices in 2002. Newmont expects Exploration, research and development expenses to be approximately $140 million to $150 million in 2004.
General and administrative was $130.3 million, $115.3 million and $61.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The increase for the year ended December 31, 2003, as compared to the same period in 2002, was attributable to higher legal expenses, increased pension and other employee benefit-related expenses and increased compliance and corporate governance costs. The increase in 2002, as compared to 2001, primarily relates to increased administrative costs resulting from the integration of Normandy and Franco-Nevada. General and administrative expense as a percentage of revenues was 4.1% in 2003, compared to 4.3% in 2002 and 3.7% in 2001. Newmont expects General and administrative expenses to be approximately $100 million to $110 million in 2004.
Write-down of long-lived assets totaled $35.3 million, $3.7 million and $32.7 million during the years ended December 31, 2003, 2002 and 2001, respectively. The 2003 write-down primarily related to a $28.4 million impairment charge at Golden Giant, part of the Other North America Segment, and a select number of idle vehicles in the mobile fleet at Yanacocha, which were reduced to their residual value. The impairment charge at Golden Giant resulted from a reevaluation of the life-of-mine plan which eliminated marginal stopes and reflected higher projected life-of-mine operating costs, this led to reduced proven and probable reserves and increased life-of-mine operating costs. The 2002 write-down related to an impairment charge for exploration stage mineral interests at Ity and fixed assets at Kori Kollo. The 2001 write-down primarily related to fixed assets at Minahasa, part of the Other International Segment, due to a reevaluation of the life-of-mine plan that resulted in a reduction of proven and probable reserves. Newmont is currently evaluating the mine plan at Ovacik relative to certain uncertainties that exist at the operation, including land access, changes in Turkish taxation legislation and the operating costs of underground operations. If such uncertainties are not favorably resolved, it is reasonably possible that the Company could recognize a charge for impairment of the long-lived assets at Ovacik. The carrying value of Ovacik’s long-lived assets at December 31, 2003 was approximately $52.1 million. See Results of Operations, below for further discussion of the Turkish taxation legislation.
For a discussion of the Company’s policy for assessing the carrying value of its long-lived assets for impairment, see Critical Accounting Policies, above.
Merger and restructuring expenses of $60.5 million in 2001 included $28.1 million of transaction and related costs associated with the acquisition of Battle Mountain and $32.4 million of restructuring expenses that included $22.1 million for voluntary early retirement pension benefits and $10.3 million for employee severance and office closures.
Other expenses in 2003, 2002 and 2001 were $49.5 million, $29.4 million and $11.5 million, respectively. The 2003 expense included charges for additions to reclamation and remediation liabilities related to depleted ore bodies, an accrual for certain environmental obligations, costs associated with the finalization of a de-watering agreement in Nevada, severance costs at the Kori Kollo project in Bolivia, and costs related to compliance and governance implementation activities associated with the Sarbanes-Oxley Act of 2002. The 2002 expenses primarily included integration costs relating to the acquisitions of Normandy and Franco-Nevada and costs associated with employee severance benefits. The 2001 expense was primarily composed of start-up costs for the La Quinua mine site at Yanacocha and accounts receivable write-offs from third party contractors.
Gain on investments, net was $83.2 million and $47.1 million for years ended December 31, 2003 and 2002, respectively. There were no gains or losses on investments during the year ended December 31, 2001. During the year ended December 31, 2003, Newmont recorded gain on exchange of Echo Bay shares for Kinross shares of $84.3 million, a net loss of $7.4 million on the sale of approximately 28 million Kinross shares and a gain of approximately $6.3 million on the sale of other investments. The December 31, 2002 gain of $47.3 million is
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primarily related to Newmont’s sale of its investment of Lihir Gold Limited. See Investing Activities for more information on these transactions.
Gain (loss) on derivative instruments, net, representing non-cash, mark-to-market gains and losses recognized on ineffective and partially ineffective gold derivative instruments, was $22.9 million, $(39.8) million and $1.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. The 2003 gain related primarily to the acquired Normandy hedge books and resulted predominantly from a strengthening of the Australian dollar from approximately $0.56 to $0.75 per U.S. dollar between December 31, 2002 and December 31, 2003. This gain was partially offset by the U.S. dollar gold price increasing from $347 per ounce to $416 per ounce over the same period. The loss in 2002 primarily relates to the acquired Normandy gold hedge books and resulted from the increase in the U.S. dollar gold price from $300 per ounce at February 15, 2002, the date of acquisition of Normandy, to $347 at December 31, 2002, partially offset by the appreciation in the Australian dollar per U.S.$ from $0.52 at February 15, 2002 to $0.56 at December 31, 2002. Generally, higher gold prices increase Newmont’s derivative liability position, whereas appreciation in the Australian dollar decreases Newmont’s derivative liability position. The Company has substantially eliminated the acquired Normandy hedge books as of December 31, 2003, so gains and losses in the future should not be as significant. Prior to the acquisition of Normandy, Gain (loss) on derivative instruments primarily reflected the change in fair value of written call option contracts at the end of each year. In September 2001, Newmont entered into transactions that closed out these call options. These options were replaced with a series of sales contracts requiring physical delivery of the same quantity of gold over slightly extended future periods. The call options were marked to their market value of $53.8 million immediately prior to their close, resulting in a non-cash gain of $1.8 million in 2001. The value of the new sales contracts was recorded as Deferred revenue from sale of future production and will be included in sales revenue as delivery occurs.
Gain on extinguishment of NYOL bonds, net was $114.0 million for the year ended December 31, 2003. On May 29, 2003, Newmont, through its subsidiary Yandal Bond Company Limited (“YBCL”), made an offer to acquire all of NYOL’s outstanding 8 7/8% Senior Notes due in April 2008 at a price of $500 per $1,000 principal amount. YBCL received binding tender offers for the Senior Notes totaling $237.0 million, representing 99% of the $237.2 million principal amount outstanding at the time of the offer. The liabilities for the remaining NYOL bonds were extinguished in connection with NYOL’s insolvency proceeding in Australia (see Notes 12 and 27 to the Consolidated Financial Statements).
Gain on extinguishment of NYOL derivative liability, net was $106.5 million for the year ended December 31, 2003. On May 28, 2003, YBCL made an offer to acquire all of NYOL’s gold hedge contracts from the counterparties at a rate of $0.50 per $1.00 of net mark-to-market hedge liability as of May 22, 2003. Six of a total of seven counterparties representing 94% of the gold ounces in the NYOL hedge book and 76% of the mark-to-market May 22, 2003 hedge liability, assigned their hedge contracts to YBCL. The remaining NYOL hedge contract liabilities were extinguished in connection with NYOL’s insolvency proceeding in Australia (see Notes 12 and 27 to the Consolidated Financial Statements).
Loss on extinguishment of debt was $33.8 million for year ended December 31, 2003. During the first quarter of 2003, Newmont repurchased $23.0 million of its 8 3/8% debentures, $52.3 million of its 8 5/8% debentures, $10.0 million of Newmont Australia 7 1/2% guaranteed notes, and $30.9 million of Newmont Australia 7 5/8% guaranteed notes for total cash consideration of $135.8 million. During the fourth quarter of 2003, Newmont repurchased $125.0 million of its 8 3/8% debentures, $70.5 million of 7 1/2% Newmont Australia guaranteed notes and 100% of its 6% convertible subordinated debentures for total cash consideration of $309.8 million. See Liquidity and Capital Resources, Financing Activities.
Loss on guarantee of QMC debt was $30.0 million for the year ended December 31, 2003. Newmont is the guarantor of an A$71.0 million (approximately $53.2 million) amortizing loan facility of QMC Finance Pty Ltd. (“QMC”), of which A$65.2 million (approximately $48.9 million) was outstanding as of December 31, 2003. The QMC loan facility, which is collateralized by the assets of Queensland Magnesium Project, expires in
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November 2006. During the fourth quarter of 2003, Newmont recorded a $30.0 million charge in Loss on guarantee of QMC debt. Newmont reduced the amount accrued for this contingent obligation by the estimated fair value of the AMC assets that would be subrogated to Newmont in the event the guarantee is called.
Dividends, interest income, foreign currency exchange and other income was $132.2 million, $39.9 million and $7.4 million for the years ended December 31, 2003, 2002 and 2001, respectively, as follows:
Years Ended December 31, 2003 2002 2001 (in thousands) Dividends and interest income
$ 10,554 $ 14,139 $ 2,976 Foreign currency exchange gain (loss), net
96,971 14,020 (5,088 ) Gains on sales of mining and exploration properties
15,394 6,112 3,098 Other
9,279 5,614 6,401 Total
$ 132,198 $ 39,885 $ 7,387
The year ended December 31, 2003 included a foreign currency translation gain of $97.0 million primarily composed of the following: (i) exchange gains, net of $58.9 million on Canadian dollar-denominated intercompany loans with a subsidiary whose functional currency is the Canadian dollar, reflecting a strengthening of the Canadian dollar during the period from $0.63 to $0.77 per US dollar; (ii) a $27.4 million mark-to-market gain on ineffective foreign currency swaps; (iii) a $19.2 million foreign currency gain on the translation of Newmont Australia Limited’s financial statements to U.S. dollars due to appreciation of the Australian dollar from $0.56 to $0.75 per U.S.$; and (iv) other foreign currency losses of $8.5 million. As of December 31, 2003, the Company converted a substantial portion of the Canadian dollar-denominated intercompany loans to long-term notes, as the Company does not intend to settle these loans in the foreseeable future. As a result, the Company will no longer record foreign currency gains and losses in earnings with respect to the converted long-term notes.
Interest expense, net of amounts capitalized was $88.6 million, $129.6 million and $98.1 million in 2003, 2002 and 2001, respectively. Capitalized interest totaled $8.9 million, $5.2 million and $10.6 million in each year, respectively. Net interest expense declined during 2003 from 2002 primarily due to a decrease in outstanding debt obligations (see Liquidity and Capital Resources and Financing Activities, below) resulting from Newmont’s debt-reduction strategy. Net interest expense increased in 2002 from 2001 primarily from long-term debt assumed as part of the acquisition of Normandy.
Income tax (expense) benefit was $(206.9) million in 2003, compared to $(19.9) million and $59.3 million in 2002 and 2001, respectively. The increase in income tax expense in 2003, compared to 2002, was primarily attributable to $709.1 million higher Pre-tax income (loss) before minority interest, equity income (loss) of affiliates and cumulative effect of a change in accounting principle (“pre-tax income (loss)”). The Company’s effective tax rates were 22.4% and 9.2% in 2003 and 2002 based on pre-tax income of $925.4 million and $216.3 million, respectively. The Company’s 2001 pre-tax loss was $63.1 million. The factors that most significantly impact the Company’s effective tax rate are percentage depletion and resource allowances, valuation allowances related to deferred tax assets, foreign earnings net of foreign tax credits, earnings attributable to minority interests in subsidiaries and affiliated companies, foreign currency translation gains and losses and the impact of certain specific transactions. Most of these factors are sensitive to the average realized price of gold and other metals.
Percentage depletion allowances (tax deductions for depletion that may exceed the Company’s tax basis in its mineral reserves) are available to the Company under the income tax laws of the United States for operations conducted in the United States or through branches and partnerships owned by U.S. subsidiaries included in the Company’s consolidated United States income tax return. The deductions are highly sensitive to the price of gold and other minerals produced by the Company. In general, such deductions are calculated separately for each
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operating mine and are based on a complex two-part formula that considers the net-of-royalty revenue received from sales of the mine output and the taxable income from the particular mine that produced the output. For 2003 and prior years, similar types of deductions have been available for mining operations in Canada and were referred to as resource allowances. However, changes in the Canadian tax law enacted in 2003 repeal the resource allowances beginning in 2004. The tax benefits from percentage depletion and resource allowances were $21.5 million, $34.4 million and $17.3 million in 2003, 2002 and 2001, respectively. The reduction in 2003 compared to the other periods resulted primarily from the fact that the 2002 benefit included incremental depletion allowances resulting from the settlement of tax controversies and reduced Canadian resource allowances. These two factors were partially offset by increases in percentage depletion allowances due to an increase in the Company’s average realized gold price in 2003 to $366, compared to $313 and $271 for 2002 and 2001, respectively.
The Company operates in various countries around the world that have tax laws, tax incentives and tax rates that are significantly different than those of the United States. Many of these differences combine to move the Company’s overall effective tax rate higher or lower than the United States statutory rate. The effect of these differences are shown in Note 16 to the Consolidated Financial Statements as either a rate differential or the effect of foreign earnings, net of credits. Differences in tax rates and other foreign income tax law variations make the Company’s ability to fully utilize all of its available foreign income tax credits on a year-by-year basis highly dependent on the price of the minerals produced by the Company since lower prices can result in the Company having insufficient sources of taxable income in the United States to utilize all available foreign tax credits. Such credits have very limited carryback and carryforward periods and can only be used to reduce the United States income tax imposed on the Company’s foreign earnings included in its annual United States consolidated income tax return. The effects of foreign earnings, net of allowable credits, were reductions of income tax expense of $27.8 million, $16.7 million and $29.5 million in 2003, 2002 and 2001, respectively. Included in the foreign tax credit component of the 2003 amount is a benefit of $49.8 million resulting from the utilization of foreign tax credit carryforwards for which a valuation allowance previously had been recorded. This utilization primarily is caused by the realization of higher sources of taxable income in the United States resulting from the increase in the Company’s average realized gold price in 2003.
The tax effect of changes in local country tax laws as set forth as a separate item in the Company’s effective tax reconciliation in Note 16 to the Consolidated Financial Statements, resulted in a net tax benefit of $35.7 million in 2003. The net tax benefit is primarily related to a change in tax law in Australia that allows the Company to consolidate wholly-owned subsidiaries in that country.
Included in the effect of foreign taxes on the Company’s effective tax rate for 2003 are the effects of transactions occurring at subsidiaries, the earnings of which Newmont intends to indefinitely reinvest and, therefore, for which no United States deferred tax liabilities or assets can be provided. These transactions include a $16.3 million tax expense on the exchange of the Company’s investment in Echo Bay for shares of Kinross, a $10.3 million tax benefit on the subsequent loss on the sale of Kinross shares, a $7.4 million tax benefit on the Equity loss and impairment of Australian Magnesium Corporation, and $35.6 million and $32.0 million of tax expense on the Gain on the extinguishment of NYOL bonds and the Gain on extinguishment of NYOL derivatives liability, respectively.
As indicated above, for financial reporting purposes, NYOL U.S. dollar-denominated bonds have been treated as extinguished giving rise to a significant gain. The notes were purchased from the third party holders by an United States affiliate of NYOL and remained outstanding at year end. For Australian and United States income tax purposes the transaction is treated as a deemed repurchase of the notes followed by a deemed re-issuance of new notes with a face value equal to the amount paid to the third party holders. While no cash taxes are payable on this type of income under Australian tax law, certain tax attributes of the Australian group are required to be reduced by the lower of the amount of the deemed extinguishment gain or the available tax attributes. The expected future tax benefit related to the tax attributes required to be eliminated previously had been recorded as a deferred tax asset. Consequently, the elimination of the tax attributes required a reduction in
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the group’s deferred tax assets and a charge to income tax expense in the amount of $35.6 million. This 2003 tax expense component is set forth as a separate reconciling item in Note 16 to the Consolidated Financial Statements.
The need to record valuation allowances related to the Company’s deferred tax assets (primarily attributable to net operating losses and tax credits) is principally dependent on the following factors: (i) the extent to which the net operating losses and tax credits can be carried back and yield a tax benefit; (ii) the Company’s long-term estimate of future average realized minerals prices; and (iii) the degree to which many of the tax laws and income tax agreements imposed upon the Company and its subsidiaries around the world tend to create significant tax deductions early in the mining process. These up-front deductions can give rise to net operating losses and credit carryforwards in circumstances where future sources of taxable income may not coincide with available carryforward periods even after taking into account all available tax planning strategies. Furthermore, certain liabilities accrued for financial reporting purposes may not be deductible for tax purposes until such liabilities are actually funded which could happen after mining operations have ceased, when sufficient sources of taxable income may not be available. Changes to valuation allowances decreased income tax expense by $85.2 million in 2003 and increased income tax expense in 2002 and 2001 by $2.5 million and $17.3 million, respectively. In 2003, the Company reversed a valuation allowance of $43.0 million that had been recorded with respect to the United States net operating losses of a subsidiary acquired in a prior period business combination accounted for as a pooling of interests since future sources of taxable income will be sufficient to utilize these loss carryforwards over the period of time that such losses are allowed to be claimed. As noted above, $49.8 million of the valuation allowance recorded in prior periods with respect to the Company’s foreign tax credits also was reversed. Partially offsetting these reductions in valuation allowances was the need to record valuation allowances for currently arising tax losses incurred by some of the Company’s foreign subsidiaries.
The Company consolidates subsidiaries with interests attributable to minority interests. However, for tax purposes, the Company only is responsible for the income taxes on the portion of the taxable earnings attributable to its ownership interest of each consolidated entity. Such minority interests contributed $22.2 million, $11.5 million and $10.1 million in 2003, 2002 and 2001, respectively, as reductions in the Company’s income tax expense. The increase in 2003 is primarily due to increased earnings from higher gold prices at consolidated subsidiaries with minority interests. This increase was partially offset by lower reinvestment credits that are available to Yanacocha under Peruvian tax regulations.
The Company’s effective tax in 2003 was increased by $54.5 million due to changes in foreign currency exchange rates (principally the Australian dollar) compared with $9.3 million in 2002. In 2003 and 2002, these amounts primarily relate to the Australian tax effect of realized and unrealized translation gains attributable to United States dollar-denominated assets and liabilities and the gold derivatives positions at Newmont Australia Limited whose functional currency is the United States dollar. Because Newmont intends to indefinitely reinvest earnings from Newmont Australia Limited, no offsetting United States deferred income tax benefit can be provided. The effect in 2003 is substantially higher than 2002 because of the significant strengthening of the Australian dollar against the United States dollar, which took place in 2003.
During 2002, the Company settled an audit conducted by the Internal Revenue Service of the tax returns of an acquired entity involving several taxable periods that predated the Company’s acquisition. At issue was the proper federal income tax treatment of a portion of a transaction involving an exchange of natural resource properties. The settlement gave rise to additional future tax deductions, the tax benefit of which previously had not been recorded and for which no deferred taxes were required to be provided. Accordingly, the Company’s consolidated income tax expense for 2002 was reduced by approximately $10 million due to this non-recurring item.
Based on the uncertainty and inherent unpredictability of the factors influencing the Company’s effective tax rate and the sensitivity of such factors to gold and other metals prices as discussed above, Newmont’s effective tax rate is expected to be volatile in future periods.
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Minority interest in income of subsidiaries was $173.2 million, $97.4 million and $65.4 million for the years ended December 31, 2003, 2002 and 2001, respectively. The year-to-year increases were primarily a result of increased earnings at Yanacocha, where Newmont has a 51.35% interest, due to higher gold prices, increased gold sales and lower production costs (see Results of Operations, South American Operations).
Equity loss and impairment of Australian Magnesium Corporation was $119.5 million and $1.8 million for the years ended December 31, 2003 and 2002, respectively. Newmont acquired Australian Magnesium Corporation (“AMC”) as part of the Normandy acquisition during February 2002. During 2003, Newmont recorded a write-down of its investment in AMC of $119.5 million consisting of a write-down of approximately $11.0 million in the first quarter of 2003 for an other-than-temporary decline in value of the AMC investment, as well as its proportionate share of AMC’s first quarter losses of $0.7 million, and a second quarter write-down of $107.8 million that was triggered by ongoing issues related to the project financing and financial viability of the Stanwell Magnesium Project and AMC’s inability to attract a new partner to finance this project. AMC halted the development and construction of the Stanwell Project during the second quarter of 2003 and recorded an impairment charge for the write-down of the Project’s carrying value. Newmont’s equity and impairment charge included $72.7 million for the write-off of its investment in AMC, including the impairment charge on the Stanwell Project, a $24.8 million write-down of a forgiven loan receivable due to Newmont from AMC, a $10.0 million charge to settle Newmont’s guarantee of a contract with Ford Motor Company, $6.6 million for a new credit facility provided by Newmont as part of AMC’s restructuring and other adjustments of approximately $1.1 million, partially offset by a $7.4 million income tax benefit. During December 2003, Newmont sold its interest in AMC. See Note 10 to the Consolidated Financial Statements.
Equity income of affiliates was $84.4 million, $53.2 million and $22.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The following table indicates income (loss) by affiliate:
Years Ended December 31, 2003 2002 2001 (in thousands) Batu Hijau
$ 82,892 $ 42,119 $ 22,513 TVX Newmont Americas
810 9,737 — Echo Bay
–– (380 ) — AGR Matthey
725 1,675 — Total
$ 84,427 $ 53,151 $ 22,513
The year-to-year increases in equity income in Batu Hijau resulted primarily from higher copper prices, increased gold by-product credits and lower smelting and refining costs (see Results of Operations, Other Mining Operations). Newmont sold its interest in TVX Newmont Americas during the first quarter of 2003. See Note 10 of the Consolidated Financial Statements.
Newmont recorded a charge for the Cumulative effect of a change in accounting principle, net of tax effective January 1, 2003 of $34.5 million reflecting the effect of the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations,” that changed the method of accounting for the Company’s estimated mine reclamation and abandonment costs. Newmont recorded a gain for the Cumulative effect of a change in accounting principle of $7.7 million effective January 1, 2002 with respect to depreciation, depletion and amortization of Property, plant and mine development, net to exclude future estimated development costs expected to be incurred for certain underground operations. See Accounting Changes, above, for more information.
Other comprehensive income (loss), net of tax, in 2003, primarily included a $68.4 million gain on the effective portion of changes in the fair value of derivative instruments classified as cash flow hedges and a $23.2 million gain on the translation of subsidiaries with non-U.S. dollar functional currencies, partially offset by
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a $(5.0) million decline in value of marketable equity securities. Other comprehensive income (loss), net of tax, in 2002, primarily included $(28.7) million for a minimum pension liability adjustment, $(16.7) million for unrealized losses on derivatives designated as cash flow hedges and $(12.8) million for a decline in value of marketable equity securities. Other comprehensive income (loss), net of tax, in 2001, primarily included an $18.3 million gain for temporary changes in the market value of Lihir Gold securities.
Equity Ozs. Sold Total Cash Cost Per
Equity Oz.
2003 2002 2001 2003 2002 2001 (in thousands) ($ per equity ounce) North America:
Nevada
2,490.8 2,723.5 2,703.2 $ 235 $ 225 $ 222 Mesquite, California
49.2 57.1 92.6 184 177 205 La Herradura, Mexico
67.8 64.2 54.7 162 176 173 Golden Giant, Canada
229.7 281.5 283.7 227 196 187 Holloway, Canada
65.1 97.7 89.4 312 204 209 Total/Weighted-Average
2,902.6 3,224.0 3,223.6 233 220 217 South America:
Yanacocha, Peru
1,467.9 1,176.9 983.1 120 125 115 Kori Kollo, Bolivia
158.5 249.4 274.8 184 156 158 Total/Weighted-Average
1,626.4 1,426.3 1,257.9 126 131 125 Australia:
Pajingo
330.3 296.4 126.0 129 95 105 Kalgoorlie
404.7 324.7 — 263 215 — Yandal
565.6 611.1 — 273 215 — Tanami
588.6 452.4 — 240 205 — Total/Weighted-Average
1,889.2 1,684.6 126.0 236 191 105 Other Operations:
Zarafshan-Newmont, Uzbekistan
218.1 255.8 222.0 147 134 136 Minahasa, Indonesia
92.2 147.2 341.5 249 218 142 Martha, New Zealand
108.9 107.8 — 199 156 — Ovacik, Turkey
168.2 125.7 — 129 122 — Total/Weighted-Average
587.4 636.5 563.5 168 155 139 Equity Investments:
Batu Hijau, Indonesia
328.9 278.0 295.1 n/a n/a n/a TVX Newmont Americas
14.5 183.5 — n/a n/a n/a Echo Bay
21.2 185.2 — n/a n/a n/a Total/Weighted-Average
364.6 646.7 295.1 n/a n/a n/a Other:
Golden Grove, Australia
13.4 13.6 — n/a n/a n/a Newmont Total/Weighted-Average
7,383.6 7,631.7 5,466.1 $ 203 $ 189 $ 184
Disclosure of total cash costs per ounce is intended to provide investors with information about the cash generating capacities of Newmont’s mining operations. Newmont’s management uses this measure for the same purpose and for monitoring the performance of its gold mining operations. This information differs from measures of performance determined in accordance with generally accepted accounting principles (“GAAP”) and
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should not be considered in isolation or as a substitute for measures of performance determined in accordance with GAAP. This measure was developed in conjunction with gold mining companies associated with the Gold Institute, a non-profit industry group no longer in existence, in an effort to provide a level of comparability; however, Newmont’s measures may not be comparable to similarly titled measures of other companies.
For all periods presented, total cash costs include charges for mining ore and waste associated with current period gold production, processing ore through milling and leaching facilities, by-product credits, production taxes, royalties and other cash costs. Certain gold mines produce silver as a by-product, and Batu Hijau produces gold as a by-product. Proceeds from the sale of by-products are reflected as credits to total cash costs. With the exception of Nevada, Yanacocha, Golden Grove and Batu Hijau, such by-product sales have not been significant to the economics or profitability of the Company’s mining operations. All of these charges and by-product credits are included in Costs applicable to sales. Charges for reclamation are also included in Costs applicable to sales, but are not included in total cash costs. Reclamation charges are included in total production costs, together with total cash costs and Depreciation, depletion and amortization. Total production costs provide an indication of earnings before interest expense and taxes for Newmont’s share of gold mining properties, when taking into account the average realized price received for gold sold, as this measure combines Costs applicable to sales plus Depreciation, depletion and amortization, net of minority interest. A reconciliation of total cash costs and total production costs to Costs applicable to sales in total and by segment is provided in Item 2, Properties, Operating Statistics.
Unless otherwise indicated, and based on current mine plans, expected gold sales for each operation for the years 2005 through 2008 are expected to continue at levels comparable to the expected levels for 2004. The Company expects that gold production will range between 7.0 million and 7.2 million equity ounces in 2004 and will range between 7.0 million and 7.5 million equity ounces per year through 2006, increasing thereafter.
North American Operations
Newmont’s Nevada operations are along the Carlin Trend near Elko and in the Winnemucca region, where the Twin Creeks mine and the Lone Tree Complex are located. Nevada operations also include the Midas underground mine (acquired in February 2002 as part of the Normandy acquisition). Nevada’s gold sales in 2003 were 2.49 million equity ounces compared to 2.72 million equity ounces in 2002, or 9% lower. Total cash costs for Nevada increased to $235 per equity ounce in 2003 from $225 per equity ounce in 2002. The 232,700 ounce decline in gold sales during 2003 compared to 2002 is primarily attributable to a 29% decline in oxide mill production, a 11% decline in leach production and a build up of inventory. The decrease in oxide mill production was due to a 44% decline in oxide mill throughput reflecting lower tons of oxide ore mined from maturing ore bodies. Open pit mined tonnage increased 26% during 2003, compared to 2002, primarily due to increased waste removal for the Gold Quarry expansion at Carlin and commencement of production from Section 30 at Twin Creeks. Leach production declined during 2003, compared to 2002, due to timing of material placed on the pads. The $10 increase in total cash costs per equity ounce during 2003, compared to 2002, was due primarily to the decrease in ounces sold, higher labor, mine maintenance, power and diesel costs, and increased contracted services due to increased production at the Chukar underground mine where contract mining is utilized. Nevada’s gold sales in 2002 of 2.72 million equity ounces were 1% higher than in 2001. Total cash costs at Nevada also increased slightly from $222 per equity ounce in 2001 to $225 per equity ounce in 2002. The Midas mine contributed approximately 196,200 ounces of production in 2002, or approximately 7% of Nevada’s production. Without the Midas production, Nevada gold sales would have declined about 6.5% in 2002 compared to 2001. This was due to less oxide mill throughput in 2002 due to the shutdown of the Pinon Mill at Twin Creeks, utilization of lower-grade oxide stockpiles resulting in lower recoveries in most oxide mills and a 38.5% decline in tons placed on the leach pads due to mining more mill-grade material and the postponement of production from the Gold Quarry South Layback project until 2003. These trends were largely offset by increased throughput in the refractory mills reflecting better utilization of the Carlin Roaster and the Twin Creeks Sage Mill and a 3% increase in refractory grade. Nevada’s gold sales in 2004 are expected to be 2.6 million equity ounces. Nevada’s silver by-product credits aggregated $15.1 million, $11.3 million and $1.9 million during 2003, 2002 and 2001, respectively. At the budgeted silver price of $5.25 per ounce, the Company expects Nevada’s
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silver by-products credits to decrease to approximately $13.5 million in 2004. Although the amount of Nevada’s silver by-product credits is expected to vary from one period to another, such variations are not expected to be material to the economics of Nevada’s operations.
In Nevada, non-governmental organizations have brought a series of actions, as described in more detail in Note 27 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 how the Company conducts operations, and such conditions could have a material adverse effect on Nevada’s results of operations or financial position.
Hourly waged employees at Newmont’s Carlin, Nevada operations are represented by the Operating Engineers Local Union No. 3 of the International Union of Operating Engineers, AFL-CIO. On September 30, 2002, the Carlin labor agreement expired. During 2003, Newmont actively negotiated with the union and participated in federal mediation in an effort to reach an acceptable contract. On February 5, 2004, union employees voted to ratify Newmont’s offer for a new agreement.
Gold sales at the Mesquite heap leach mine in southern California decreased 14% to 49,200 ounces in 2003 from 57,100 ounces in 2002. Total cash costs at Mesquite increased to $184 per ounce in 2003 from $177 per ounce in 2002. The decrease in ounces sold in 2003 primarily reflects the impact of diminishing returns from releaching activities. Mesquite’s gold sales decreased 38% in 2002 from 2001, and total cash costs per ounce decreased 14% in 2002 from $205 in 2001, reflecting the impact of the cessation of mining activities and the depletion of the ore body in 2001. Mining activities ceased in the second quarter of 2001. Newmont sold Mesquite in November 2003. See additional information in Investing Activities below. Newmont continued to record gold sales from Mesquite up to the closing date of the transaction.
La Herradura, a 44%-owned, heap leach operation in Sonora, Mexico operated by Industriales Peñoles, sold 154,091 ounces of gold during 2003. Newmont’s share of 2003 gold sales totaled 67,800 equity ounces at total cash costs of $162 per equity ounce, compared to 64,200 equity ounces at total cash costs of $176 per equity ounce in 2002. Gold sales for 2003 increased compared to 2002 primarily due to capital investments that led to increased mining rates and ore placement on the leach pads. Total cash costs per equity ounce in 2003 decreased compared to 2002 primarily due to the increase in gold ounces sold. La Herradura’s 2002 sales and total cash costs per equity ounce increased 17% and 2%, respectively, compared to 54,700 equity ounces at total cash costs of $173 per equity ounce in 2001. Gold sales in 2004 are expected to total approximately 70,000 equity ounces. Gold sales are expected to increase to near 100,000 equity ounces in 2005 and decline to approximately 95,000, 60,000 and 15,000 equity ounces in 2006, 2007 and 2008, respectively.
The Golden Giant underground mine in Ontario, Canada sold 229,700 ounces of gold at total cash costs of $227 per ounce in 2003, compared to 281,500 ounces at total cash costs of $196 per ounce in 2002. Gold sales declined by 51,800 ounces during 2003 compared to 2002 primarily due to a 35% decrease in mill throughput due to reduced mining faces in stope sequencing at this maturing mine, partially offset by a 35% increase in mill feed ore grade. The increase in total cash costs per ounce during 2003, compared with 2002, resulted primarily from a combination of the appreciation of the Canadian dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates below), which had the effect of inflating local-currency denominated costs, and declining gold sales. Gold sales from Golden Giant declined by 1% and total cash costs per ounce increased by 5% in 2002, compared to 283,700 ounces at $187 per ounce in 2001. Despite similar sales volumes in 2002 compared to 2001, total cash costs per ounce increased in 2002 reflecting increased electricity rates, mining costs expensed for ongoing development, increased ground support and maintenance costs and appreciation of the Canadian dollar in relation to the U.S. dollar. During 2003, Golden Giant recorded an impairment charge of $28.4 million resulting from a reevaluation of the life-of-mine plan that reduced proven and probable reserves. This mine is projected to experience diminishing mining faces, smaller sized stopes and more labor intensive mining techniques in 2004, leading to projected gold ounces sold of approximately 150,000. Based on the current mine plans, gold sales at Golden Giant are expected to steadily decline to approximately 60,000 and 10,000 ounces per year in 2006 and 2007, respectively, as the operation approaches the end of its life.
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The Holloway underground mine in Ontario, Canada is an 84.65%-owned joint venture with Teddy Bear Valley Mines. Holloway’s gold sales in 2003 were 33% lower at 65,100 equity ounces, compared to 97,700 equity ounces in 2002. Total cash costs at Holloway increased to $312 per equity ounce in 2003 from $204 per equity ounce in 2002. The decrease in sales during 2003 is due to a 20% decline in mill ore grade compared to 2002. Higher total cash costs per equity ounce in 2003 resulted from declining production and a strengthening Canadian dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates below). In 2002, gold sales increased 9% and total cash costs per equity ounce decreased 2%, compared to 89,400 equity ounces at total cash cost of $209 per equity ounce in 2001. The increase in ounces sold from 2001 to 2002 primarily reflected increasing mill throughput from surface secondary crushing and draw-downs of inventories in 2002. The decrease in total cash costs in 2002 is primarily from increased production. Holloway is expected to sell approximately 90,000 equity ounces in 2004. Gold sales are projected to remain steady through 2006 and decrease by approximately 50% in 2007, when operations are expected to cease.
South American Operations
Minera Yanacocha S.R.L. (“Yanacocha”) in Peru is 51.35%-owned by Newmont and includes five open pit mines, four leach pads, two gold recovery plants and a crushing and agglomeration facility. Gold sales increased 25% in 2003, from 2.29 million ounces (1.18 million equity ounces) in 2002 to 2.86 million ounces (1.47 million equity ounces) in 2003. Total cash costs per equity ounce decreased from $125 per equity ounce in 2002 to $120 per equity ounce in 2003. The increase in sales during 2003 compared to 2002 is primarily attributable to increased leach solution processing capacity and an 18% higher ore grade due to a planned mining sequence, leading to higher ore grades at the LaQuinua and Cerro Yanacocha pits. The increase in the grade of ore is primarily related to increased production from the higher-grade La Quinua pit. By-product credits for 2003, 2002 and 2001 were $14.2 million, $9.0 million and $6.3 million, respectively. Total cash costs per equity ounce in 2003 declined in comparison to 2002 because of the increase in gold ounces sold and the higher by-product credits, partially offset by higher workers’ participation payments due to higher taxable income, higher fuel costs and higher royalties due to higher gold prices. Gold sales in 2002 were 20% higher than 2001 gold sales of 1.90 million ounces (0.98 million equity ounces). Total cash costs per equity ounce in 2002 were up 9% from $115 in 2001 primarily due to an increase in production coming from the higher cost La Quinua operation that started-up in late 2001, which requires crushing and agglomeration unlike other Yanacocha ore bodies, partially offset by economies of scale resulting from higher production levels. Total cash costs per equity ounce in 2001 benefited from higher sales due to higher ore grade.
Production at Yanacocha is now at a steady state. Production had grown annually through the discovery and development of additional reserves and increased mining and processing capacity. Tons mined in 2003 were slightly lower than the 2002 levels as haul distances have increased due to pit expansions. In 2003, Yanacocha mined approximately 205 million tons of material (147 million ore tons and 58 million waste tons). Without adding new mining equipment in 2002, Yanacocha reached a mining rate of 600,000 tons per day in the fourth quarter of 2002. Yanacocha mined approximately 204 million tons of material (149 million ore tons and 55 million waste tons) in 2002, compared to approximately 156 million tons (85 million ore tons and 71 million waste tons) in 2001. Yanacocha is expected to sell approximately 3.1 million ounces (1.6 million equity ounces) of gold in 2004. Based on the current mine plans, production is expected to be steady (plus or minus 10%-20%) through 2008. Yanacocha is currently studying the feasibility of an oxide mill and the development of the Minas Conga ore deposits.
On December 9, 2003, the Workers’ Union of Yanacocha was created and registered before the Peruvian Labor Ministry. Currently, the union has 360 members, out of a total of approximately 2,000 employees registered on the Yanacocha payroll. Usually, once a union has been created, it submits a list of petitions in order to initiate a collective bargaining agreement. While no such submittal has been made to date, the terms of any collective bargaining agreement will apply only to union members if such a submittal is made, given that the union represents less than a majority of Yanacocha’s employees.
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The Kori Kollo open pit mine in Bolivia is owned by Empresa Minera Inti Raymi S.A., in which Newmont has an 88% interest with a Bolivian partner owning the remaining 12% interest. Gold ounces sold in 2003 totaled 158,500 equity ounces, compared to 249,400 equity ounces in 2002. Total cash costs per equity ounce were $184 in 2003, compared to $156 in 2002. The primary factors contributing to lower production during 2003 compared to 2002 were a 24% decrease in mill feed grades, a 28% decrease in ore tons milled and a 43% decrease of ore placed on the leach pads. Mill feed grade declined in 2003 as a result of processing rehandled material. Total cash costs per equity ounce increased by $28 in 2003, compared to 2002, primarily due to the reduction in equity gold ounces sold in 2003. By-product credits for 2003 and 2002 were $2.9 million and $2.4 million, respectively. Equity gold ounces sold in 2002 totaled 249,400 ounces, compared to 274,800 in 2001. Total cash costs per equity ounce decreased 1% in 2002, compared to $158 in 2001. Production declined in 2002 primarily from processing lower grade ore through the mill. Equity ounces sold in 2004 are expected to total approximately 20,000 equity ounces. Kori Kollo is a mature mine. Mining was completed and the mill closed in October 2003. Leach production will continue until residual leaching is completed in 2005. Kori Kollo is evaluating processing oxide ores on leach pads from the Llallagua pit. A modest pad expansion at the existing facility would be required to accommodate the additional ore. Kori Kollo is also evaluating the possible development of the Kori Chaca pit, which would require building a new leach pad. These projects have the potential to produce 100,000 ounces per year from 2005 to 2007.
Australian Operations
Information related to Australian operations for 2003 reflects an entire year of activity. Australian operations for 2002 reflect activity from February 16, 2002 (as the Normandy acquisition was effective February 15, 2002) through December 31, 2002, with the exception of Pajingo, which was already 50% owned by Newmont prior to the acquisition of Normandy and therefore reflects Newmont’s 50% ownership through February 15, 2002 and 100% ownership from February 16, 2002 forward.
At the Pajingo mine in north Queensland, gold sales for 2003 increased 11% from 296,400 equity ounces in 2002 to 330,300 equity ounces in 2003. Total cash costs per equity ounce increased to $129 in 2003 from $95 per equity ounce in 2002. Gold sales for 2003 increased compared to 2002 primarily due to a 13% increase in ore grade and a 7% increase in mill throughput. Total cash costs per equity ounce at Pajingo increased by $34 during 2003 compared to 2002 primarily due to the appreciation of the Australian dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates below), increased development activity and increased overhead charges. In addition, production and total cash costs at Pajingo were adversely affected in the first quarter of 2003 by a shortfall of high-grade ore due to a delay in the development schedule of the Jandam and Vera South Deeps areas, resulting in supplemental production from lower-grade ore stockpiles. Pajingo’s gold sales for 2002 increased 135% and total cash costs per ounce decreased 10%, compared to 126,000 equity ounces at total cash costs of $105 per ounce in 2001. The increase in ounces sold in 2002 is primarily from Newmont’s interest in the operation increasing to 100% from 50% in prior years due to the acquisition of Normandy. Sales also increased as a result of higher production due to higher-grade ore in 2002. Total cash costs per ounce declined in 2002 reflecting the benefit of a full year of owner mining. Gold sales in 2004 are projected to total approximately 275,000 ounces. Based on current mine plans, gold sales at Pajingo are expected to gradually decline each year to approximately 240,000 ounces, 155,000 ounces and 70,000 ounces in 2005, 2006 and 2007, respectively, as the project approaches the end of its life.
At the 50%-owned Kalgoorlie operations in Western Australia, gold sales in 2003 were 25% higher at 404,700 equity ounces, compared to 324,700 equity ounces in 2002. Total cash costs per equity ounce were $263 in 2003, compared to $215 per equity ounce in 2002. Gold sales for 2003 increased by 80,000 equity ounces primarily due to a 15% increase in mill throughput and an 18% increase in mill ore grade, as well as having a full year of production compared to a ten and one-half month period in 2002. For 2003, total cash costs per equity ounce increased by $48 primarily due to the appreciation of the Australian dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates, below), higher amortization of deferred stripping and the increase in mining activity at Mt. Charlotte, an underground mine just north of the Super Pit, partially offset by increased gold
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ounces sold. Total cash costs per equity ounce for 2002 were higher-than-anticipated due to continued economic, but higher cost mining at Mt. Charlotte and higher milling costs resulting from the treatment of lower grade material. For 2004, gold sales at Kalgoorlie are expected to total 430,000 equity ounces. Equity gold sales are expected to remain steady at approximately 400,000 ounces for the next five years. In 2003, the joint venture owners completed an evaluation of operating initiatives to improve Kalgoorlie’s cost structure. Benefits from implementing this program are expected to gradually reduce costs over the longer term.
At the Yandal operations, which consist of the Bronzewing, Jundee and Wiluna mines in Western Australia, gold sales for 2003 decreased 7% from 611,100 ounces in 2002 to 565,600 ounces in 2003. Total cash costs were $273 per ounce in 2003, compared to $215 per ounce in 2002. The decrease in gold ounces sold during 2003 compared to 2002 resulted primarily from a 7% decrease in mill ore grade driven by lower grades at all three sites, partially offset by a 6% increase in mill throughput from a full year of production in 2003. Total cash costs per ounce increased $58 per ounce for 2003 compared to 2002 primarily due to higher operating costs related to increased underground activities at Jundee and Wiluna and the appreciation of the Australian dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates, below). Bronzewing sold fewer ounces than expected in 2002 due to a 14% lower-than-expected mill feed grade, lower-than-planned tons milled and a shortfall in underground ore production. Bronzewing total cash costs per ounce were higher-than-planned in 2002 due primarily to higher mining costs and the one-time cost of transitioning to owner mining during the period. Gold sales at the Jundee property were less than anticipated in 2002 due to mining in lower-grade underground stopes in the third quarter and increased quantities of lower-grade regional ore processed throughout the year. Total cash costs per ounce in 2002 at Jundee were consistent with the Company’s expectations, with the effects of lower production being offset by lower operating costs due to lower mining volumes and underground development achieved by the new mining contractor. Newmont sold Wiluna in December 2003 (see additional information in Investing Activities). Based on current mine plans, mining at Bronzewing is expected to end during the first quarter of 2004, and ongoing sales from Jundee for 2004 through 2008 are expected to vary between 250,000 and 340,000 ounces per year. Total Yandal gold sales in 2004 are expected to be approximately 350,000 ounces.
Newmont Yandal Operations Pty Ltd (“NYOL”), the Newmont subsidiary that owns the Yandal operations, had a substantial outstanding derivatives position at December 31, 2002, which was extinguished during 2003 (see Financing Activities, below).
Newmont controls a significant land position through its control of Newmont NFM and Otter Gold Mines Limited (“Otter”) in the highly prospective Tanami gold district. In April 2003, the Company increased its interest in Newmont NFM to 100% from approximately 85.9% through the acquisition of the minority shareholder interests (see Acquisitions—Newmont NFM Limited Scheme of Arrangement, above). For 2003, the Tanami operations sold 588,600 equity ounces of gold, compared to 452,400 equity ounces in 2002. Total cash costs per equity ounce were $240 in 2003, compared to $205 per equity ounce in 2002. Gold sales increased by 136,200 equity ounces for 2003 compared to 2002 primarily due to the increase in ownership and a 19% increase in mill throughput. Total cash costs per equity ounce for 2003 increased compared to 2002 primarily due to the appreciation of the Australian dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates below), higher royalties due to higher gold prices, increases in milling costs and higher overhead charges. Equity gold sales at Tanami were higher than expected in 2002 reflecting higher-than-expected grades and recoveries, partially offset by lower mill throughput. Total cash costs per equity ounce were higher than expected in 2002 due to additional milling and maintenance costs resulting from abrasive ore from the Groundrush mine, partially offset by the impacts of higher production. Tanami is expected to increase sales to approximately 660,000 equity ounces in 2004, reflecting higher-grade stopes at The Granites and improved recoveries and higher ore grades at Groundrush. Total cash costs per ounce are expected to rise in 2004 due to deeper mining and additional crushing costs at Groundrush, partially offset by the impact of higher production at The Granites. Based on current mine plans, gold sales from the Tanami operations are expected to decline by approximately 100,000 to 150,000 ounces beginning in 2005 and decline gradually until 2008 due to the end of production at Groundrush.
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Other Mining Operations
Information related to Martha, Ovacik, and Golden Grove for 2003 reflects an entire year of activity. Information related to TVX Newmont Americas and Echo Bay for 2003 reflects activity only from January 1, 2003 to January 31, 2003, when the investments were sold and exchanged as part of the Kinross transaction (see Other Investing Activities). Information for 2002 related to Martha, Ovacik, Golden Grove and TVX Newmont Americas, which were acquired as a result of the Normandy acquisition on February 15, 2002, reflects activity from February 16, 2002 through December 31, 2002. Information related to Echo Bay for 2002 reflects activity from April 3, 2002 (the date Newmont’s investment was converted from capital debt securities to common shares of Echo Bay) through December 31, 2002. Information for all other properties in 2002 reflects activity from January 1, 2002 through December 31, 2002.
Gold Operations. The Zarafshan-Newmont Joint Venture, in the Central Asian Republic of Uzbekistan, is a 50/50 joint venture between Newmont and two Uzbekistan government entities, the State Committee for Geology and Mineral Resources (the “State Committee”) and Navoi Mining and Metallurgical Combinat (“Navoi”). Gold sales in 2003 totaled 218,100 equity ounces compared to 255,800 equity ounces in 2002. Total cash costs per equity ounce were $147 in 2003 compared to $134 per equity ounce in 2002. For 2003, gold sales decreased by 37,700 equity ounces compared with 2002 as a result of a 19% decrease in ore grade processed partially offset by a 3% increase in ore placed on the leach pads. The lower ore grade is expected to continue during 2004. The increase in total cash costs per equity ounce during 2003, compared to 2002, is primarily a result of the decrease in gold ounces sold. Gold sales in 2002 increased 15% compared to 222,000 equity ounces in 2001. Gold sales increased in 2002 due to higher-grade ore placed on the leach pads. Total cash costs in 2002 were consistent with the $136 per equity ounce in 2001. Zarafshan-Newmont is expected to sell approximately 180,000 equity ounces in 2004. Based on current mine plans, Newmont’s share of gold sales at Zarafshan-Newmont is expected to vary between 150,000 and 165,000 equity ounces per year during the four years after 2004. Declining future sales compared to 2004 are expected primarily due to lower-grade ore expected to be placed on the leach pads during those periods.
Zarafshan-Newmont produces gold by crushing and leaching ore from existing stockpiles of low grade oxide material from the nearby government-owned Murantau mine located in the Kyzylkum Desert. The State Committee and Navoi furnish ore to Zarafshan Newmont under an ore supply agreement. Under the agreement, the State Committee and Navoi are obligated to deliver 242.5 million tons of ore to Zarafshan-Newmont from various areas of the stockpiles designated into four different “Zones” under the agreement. As of December 31, 2003, approximately 124.3 million tons of ore have been delivered, leaving a balance of 118.2 million tons to be delivered (8.9 million tons from Zone 3 and 109.3 million tons from Zone 4). Initially, ore from all Zones was to be delivered regardless of the gold price and the price of the ore was dependent on the grade of ore delivered. In May 2003, the parties amended the grade and pricing structure of the ore supply agreement with respect to ore to be delivered from Zone 4. Under the May 2003 amendment the parties have agreed to a mine plan designed to achieve an average grade of at least 0.036 ounce of gold per ton for ore from Zone 4. The amount paid for this ore is dependent on the average grade of ore and the average gold price during the period in which the ore is processed. In the event the State Committee and Navoi supply ore from Zone 4 having an average grade less than 0.036 ounce per ton in a given month and the average gold price during such month is less than $320 per ounce, the price of such ore will be discounted. At certain combinations of low ore grade and at gold prices less than $320 per ounce, the computed price may result in a credit to Zarafshan-Newmont, which will be offset against free cash distributions or future ore purchase payments due to the State Committee and Navoi.
At Minahasa, in Indonesia, Newmont has an 80% interest but is attributed a greater percentage of the gold production until it recoups the bulk of its investment including interest. Prior to November 2001, Newmont was attributed 100% of Minahasa’s gold production and subsequently 94%, as Newmont recouped some of its investment through the collection of funds in accordance with existing loan agreements. Minahasa’s gold sales decreased 37% from 147,200 equity ounces in 2002 to 92,200 equity ounces in 2003. Total cash costs per equity ounce increased during 2003 to $249 from $218 during 2002. The decrease of 55,000 equity ounces during 2003
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compared to 2002 resulted primarily from a 27% decrease in mill ore grade and a 3% decrease in mill throughput. Total cash costs per equity ounce for 2003 increased by $31 per equity ounce primarily due to the increased use of consumables, higher diesel fuel prices and a higher level of contracted services, partially offset by lower administrative expenses. Equity gold ounces sold decreased 57% in 2002, compared to 341,500 equity ounces in 2001. Total cash costs per equity ounce increased 54% in 2002, compared to $142 per equity ounce in 2001. Production declined and costs increased in 2002 primarily due to processing lower-grade ore. Mining activities ceased late in 2001; however, it is expected that processing of the remaining stockpiles will continue until April 2004. Sales in 2004 are expected to be approximately 50,000 equity ounces.
Gold sales at the Martha mine in New Zealand (acquired as part of the Normandy acquisition) were 108,900 equity ounces in 2003, a 1% increase from gold sales in 2002 of 107,800 equity ounces. Total cash costs per equity ounce increased to $199 in 2003 from $156 in 2002. Gold sales in 2003 increased by only 1,100 equity ounces compared to the 2002, despite the fact that 2002 included only ten and one-half months of production. This is attributable to a 13% decline in mill ore grade in 2003, partially offset by an 18% increase in mill throughput. The increase in total cash costs per equity ounce of $43 in 2003 compared to 2002 resulted primarily from appreciation of the New Zealand dollar compared to the U.S. dollar (see Foreign Currency Exchange Rates, below), increased milling costs from higher electricity rates, higher consumption of grinding media, an earlier than planned SAG mill liner replacement and higher cyanide and lime consumption. Through separate transactions in 2003, Newmont has acquired the minority interests of both Newmont NFM and Otter Mines, giving it 100% ownership in Martha (see Investing Activities, below). Martha is expected to sell approximately 120,000 equity ounces of gold in 2004. Gold sales are expected to remain steady until 2008, when sales are projected to decline to approximately 86,000 equity ounces.
The wholly-owned Ovacik mine near the Aegean Sea in western Turkey (acquired as part of the Normandy acquisition on February 15, 2002) sold 168,200 ounces of gold during 2003, a 34% increase from 2002 sales of 125,700 ounces. Total cash costs per ounce increased from $122 per ounce in 2002 to $129 in 2003. The increase in gold sales of 42,500 ounces in 2003 compared to 2002 was primarily attributable to a 48% increase in mill throughput resulting from a revised mine plan that incorporates an open pit extension and increased mill efficiencies, partially offset by decrease in mill ore grade of 6%. Total cash costs per ounce increased by $7 in 2003 compared to 2002 as the positive impact of increased gold sales was offset by higher processing costs and higher administration costs. Newmont expects Ovacik to sell approximately 150,000 ounces of gold in 2004. Based on current mine plans, and subject to the discussion below, gold sales at Ovacik are expected to decline to approximately 85,000 ounces in 2005 and remain steady through 2008 as the operation approaches the end of its mine life.
The Ovacik mine in Turkey has a long history of legal challenges to the operation of the mine and, in particular, to its use of cyanide in gold production including challenges in the Turkish courts and a separate, but related action in the European Court of Human Rights. For additional information, see Note 27 to the Consolidated Financial Statements. As a result of these legal challenges, the Turkish courts or the European Court of Human Rights could grant relief that could lead to the closure of the mine or the interruption of mining activities. Any such closure or interruption would adversely impact the operations of the Ovacik mine, and could result in the impairment of the carrying value of the assets associated with the Ovacik mine. The total assets and proven and probable reserves of the Ovacik mine at December 31, 2003 were approximately $71.5 million and 170,000 ounces, respectively, and the total revenue generated by the Ovacik mine during 2003 was approximately $61 million. Newmont is currently evaluating the mine plan at Ovacik relative to certain uncertainties that exist at the operation, including land access and the operating costs of underground operations.
In addition, effective January 2, 2004, the Turkish government enacted several legislative amendments that could impact Ovacik’s right to receive future refunds of value-added tax (“VAT”) assessed on production materials. The impact of these legislative amendments could decrease the projected economic return from the operation both through increased operating and capital costs and reduced reserves. Efforts are underway to assess the impact of these amendments on Ovacik’s operations, and to clarify or modify the amendments. Depending on
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how these uncertainties are resolved, it is reasonably possible that the Company could recognize a charge for impairment of some or all of the long-lived assets at Ovacik in the first quarter of 2004. The carrying value of Ovacik’s long-lived assets at December 31, 2003 was approximately $52.1 million.
Franco-Nevada purchased capital securities of Echo Bay with face value of $72.4 million in June 2001. In January 2002, $4.6 million of these capital securities were sold. Newmont acquired Franco-Nevada’s remaining holdings of Echo Bay’s capital securities in connection with its acquisition of Franco-Nevada in February 2002. Subsequent to this acquisition, an agreement was reached to exchange the capital securities for common stock of Echo Bay, which occurred on April 3, 2002 and resulted in Newmont Mining Corporation of Canada Limited (a wholly-owned subsidiary of Newmont) owning 48.8% of Echo Bay. From April 3, 2002, Newmont accounted for its investment in Echo Bay under the equity method. On January 31, 2003, Kinross Gold Corporation, Echo Bay Mines Ltd. and TVX Gold Inc. were combined. Under the terms of the combination, Newmont received a 13.8% interest in the restructured Kinross in exchange for its then 45.67% interest in Echo Bay. Newmont recorded a gain of approximately $84.3 million on the exchange of its Echo Bay interests. During 2002, Newmont’s share of Echo Bay gold sales was 185,200 equity ounces, and its share of Echo Bay gold sales was 21,200 equity ounces in 2003.
TVX Newmont Americas was 49.9%-owned by Newmont and 50.1%-owned by TVX Gold Inc. and was treated as an equity investment for reporting purposes in 2002. The principal assets of TVX Newmont Americas were interests in operating gold mines in South America (Paracatu, Crixas and La Coipa) and Canada (Musselwhite and New Britannia). Newmont’s share of TVX Newmont America’s 2002 gold sales was 183,500 equity ounces. On January 31, 2003, Newmont sold its 49.9% interest in TVX Newmont Americas to TVX Gold Inc. for $180 million. Newmont’s share of TVX Newmont America’s 2003 gold sales was 14,500 equity ounces.
Base Metal Operations. At the Batu Hijau mine in Indonesia, copper sales totaled 343.4 million equity pounds (pounds attributable to Newmont’s economic interest) in 2003, compared to 362.3 million and 360.0 million equity pounds in 2002 and 2001, respectively. Total cash costs were $0.23, $0.31 and $0.37 per equity pound, after gold and silver by-product credits, in 2003, 2002 and 2001, respectively.
During 2003, Newmont had a 56.25% economic interest (a 45% ownership interest) in the Batu Hijau mine (see Note 10 to the Consolidated Financial Statements).
Equity copper sales declined by 18.9 million pounds in 2003 compared to 2002 primarily reflecting a 4% decrease in dry tons processed. Total cash costs improved in 2003 as compared to 2002 primarily due to higher gold by-product credits, reflecting higher gold prices, and lower smelting and refining charges. Net total cash costs declined in 2002 compared to 2001 due to operational improvements and the addition of a pebble crushing circuit for improved process efficiency. The improvement in 2002 total cash costs per equity pound was also partially attributable to higher gold prices during the year, which resulted in higher by-product credits. Gold sales, accounted for as by-product credits, totaled 328,900, 278,000 and 295,100 equity ounces for 2003, 2002 and 2001, respectively. The Company’s equity income from Batu Hijau includes gold and silver revenues that are credited against Costs applicable to sales as by-product credits in the determination of Batu Hijau’s net income for each period presented in Equity income of Affiliates in the Statements of Consolidated Operations and Comprehensive Income (Loss). These by-product credits represented 51%, 44% and 42% of revenues and reduced production costs by 76%, 58% and 48% for 2003, 2002 and 2001, respectively. Such by-product credits are expected to continue through the end of production in 2030. These by-product credits are expected to vary from time to time and are significant to the economics of the Batu Hijau operation. Gold by-product credits have a significant impact on the profitability of the Batu Hijau operations. Sales in 2004 are expected to total approximately 360 million to 400 million equity pounds of copper and 360,000 equity ounces of gold.
The wholly-owned Golden Grove copper/zinc operation in Western Australia (acquired as part of the Normandy acquisition) sold 74.3 million pounds of copper and 104.7 million pounds of zinc in 2003 at total cash costs of $0.59 and $0.19 per pound, respectively. For 2002, Golden Grove sold 44.8 million pounds of copper and
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111.2 million pounds of zinc at total cash costs of $0.57 and $0.24 per pound, respectively. Lead, silver and gold by-product credits at Golden Grove totaled $15.5 million and $16.0 million during 2003 and 2002, respectively. As Golden Grove has a poly-metallic ore body, such by-product credits are expected to continue in the future and to vary from period-to-period based on the portions of the ore body being extracted at the time.
Merchant Banking
Newmont’s Merchant Banking Segment is composed of an Equity Portfolio sub-segment, focused on managing the Company’s portfolio of equity securities, a Royalty Portfolio Sub-Segment, a Portfolio Management sub-segment, providing in-house investment banking and advisory services to the Company and a Downstream Gold Refining sub-segment. The Merchant Banking Segment did not exist prior to the acquisitions of Normandy and Franco-Nevada in February 2002.
The Merchant Banking Segment recognized Gain on investment, net of $83.2 million in 2003 and $47.1 million in 2002 related primarily to a number of individually significant transactions described herein. On January 31, 2003, Kinross Gold Corporation (“Kinross”), Echo Bay Mines Ltd. (“Echo Bay”) and TVX Gold Inc. (“TVX Gold”) were combined, and TVX Gold acquired Newmont’s 49.9% interest in the TVX Newmont Americas joint venture. Under the terms of the combination and acquisition and through the efforts of the Merchant Banking Segment, Newmont received a 13.8% interest in the restructured Kinross in exchange for its then 45.67% interest in Echo Bay and $180 million for its interest in TVX Newmont Americas. Newmont recognized a pre-tax gain of $84.3 million on the transaction in Gain on investments, net in the Statement of Consolidated Operations. During the third quarter of 2003, Newmont sold a portion of its Kinross shares for total cash proceeds of $224.6 million and recorded a pre-tax loss on sale of $7.4 million. At December 31, 2003, Newmont classified its remaining investment in Kinross as a short-term, available-for-sale marketable security, and the fair value of the investment was $115.3 million. During the year ended December 31, 2003, a loss of $6.1 million, net of tax, was recorded in Other comprehensive income, net of tax for the change in market value of the Kinross investment. The Company does not believe this loss to be other-than-temporary. The Merchant Banking Segment sold its 9.74% equity holding in marketable securities of Lihir Gold during the second quarter of 2002 through a block trade to Macquarie Equity Capital Markets Limited in Australia for approximately $84 million, resulting in the recognition of a pre-tax gain of approximately $47.3 million.
Newmont’s Merchant Banking Segment holds royalty interests, which were acquired as a result of the Franco-Nevada acquisition. Royalty interests are generally in the form of a net smelter return (“NSR”) royalty that provides for the payment either in cash or in-kind physical metal of a specified percentage of production, less certain specified transportation and refining costs. In some cases, Newmont owns a net profit interest (“NPI”) entitling Newmont to a specified percentage of the net profits, as defined in each case, from a particular mining operation. The majority of NSR royalty revenue and NPI revenue can be received in kind at the option of Newmont. The Merchant Banking Segment earned $56.3 million of royalty revenue in 2003, compared to $35.7 million in 2002. The increase in 2003 is primarily attributable to higher gold and oil and gas prices.
The Merchant Banking Segment provides advisory services to Newmont to assist it in managing its portfolio of operating and property interests. In 2003 and 2002, Merchant Banking advised Newmont on a variety of transactions including the process of extinguishing the majority of the bond and derivative liabilities of NYOL during the second and third quarters of 2003 (see Financing Activities). These transactions gave rise to a Gain on extinguishment of NYOL bonds, net of $114.0 million and a Gain on extinguishment of NYOL derivative liability, net of $106.5 million, both net of transaction costs, for the year ended December 31, 2003. Total cash payments to extinguish the NYOL bonds and the NYOL derivatives liabilities (including costs) were $98.5 million and $103.6 million, respectively, during the year ended December 31, 2003.
The Merchant Banking Segment also manages Newmont’s investments in downstream gold refining and distribution businesses. Newmont acquired an interest (currently 40%) in the AGR Matthey Joint Venture (“AGR”) in Australia as part of the acquisition of Normandy in February 2002. In December 2003, Newmont
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also acquired a 50% interest in European Gold Refineries (“EGR”) which owns 100% of a Swiss gold refinery and 66.5% of the second largest distribution and financier of gold products for the Italian market. The Merchant Banking Segment earned $0.7 million and $1.3 million in Equity income of affiliates through its investment in AGR in 2003 and 2002, respectively.
Exploration
Exploration, research and development expenditures were $115.2 million, $88.9 million and $55.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. Of these amounts, $81.5 million, $71.3 million and $44.0 million related to exploration activities managed by the Exploration Segment for the years ended December 31, 2003, 2002 and 2001, respectively, with the balance relating primarily to research and advanced project development activities not managed by Newmont’s Exploration Segment. The Exploration Segment is responsible for all activities, regardless of location, associated with the Company’s efforts to discover new mineralized material that will advance into proven and probable reserves. Internally generated proven and probable reserve additions are attributed to the Exploration Segment to the extent that such additions are derived from (i) a discovery made by the Company or Normandy; or (ii) a discovery made on previously acquired properties (whether acquired by the Company or by Normandy) prior to their acquisition by the Company or Normandy as a result of exploration efforts conducted subsequent to the acquisition date.
Exploration expenditures in 2003 reflect higher funding of exploration activities by Newmont in response to higher prevailing gold prices. During 2003, Newmont replaced approximately 12.9 million gold ounces of depletion and divestitures with 17.3 million ounces of additions to proven and probable reserves, of which 87% were attributable to the Exploration Segment. Exploration activities during 2003 primarily focused on oxide and sulfide targets, including the Antonio and Corimayo deposits at Yanacocha, the Gold Quarry, Twin Creeks, Lone Tree and Carlin North Area deposits in Nevada and various deposits at the Company’s Australian operations. The Exploration Segment also focused its activities on Newmont’s two projects in Ghana, nearly doubling Newmont’s prior year’s reserves to 7.6 million ounces at Ahafo and 4.3 million equity ounces at Akyem as of December 31, 2003. The 2002 increase in exploration expenditures from 2001 was a result of the integration of the Normandy and Franco-Nevada exploration programs and from the increase in available capital to fund exploration activities at or around existing operations. Newmont anticipates it will spend between approximately $100 million and $110 million on exploration activities in 2004 and has established the replacement of depletion with additions to proven and probable reserves as the Exploration Segment’s objective for the year.
Foreign Currency Exchange Rates
In addition to its domestic operations in the United States, Newmont has operations in Australia, New Zealand, Peru, Indonesia, Canada, Uzbekistan, Bolivia, Turkey and other foreign locations. The Company’s foreign operations sell their gold production based on an U.S. dollar gold price.
Fluctuations in the local currency exchange rates in relation to the U.S. dollar can increase or decrease profit margins and total cash costs per ounce to the extent costs are paid in local currency at foreign operations. Such fluctuations have not had a material impact on the Company’s revenue since gold is sold throughout the world principally in U.S. dollars. Approximately 45%, 46% and 23%, of Newmont’s total cash costs were paid in local currencies in 2003, 2002 and 2001, respectively. The Company’s total cash costs are most significantly impacted by variations in the Australian dollar/U.S. dollar exchange rate. However, variations in the Australian dollar/U.S. dollar exchange rate historically have been strongly correlated to variations in the U.S. dollar gold price over the long-term. Increases or decreases in costs at Australian locations due to exchange rate changes have therefore tended to be mitigated by changes in sales reported in U.S. dollars at Australian locations in the Company’s Consolidated Financial Statements. No assurance, however, can be given that the Australian dollar/U.S. dollar exchange rate will continue to be strongly correlated to the U.S. dollar gold price in the future.
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The following chart demonstrates the impacts on total cash costs and total cash costs per ounce of variations in the local currency exchange rates in relation to the U.S. dollar at Newmont’s foreign operations during each of years in the three-year period ended December 31, 2003.
Year ended December 31, 2003:
Operation
Percentage change
in average local
currency
exchange rate;
appreciation
(devaluation)Increase (decrease)
to total cash costs
in U.S. dollars
(000)Increase (decrease)
to total cash costs
per ounce in
U.S. dollarsNorth America:
La Herradura
(12 )% $ (464 ) $ (7 ) Golden Giant
11 % $ 5,500 $ 24 Holloway
11 % $ 2,148 $ 33 South America:
Yanacocha
1 % $ 472 $ — Kori Kollo
(8 )% $ (1,103 ) $ (7 ) Australia:
Pajingo
17 % $ 7,093 $ 21 Kalgoorlie
17 % $ 20,121 $ 50 Yandal
17 % $ 25,587 $ 45 Tanami
17 % $ 23,387 $ 39 Other International:
Zarafshan-Newmont Joint Venture
(26 )% $ (1,166 ) $ (5 ) Minahasa
8 % $ 1,015 $ 11 Martha
17 % $ 5,659 $ 51 Ovacik
5 % $ 881 $ 5
Year ended December 31, 2002:
Operation
Percentage change
in average local
currency
exchange rate;
appreciation
(devaluation)Increase (decrease)
to total cash costs
in U.S. dollars
(000)Increase (decrease)
to total cash costs
per ounce in
U.S. dollarsNorth America:
La Herradura
(4 )% $ (57 ) $ (1 ) Golden Giant
(1 )% $ (712 ) $ (3 ) Holloway
(1 )% $ (237 ) $ (2 ) South America:
Yanacocha
— % $ (84 ) $ — Kori Kollo
(8 )% $ (538 ) $ (2 ) Australia(1):
Pajingo
5 % $ 1,122 $ 8 Kalgoorlie
5 % $ 3,398 $ 10 Yandal
5 % $ 5,200 $ 9 Tanami
5 % $ 4,249 $ 8 Other International:
Zarafshan-Newmont Joint Venture
(71 )% $ (2,719 ) $ (11 ) Minahasa
6 % $ 278 $ 2 Martha(1)
5 % $ 881 $ 8 Ovacik(1)
(24 )% $ (3,602 ) $ (29 )
(1) Includes impact from February 15, 2002, the date of the acquisition of Normandy, through December 31, 2002.
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Year ended December 31, 2001:
Operation
Percentage change
in average local
currency
exchange rate;
appreciation
(devaluation)Increase (decrease)
to total cash costs
in U.S. dollars
(000)Increase (decrease)
to total cash costs
per ounce in
U.S. dollarsNorth America:
La Herradura
1 % $ 19 $ — Golden Giant
(4 )% $ (2,079 ) $ (7 ) Holloway
(4 )% $ (765 ) $ (9 ) South America:
Yanacocha
(1 )% $ (179 ) $ — Kori Kollo
(8 )% $ (610 ) $ (2 ) Other International:
Zarafshan-Newmont Joint Venture
(28 )% $ (544 ) $ (2 ) Minahasa
(23 )% $ (1,049 ) $ (3 )
The following chart demonstrates the estimated sensitivity of projected total cash costs and cash costs per ounce to variations of the local currency exchange rates in relation to the U.S. dollar in 2004 assuming a 5% appreciation or devaluation of the local currency in relation to the U.S. dollar and assuming that foreign currency denominated cash costs remain the same as 2003 as a percentage of total cash costs at each site:
Operation
Foreign Currency +/– change
in total
cash costs
in U.S. dollars
(000)+/– change in
totalcash costs
per ounce
in U.S. dollars
North America:
La Herradura
Mexican Pesos $ 223 $ 3 Golden Giant
Canadian Dollars $ 2,277 $ 15 Holloway
Canadian Dollars $ 1,201 $ 13 South America:
Yanacocha
Nuevos Soles $ 1,926 $ 1 Kori Kollo
Bolivinos $ 62 $ 3 Australia:
Pajingo
Australian Dollars $ 2,018 $ 7 Kalgoorlie
Australian Dollars $ 6,190 $ 15 Yandal
Australian Dollars $ 4,657 $ 13 Tanami
Australian Dollars $ 6,875 $ 10 Other International:
Zarafshan-Newmont Joint Venture
Uzbek Soums $ 230 $ 1 Minahasa
Indonesian Rupiahs $ 319 $ 7 Martha
New Zealand Dollars $ 1,698 $ 13 Ovacik
Turkish Liras $ 1,174 $ 7
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In addition, the Company’s total cash costs at Golden Grove varied due to changes in the local currency exchange rates in relation to the U.S. dollar as follows for each of the two years ended December 31, 2003:
Year
Foreign Currency Percentage
change in
average local
currency
exchange
rate;
appreciation
(devaluation)Increase to
total cash
costs inU.S. dollars
(000)2003
Australian Dollars 17 % $ 9,051 2002
Australian Dollars 5 % $ 2,851
The Company estimates that a 5% appreciation (devaluation) of the local currency exchange rate in relation to the U.S. dollar at Golden Grove would decrease (increase) the Company’s projected total cash costs by approximately $3.4 million in 2004.
In addition, the Company’s Equity income of affiliates during this three-year period varied due to increases or decreases in costs from changes in the local currency exchange rates in relation to the U.S. dollar at the Batu Hijau copper mine in Indonesia as follows for each of the three years ended December 31, 2003:
Year
Foreign Currency Percentage
change in
average local
currency
exchange
rate;
appreciation
(devaluation)Additional
income included
in equity
income (loss)in affiliates, net
(000)2003
Indonesian Rupiah 8 % $ (2,974 ) 2002
Indonesian Rupiah 6 % $ (1,750 ) 2001
Indonesian Rupiah (23 )% $ 5,146
The Company estimates that a 5% appreciation or devaluation, respectively, of the local currency exchange rate in relation to the U.S. dollar at Batu Hijau would decrease or increase, respectively, the Company’s projected Equity income of affiliates by approximately $2.0 million in 2004.
The Company does not believe that foreign currency exchange rates in relation to the U.S. dollar have had a material impact on its determination of proven and probable reserves in the past. However, in the event that a sustained weakening of the U.S. dollar in relation to the Australian dollar, and/or to other foreign currencies that impact the Company’s cost structure, were not mitigated by offsetting increases in the U.S. dollar gold price or by other factors, the Company believes that the amount of proven and probable reserves in the applicable foreign country could be reduced as certain proven and probable reserves may no longer be economic. The extent of any such reduction would be dependent on a variety of factors including the length of time of any such weakening of the U.S. dollar, and management’s long-term view of the applicable exchange rate. Future reductions of proven and probable reserves would primarily result in reduced gold sales and increased depreciation, depletion and amortization calculated using the units-of-production method and, depending on the level of reduction, could also result in impairments of property, plant and mine development, mineral interests and other intangible assets and/or goodwill.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which provides guidance on the identification and reporting for entities over which control is achieved through means other than voting rights. FIN 46 defines such entities as variable interest entities (“VIEs”). A FASB Staff Position issued in October 2003 deferred the effective date of FIN 46 to the first interim
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or annual period ending after December 15, 2003 for entities created before February 1, 2003, if certain criteria are met. Subsequently, during December 2003, the FASB issued FIN 46R which replaces the original interpretation. Application of this revised interpretation is required in financial statements for companies that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for other types of entities is required in financial statements for periods ending after March 15, 2004.
As of December 31, 2003, Newmont had an interest in an entity considered to be a special-purpose entity, QMC Finance Pty Ltd (“QMC”). Newmont has not consolidated QMC, however, as Newmont is not the primary beneficiary of QMC as defined by FIN 46R. For a complete discussion regarding Newmont’s interest in and activities with QMC, see Note 10 to the Consolidated Financial Statements.
Newmont is currently evaluating the impact FIN 46R will have on its financial statements for any other VIE in which the Company has an interest that is not considered to be a special-purpose entity and that was created before December 31, 2003. Newmont has identified the Batu Hijau operation as a VIE because of certain capital structures and contractual relationships. Newmont has also determined that it is the primary beneficiary of the Batu Hijau operation. Therefore, Newmont expects to consolidate Batu Hijau effective January 1, 2004. For a complete discussion regarding Newmont’s interest in and activities with Batu Hijau, see Note 10 to the Consolidated Financial Statements.
In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” to amend and clarify financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The changes in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly to achieve more consistent reporting of contracts as either derivative or hybrid instruments. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. SFAS 149 did not have any impact on the Company’s financial position or results of operations at December 31, 2003, or for the year then ended.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” providing guidance regarding classification of freestanding financial instruments as liabilities (or assets in some circumstances). SFAS 150 was originally effective for financial instruments entered into or modified after May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003, and was to be applied prospectively. However, on October 29, 2003, the FASB decided to defer the provisions of paragraphs nine and ten of SFAS 150 as they apply to mandatorily redeemable non-controlling interests. These provisions require that mandatorily redeemable minority interests within the scope of SFAS 150 be classified as a liability on the parent company’s financial statements in certain situations, including when a finite-lived entity is consolidated. The deferral of those provisions is expected to remain in effect while these interests are addressed in either Phase II of the FASB’s Liabilities and Equity Project or Phase II of the FASB’s Business Combinations Project. The FASB also decided to (i) preclude any “early” adoption of the provisions of paragraphs nine and ten for these non-controlling interests during the deferral period; and (ii) require the restatement of any financial statements that have been issued where these provisions were applied to mandatorily redeemable non-controlling interests. SFAS 150 is not expected to have any impact on the Company’s financial position or results of operations.
During December 2003, the FASB issued SFAS No. 132 (revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This revised statement, which expands required disclosures, is effective for fiscal years ending after December 15, 2003 with the exception of estimated future benefit payments disclosure which is effective for fiscal years ending after June 15, 2004. Newmont adopted this statement as of December 31, 2003, and has included the appropriate disclosures in its financial statements at December 31, 2003. See Note 20 to the Consolidated Financial Statements.
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The Emerging Issues Task Force (“EITF”) formed a committee to evaluate certain mining industry accounting issues, including issues arising from the application of SFAS No. 141 and SFAS No. 142 to business combinations within the mining industry, accounting for goodwill and other intangibles and the capitalization of costs after the commencement of production, including deferred stripping. The issues to be discussed also include whether mineral interests conveyed by leases represent tangible or intangible assets and the amortization of such assets. The Company believes that its accounting for its mineral interests conveyed by leases is in accordance with generally accepted accounting principles. However, the Company cannot predict whether the deliberations of the EITF will ultimately modify or otherwise result in new accounting standards or interpretations thereof that differ from the Company’s current practices.
Liquidity and Capital Resources
For 2003, Net cash provided by operating activities was $588.8 million, compared to $670.3 million and $369.7 million for 2002 and 2001, respectively. Net cash provided by operating activities was significantly impacted by the following key factors:
Years ended December 31, 2003 2002 2001 Equity gold sales (000 ounces)
7,383.6 7,631.7 5,466.1 Average price received per ounce of gold
$ 366 $ 313 $ 271 Newmont weighted-average total cash costs per equity ounce
$ 203 $ 189 $ 184 Exploration, research and development (in millions)
$ 115.2 $ 88.9 $ 55.5 General and administrative expense
$ 130.3 $ 115.3 $ 61.2 (Use) source of cash flow from changes in operating assets and liabilities (in millions)
$ (202.9 ) $ 12.5 $ 60.7
Cash flows from the change in operating assets and liabilities resulted in a use of cash in 2003 of $202.9 million compared to sources of cash of $12.5 million and $60.7 million in 2002 and 2001, respectively. Cash used in 2003 for operating assets and liabilities primarily related to $121.0 million used for early settlement of effective derivative instruments to substantially eliminate the Australian gold hedge books. Also, a temporary build up of inventories at year end reduced cash flow from operations by $72.8 million. In addition, earnings of $146.0 million were distributed to the minority partners of Yanacocha during 2003 compared to $24.7 million and $4.9 million in 2002 and 2001, respectively. Higher operating cash flows in 2002 compared to 2001 primarily reflect the impact of operating cash flows from the February 15, 2002 acquisition of Normandy and Franco-Nevada operations and the impact of an increased average realized gold price in 2002. Operating cash flows in 2001 were lower primarily due to the lower average realized gold price, partially offset by a reduction of inventory balances of $35.5 million.
Net cash (used in) provided by investing activities was $(201.8) million, $112.1 million and $(385.0) million in 2003, 2002 and 2001, respectively. Newmont’s primary investing activity is Additions to property, plant and mine development, which were $(501.4) million, $(300.1) million and $(390.0) million for 2003, 2002 and 2001, respectively. See Additions to Property, plant and mine development below for more information on capital expenditures. In 2003 and 2002, the Company engaged in significant acquisition and disposition activity related to the acquisitions of Normandy and Franco-Nevada and the subsequent disposition of investments acquired as part of those acquisitions. The year ended 2003 included $180 million of proceeds from the sale of TVX Newmont Americas and $232.2 million of proceeds from the sale of marketable securities of Kinross Gold Corporation and other investments, approximately $39.3 million of cash payments received from Batu Hijau for intercompany transactions, partially offset by a $56.2 million equity contribution to AMC. Additionally, during the year ended 2003, $55.3 million was used for the early settlement of ineffective derivative instruments and $11.2 million was used to acquire the Newmont NFM minority interests (see Investing Activities, below). Cash from investing activities in 2002 also included $404.4 million of proceeds from the sales of short-term investments obtained as part of the acquisition of Franco-Nevada, $84 million of proceeds from the sale of
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marketable securities of Lihir and $50.8 million of proceeds from the settlement of cross currency swaps that were obtained as part of the Normandy acquisition, offset by $90.3 million of net cash consideration for the acquisitions of Normandy and Franco-Nevada, $24.8 million of cash advances to affiliated companies and $21.1 million of cash outflows to settle ineffective derivative instruments. There were no significant investing cash flows other than capital expenditures in 2001.
Net cash provided by (used in) financing activities was $546.7 million in 2003, compared to $(530.1) million and $85.1 million in 2002 and 2001, respectively. The increase in cash from financing activities in 2003 is primarily related to approximately $1.0 billion in proceeds from the issuance of 25 million shares of the Company’s common stock (see Note 17 of the Consolidated Financial Statements). Financing activities in 2003 also included $1.2 billion of debt repayments, including early extinguishments (see Financing Activities, below), and $70.8 million of cash outflows for dividend payments, offset by $492.8 million of borrowings under the Company’s credit facilities, which were repaid during the year, $162.5 million of proceeds from the issuance of common stock on the exercise of Franco-Nevada Class B warrants and $96.8 million of proceeds from the issuance of common stock related to stock compensation plans. Financing activities in 2002 included draw-downs on the Company’s credit facilities of $493.4 million to pay the cash portion of the purchase price of Normandy. Such draw-downs were repaid shortly after the acquisition with the proceeds from the sale of the Franco-Nevada short-term investments. Including the repayment of the credit facilities, the Company repaid approximately $1.0 billion of debt in 2002. See Financing Activities, below. Dividend payments for 2002 totaled $50.0 million, and the Company received approximately $67.3 million of proceeds from the issuance of common stock primarily related to stock compensation plans. In 2001, Newmont received proceeds from long-term debt of $1.0 billion and repaid $951.6 million primarily related to settling the Company’s credit facilities, paid $31.0 million of dividends and benefited from the lifting of restrictions on $40.0 million of cash.
Newmont’s contractual obligations at December 31, 2003 are summarized as follows:
Payments Due by Period Contractual Obligations
Total Less than
1 Year1-3
Years
3-5
Years
More
than5 Years
(unaudited, in millions) Long-term debt(1)
$ 990.1 $ 225.8 $ 342.8 $ 173.5 $ 248.0 Capital lease obligations(1)
435.3 32.0 104.2 73.0 226.1 Remediation and reclamation obligations(2)
544.8 67.0 164.5 60.1 253.2 Other long-term liabilities(3)
165.4 37.8 54.7 48.0 24.9 Operating leases
45.7 15.3 23.8 3.5 3.1 Minimum royalty payments
177.6 27.4 82.9 35.0 32.3 Purchase obligations(4)
142.3 99.9 26.3 9.3 6.8 Other(5)
167.7 49.2 116.2 2.3 — Total
$ 2,668.9 $ 554.4 $ 915.4 $ 404.7 $ 794.4
(1) Amounts represent principal and estimated interest payments assuming no early extinguishment.
(2) Mining operations are subject to extensive environmental regulations in the jurisdictions in which they operate. Pursuant to environmental regulations, the Company is required to close its operations and reclaim and remediate the lands that operations have disturbed. The estimated undiscounted cash outflows of these remediation and reclamation obligations are reflected here. For more information regarding remediation and reclamation liabilities, see Note 14 to the Consolidated Financial Statements.
(3) Contractual obligations for Other long-term liabilities include employee related liabilities such as severance and forecasted 2004 funding requirements for the pension plans. Pension plan funding beyond 2004 cannot be reasonably estimated given variable market conditions and actuarial assumptions. Payments related to derivative contracts cannot be reasonably estimated given variable market conditions. See Note 15 to the Consolidated Financial Statements.
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(4) Purchase obligations are not recorded in the Consolidated Financial Statements. Purchase obligations represent contractual obligations for purchase of power, materials and supplies, consumables, inventories and capital projects.
(5) Other contractual obligations that are not reflected in the Company’s Consolidated Financial Statements include labor and service contracts.
Scheduled minimum long-term third party debt repayments for the Batu Hijau, accounted for under the equity method, are $86.7 million in each year from 2004 through 2008 and $306.3 million thereafter.
Off-Balance Sheet Arrangements
The Company has the following off-balance sheet arrangements: operating leases as disclosed in the above table; the guarantee of the QMC debt (see Investing Activities, below); $202.9 million of outstanding letters of credit, surety bonds and bank guarantees (see Note 27 to the Consolidated Financial Statements); and a guarantee of $35.7 million of Pollution Control Revenue Bonds of BHP Copper Inc. (see Note 27 to the Consolidated Financial Statements). Newmont also provides a contingent support line of credit to PTNNT of which Newmont’s pro-rata share is $36.6 million (see Note 10 to the Consolidated Financial Statements). Newmont has identified the Batu Hijau operation as a VIE because of certain capital structures and contractual relationships. Newmont has determined that it is the primary beneficiary of the Batu Hijau operation. Therefore, Newmont expects to consolidate Batu Hijau effective January 1, 2004 (see Recent Accounting Pronouncements, above).
Future Cash Flows
The Company expects to use cash for capital expenditures (see Investing Activities, below), to fund the Exploration and Merchant Banking Segments (see Results of Operations, above) and to service debt. For information on the Company’s long-term debt, capital lease obligations and operating leases, see Note 13 to the Consolidated Financial Statements. For information on NTP’s long-term debt, see Note 10 to NTP’s Consolidated Financial Statements. Newmont believes it will be able to fund all existing obligations from Net cash provided by operating activities. Subject to any significant adverse changes in the Company’s long-term view of gold prices, the Company has both the ability and intention to fund from Net cash provided by operating activities, the exploration expenditures and Merchant Banking investments that were assumed in the valuations performed to allocate goodwill to the Exploration and Merchant Banking Segments as part of the purchase accounting for the acquisitions of Normandy and Franco-Nevada and to perform impairment testing of such goodwill at December 31, 2003 (see Critical Accounting Policies, above). The Company believes it will be able to raise capital as needed in the future as opportunities for expansion arise.
Newmont’s cash flows are expected to be impacted by variations in the spot price of gold and other metals and by variations in foreign currency exchange rates in relation to the U.S. dollar, particularly with respect to the Australian dollar. For information concerning the sensitivity of the Company’s cash costs to changes in foreign currency exchange rates, see Results of Operations, Foreign Currency Exchange Rates, above. Cash flows could also be impacted by the value of various marketable securities, specifically the Kinross shares. During the year ended December 31, 2003, a loss of $6.2 million, net of tax, was recorded in Other comprehensive income, net of tax for the change in market value of the investment. As the value of the Kinross shares have historically been strongly correlated to the price of gold, the Company considers the unrealized loss to be temporary. The Company will continue to evaluate the need to recognize a loss for an other-than-temporary decline in the value of the investment.
Newmont’s cash flows are also expected to be impacted by its gold derivative contracts. For gold ounces sold into gold forward sales contracts and other similar instruments (“committed contracts”), the Company realizes the contract price fixed in each contract. If the spot price at the time of the sale exceeds the related contract price, Newmont does not receive the excess of the spot price over the strike price relative to the ounces sold into that contract. If the spot price at the time of the sale is below the contract price, Newmont realizes an
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above-market price on the ounces sold into that contract based on the contract price. Gold put option contracts and other similar instruments (“uncommitted contracts”) have the effect of establishing a floor price the Company will receive for gold ounces sold into each contract. If the spot price at the time of the sale exceeds the strike price of the contract, then Newmont realizes the spot price less any gold financing charges associated with such gold put option contracts. If the spot price at the time of the sale is less than the strike price, then Newmont realizes the strike price. Assuming the contracts remain outstanding in the future, committed contracts have the effect of locking in the price Newmont will realize on the sale of the ounces associated with each contract, and uncommitted contracts have the effect of establishing a minimum price Newmont will realize for the sale of the ounces associated with each contract.
Based on current gold prices and exchange rates, Newmont estimates that there will be no impact of its gold derivative contracts outstanding on the net cash proceeds from the sale of gold in 2004 compared to the proceeds the Company would have received if the relevant gold had been sold into the spot market. In 2004, 3% of estimated production is subject to uncommitted contracts with strike prices below current gold prices and there are no committed contracts remaining. In addition, no assurance can be given that the gold derivative contracts will remain outstanding in the future as Newmont may opportunistically close out certain contracts if favorable market conditions exist. Payments related to the ineffective portion of certain gold derivative contracts in the years 2004 and thereafter are not expected to exceed $5.3 million. For more information on Newmont’s gold derivative contracts, see item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Based on Newmont’s production profile for the next five years and proven and probable reserves at December 31, 2003, without considering future additions to such reserves, Newmont expects that total gold equity ounces sold in each of the next five years will not be less than 82% of expected gold ounce sales in 2004. The Company does not anticipate that reasonably expected variations in gold production alone will influence its ability to pay its debt and other obligations over that period. For information on the sensitivity of Newmont’s Net cash provided by operating activities to metal prices, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
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Additions to Property, Plant and Mine Development
Years ended December 31, 2003 2002 2001 (in millions) Capital expenditures:
North America:
Nevada
$ 109.7 $ 54.6 $ 47.1 Mesquite, California
— — 0.4 La Herradura, Mexico
2.7 1.4 0.9 Golden Giant, Canada
0.7 6.6 7.1 Holloway, Canada
2.8 1.2 1.5 Total North America
115.9 63.8 57.0 South America:
Yanacocha, Peru
194.2 146.2 276.9 Kori Kollo, Bolivia
0.9 0.6 10.5 Total South America
195.1 146.8 287.4 Australia:
Pajingo
17.4 10.2 7.3 Kalgoorlie
15.0 8.6 — Yandal
17.2 20.7 — Tanami
41.4 10.5 — Other Australia
2.3 2.8 — Total Australia
93.3 52.8 7.3 Other International Operations:
Zarafshan-Newmont, Uzbekistan
9.2 3.9 20.4 Ahafo, Ghana
15.7 — — Akyem, Ghana
8.8 — — Martha, New Zealand
11.8 5.3 — Ovacik, Turkey
6.6 4.0 — Total Other International Operations
52.1 13.2 20.4 Other:
Base Metals Operations
18.1 10.7 — Corporate and Other
24.8 11.7 17.9 Merchant Banking
1.6 1.1 — Exploration
0.5 –– — Total Other
45.0 23.5 17.9 Total Newmont
$ 501.4 $ 300.1 $ 390.0
Capital expenditures for North American operations during 2003 were $115.9 million and primarily included $60.4 million for the development of the Leeville underground mine (“Leeville”) and $11.3 million for the development of the Deep Post and Midas underground mines. South American capital expenditures of $195.1 million were primarily at Yanacocha, with approximately $93.2 million for mine and leach pad development, $24.4 million for environmental site and regional water management projects, $30.3 million for mining equipment and $46.3 million related to other ongoing expansion work. Australian capital expenditures were $93.3 million. Capital expenditures at Pajingo included $11.0 million for mine development and $6.4 million for mining equipment. Capital expenditures at Kalgoorlie consisted primarily of $13.2 million for haul trucks, a hydraulic shovel and other mining equipment. Capital expenditures at Yandal were $10.6 million
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for mine development and $6.6 million for mining equipment. Tanami expended $12.8 million for mine development and the remainder for a new ball mill, underground trucks and other mining equipment. Other international projects primarily included mine development of $9.1 million at the Martha mine in New Zealand and developmental drilling and other development activities for the Ahafo and Akyem gold projects in Ghana of $15.7 million and $8.8 million, respectively. Zarafshan capital expenditures included $7.2 million for a heap leach pad expansion and an associated conveyor system. Base Metals operations expenditures included $10.0 million for mine development and $8.1 million for mining equipment at Golden Grove. Corporate expenditures included $15.1 million for improvements in information technology systems. At December 31, 2003, commitments existed for capital expenditures of approximately $60.5 million for leach pad expansion in Yanacocha.
In 2002, capital expenditures in Nevada included deferred mine development ($15.3 million, primarily for the Deep Post underground and Midas mines), development of the Leeville project and optimization of the Phoenix project ($16.4 million