Newmont Corp (NEM) — Q3 2015 Earnings Call Transcript

Thank you. I'm Vice President of Investor Relations, but thank you anyway. Welcome to the Goldcorp third-quarter conference call. Among the senior management in the room with me today are Chuck Jeannes, President and Chief Executive Officer; Lindsay Hall, Executive Vice President and Chief Financial Officer; George Burns, Executive Vice President and Chief Operating Officer; Russell Ball, Executive Vice President, Corporate Development and Capital Projects. For those of you participating on the webcast, we've included a number of slides to support this afternoon's discussion. These slides are available on our website at www.goldcorp.com. As a reminder, we will be discussing forward-looking information that involves unique risks concerning the business, operations, and financial performance and condition of Goldcorp. Forward-looking statements include but are not limited to statements with respect to future metal prices, the estimation of mineral reserves and resources, the timing and amounts of estimated future production, cost of production, capital expenditures, and cost and timing of the development of new deposits. Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on forward-looking statements. With that, I will now turn the call over to Chuck Jeannes, President and Chief Executive Officer.

Thanks, Jeff, and thank you, everyone, for joining us today. Back in 2011, Goldcorp embarked on an ambitious program of concurrently financing and building two new high-quality gold mines in two very different jurisdictions, Eleonore in Quebec and Cerro Negro in Argentina. Today, our third-quarter results illustrate the operational and cash-generating strength that we envisioned when we first set out on this now completed mine construction program, even as the gold price has significantly weakened over the past four years. These capital investments have greatly enhanced our asset portfolio and positioned Goldcorp to provide strong free cash flow generation, even amid the current gold price environment. This cash flow also allowed us to pay off our revolving credit facility this quarter, enhancing what we believe is the strongest balance sheet in the gold sector and positioning us for long-term success, regardless of metal prices. We're pleased to report record quarterly gold production of 922,000 ounces for the quarter, as these new mines assumed a greater proportion of overall production and our flagship Penasquito mine continued its steady run of strong performance. We also reported all-in sustaining costs at $848 per ounce. We had inventory write-downs at our two Mexican mines, primarily due to gold price, and excluding these non-cash write-downs, all-in sustaining costs were an even stronger $802 per ounce. Adjusted operating cash flow met expectations, totaling $374 million or $0.45 per share, and we saw another quarter of growing free cash flow, as I said, reaching $243 million or $168 million after the payment of our dividend. Looking more closely at our operational performance, I continue to be extremely pleased with the performance of Penasquito, and we'll exceed our production guidance there between 700,000 and 750,000 ounces for the year. We also saw strong production at Cerro Negro and Musselwhite. At Eleonore, production doubled from the prior quarter, despite some challenges. Eleonore is a very high-quality gold mine that is only going to get better as the team there works through the issues. Remember, this is a big underground mine with a two-year ramp-up to full production, and we're on track with those overall expectations. At all of our mines, as well as at the corporate office, everyone at Goldcorp is 100% focused on cost control and productivity enhancements, what we call operating for excellence or O4E. As I've said before, we're well aware that in a flat gold price environment, the only way we can provide margin growth is through declining costs. As you saw in our all-in sustaining cost performance this quarter, we continue to meet this challenge. And cost control will continue to be a prime focus as we complete preparation of our 2016 budgets. Reflecting our confidence in the portfolio, we reconfirmed our production and cost guidance this morning, with production expected to be at the upper end of between 3.3 million and 3.6 million ounces at all-in sustaining costs of between $850 and $900 per ounce. We decreased our DD&A guidance to $450 an ounce from prior guidance of $425 per ounce. Lindsay will elaborate on those accounting items shortly. With our new project capital investment spending winding down as planned, we've also reconfirmed overall capital spending between $1.2 billion and $1.4 billion. We remain well-positioned for a strong finish to a great year. As I'm sure you're aware, the market performance of the gold miners has outperformed the price of gold over the last several months, as investors begin to absorb the reality of improved operating and financial performance of the sector at a lower price environment. We believe there's more room for relative outperformance, but we also believe we're getting close to the end of the gold bear market. U.S. Fed actions and inactions, Asian economic data, and other factors have done little to dampen the world's appetite for owning gold. Regular participants on our quarterly earnings calls may be familiar with this slide, depicting the likelihood of a peak gold scenario, and I include it here again to illustrate what I believe is an emerging trend in support of a higher gold price over time. As at least one of our counterparts in the base metals world has recently reminded us, the best cure for low commodity prices is low commodity prices. This is certainly true in the gold industry, where we've seen that it's nearly impossible to make a new discovery that's economic at $1100 gold. The message here is simple: Gold supply will be tightening going forward, and those companies like ours with the best assets will be uniquely positioned to benefit from this trend. Looking ahead, we remain focused on what we can control, delivering safe production at low all-in sustaining costs to achieve our 2015 guidance. We will also seek to translate the exploration success we've seen this year at Cerro Negro, Eleonore, and other sites to at least replace mined gold reserves, even at a lower reserved price. In terms of news flow, we're in the midst of work on our 2016 budgets and updated mine plans, and we look forward to providing our guidance expectations for 2016 and beyond early in the new year. I remain extremely excited by the opportunity to sustain Goldcorp's compelling investment proposition further into the future and look forward to speaking with you then. And with that, I'm going to turn it over to George.

Thanks, Chuck. I'm very pleased to report Goldcorp's mines delivered safe third-quarter gold production of 922,200 ounces at low all-in sustaining costs of $848 per ounce or $802 per ounce excluding impairments. Chuck has pointed out our strong execution at Penasquito, Cerro Negro, and Musselwhite, but most of the portfolio delivered at or near production cost expectations quarter to quarter. We also continued to see wins from our operating for excellence program. Through the first nine months of the year, we have realized benefits of approximately $250 million. Some good examples across the organization include higher gold and silver recoveries at Cerro Negro, further deployment of remote mucking and drilling at our underground mines, mechanization of the historic Upper Red Lake into lower-cost bulk mining, and lower unit cost mining at Penasquito in the mine. Importantly, our teams see further opportunities to lower costs and increase productivity across the sites. At Penasquito, the largest gold mine in Mexico remains on track for a record year. For the third quarter, safe gold production was 236,800 ounces at an all-in sustaining cost of $467 per ounce. As we discussed last quarter, the higher sulfide gold grades resulted from positive model reconciliation, as mining took place in the heart of the deposit. Gold grades are expected to continue to moderate into the fourth quarter as we move into a new phase of the ore body. The team at site has done a good job of increasing the mining rate, which is driving down our mine unit costs. In addition, we're realizing cost savings following the start-up during the quarter of the Energen electric generating plant. Conversion of natural gas-fired electric power generation will also contribute to a reduction of Penasquito's carbon footprint. Construction of the northern well field remained suspended throughout the third quarter of 2015, due to an illegal blockade by a local community. The site continues to seek a fair resolution of this matter while taking steps to enforce our contractual rights. Penasquito is also advancing alternatives for completion of the project by rerouting the infrastructure. Contingency planning is ongoing for additional water supply to the Penasquito mine until the well field project is operational. I'm confident we will have the water that we need to sustain operations until the resolution is reached. The metallurgical enhancement project feasibility study progressed during the quarter and is on track to be completed early in the new year. This study includes both a pyrite leach circuit and our proprietary concentrate enrichment project, each of which will be separately considered for advancement. During the quarter, pilot plant testing was completed and work continued to confirm capital and operating costs. At Camino Rojo, work continued to advance the pre-feasibility study, which is on track to be completed in 2016. An update of the geologic model continued during the third quarter and metallurgical testing of sulfide transition and oxide zones also advanced. Cerro Negro continued to ramp up successfully with third-quarter safe gold production totaling 135,700 ounces at an all-in sustaining cost of $731 per ounce. Increased production resulted from further ramp-up of mining rates at the Mariana Central and Eureka underground mines. Total tons milled increased, resulting in average throughput during the third quarter of 3,700 tons per day. Average milling rates in September surpassed nameplate capacity of 4,000 tons per day, ahead of schedule. On the exploration front, the news continues to be very positive. We continued our resource definition drilling program, expanding resources at the Mariana Central complex, particularly in the newly Emilia vein, where we're seeing strong grades. We're well-positioned to grow gold reserves this year at Cerro Negro. Turning to the work stoppage we announced at the end of September, we're having constructive discussions with the union that represents the mine workers while maintaining normal operations. Turning to Eleonore, third-quarter safe gold production totaled 86,700 ounces at an all-in sustaining cost of $974 per ounce. As Chuck mentioned, this was a doubling of the prior quarter as a result of the expansion of the underground mine from two to four horizons, additional mine optimization efforts, and continued ramp-up of the mill throughput. Throughput during the quarter averaged 6,500 tons per day, and some days we have exceeded nameplate plant design of 7,000 tons per day. As throughput is ramped up, the presence of pyrrhotite and iron sulfide has intermittently impacted the concentrate leaching circuit kinetics, leading to lower than expected recoveries during the quarter. We're making good progress to overcome this recent issue. As previously announced, prior to our site tour in September, in situ ore grades and initial stopes in horizon four have been as expected, but folding is being encountered. Mining in these areas is resulting in higher dilution and therefore lower than planned mine grades and gold production. The folding is of varying intensity and is estimated to affect approximately 10% of the overall Eleonore deposit. The Eleonore team continues to work on adjusting stope designs to minimize these impacts. Included in that work have been smaller stope designs, improved fragmentation, and better material handling. The folding and recovery issues have the potential to negatively impact 2015 production guidance of between 250,000 and 270,000 ounces. We continue to overcome typical ramp-up challenges, and I'm confident that these are short-term issues that will not affect the long-term performance of Eleonore. We continue to receive good news on the exploration front at Eleonore as well that support our expectation for reserve growth again this year. Work on the Eleonore Crown Pillar pre-feasibility studies continued to advance during the third quarter, with completion expected by the end of the year. On this slide, you can see quarter-over-quarter the increase in gold production and throughput, showing consistent performance from the plant. As we move towards the end of the year and the depletion of the low-grade stockpile, the key focus continues on the ramp-up of the underground. Turning to Red Lake, safe gold production totaled 77,600 ounces at an all-in sustaining cost of $1,028 per ounce. Production was lower than the prior quarters as a result of lower grades from remnant mining at the Campbell complex, mining in the lower grade sulfide zone, and lower than expected grades in the footwall zone. At our HG Young discovery, exploration continued to advance north from the 14 level at the Campbell complex. This trip provides new drill platforms for follow-up underground drilling on several positive intercepts from the ongoing surface exploration program, and we're working towards an initial resource by the end of the year. At Cochenour, our exploration drilling continued to assess the core areas of the deposit as well as the tram level, where a change in the orientation of the veins was detected. We're advancing detailed interpretation and analysis to support final mine planning and optimal placement of the infrastructure to set this mine up for long-term success. Processing of mill feed from the initial sill development work was consistent with expectations. Drilling is confirming pre-acquisition results in the upper portion of the deposit. We believe Cochenour will be a strong contributor to Red Lake in the future. Work is ongoing to define the timing of initial stope production and ramp-up of Cochenour feed for processing at Red Lake. With that, I will turn the call over to Lindsay.

Thanks, George. As demonstrated with our record quarterly gold sales, the growth and the contributions of our recent Los Filos gold mine helped offset the downward pressures the industry is experiencing in the current commodity price environment. At an average realized gold price of $1,114 per ounce on gold sales of some 942,000 ounces, the company generated adjusted revenues of $1.3 billion and adjusted operating cash flow of $374 million for the quarter. Byproduct and co-product cash costs for the third quarter were $597 and $670 per ounce respectively, compared to $547 and $656 per ounce in the prior quarter. The increase in cash costs is due primarily to the impact of the inventory write-downs of the lost heat leach value. All-in sustaining costs for the third quarter were $848 per ounce, compared to $846 per ounce in the prior quarter. As Chuck has mentioned, it would have been $46 an ounce lower without stockpile inventory write-downs. We reported a net loss in the quarter of $192 million or $0.23 per share. Excluding the usual impact of unrealized losses from the foreign exchange translation of deferred income taxes, adjusted net loss totaled $37 million or $0.04 per share in the third quarter of 2015, compared to an adjusted profit of $65 million or $0.08 per share in the previous quarter. Both reported and adjusted net losses were impacted by lower realized metal prices during the quarter and a $40 million or $0.05 per share reduction in the inventory carrying values primarily at Los Filos. We also experienced higher depreciation quarter over quarter due to a change in the mix of our production, with more production coming from our newer and higher DD&A per ounce mines, like Penasquito, Cerro Negro, and Eleonore. Additional assets were placed in service that were not forecasted, and the $19 million related to the non-cash portion of the inventory write-downs. The company generated adjusted operating cash flows of $374 million or $0.45 per share, which is before the positive change in non-cash operating working capital of $132 million. Given these operating results and capital expenditures on a cash basis of $263 million for the quarter, the company generated positive free cash flow of $243 million in the third quarter. Turning to provisional pricing, we had a negative $15 million provisional pricing impact at Penasquito and a negative $1 million impact at Alumbrera. The provisional sales at September 30, 2015 at Penasquito include 155,270 ounces of gold priced at $1,114 per ounce, 4.2 million ounces of silver at $14.65 per ounce, 68 million pounds of zinc priced at $0.75 per pound, and 28 million pounds of lead, priced at $0.75 per pound. While at Alumbrera, we have 18,567 ounces of gold, priced at $1,115 per ounce, and 14 million pounds of copper priced at $2.35 per pound. Regarding depreciation and depletion or DD&A per ounce, we expect it to increase to $450 per ounce for the year, from the previous guidance of $425 per ounce, due primarily to the impact of the mix of our production with more production coming from our newer and higher DD&A per ounce sites like Penasquito and additional assets such as the Overland waste rock conveyor at Penasquito placed in service earlier than anticipated. Goldcorp's DD&A per ounce is higher than most of our peers, primarily a result of the fact that we have newer, younger mines like Penasquito, Cerro Negro, and Eleonore. The costs associated with acquiring or building these assets are amortized over the existing reserve base to determine the DD&A per ounce. With these younger new mines, the DD&A per ounce will start out high and, as exploration success converts more ounces to reserves, which increases the denominator that these costs are amortized over, the DD&A per ounce is expected to decrease. So, while the depreciation expense in the early years will have a negative effect on reported earnings, it doesn't dilute the abilities of these new mines to generate free cash flows. We're pleased to have generated positive free cash flow after dividend of $168 million in the third quarter. As planned, we fully repaid our revolving credit facility balance. This, in combination with our positive cash balance, leaves us with $3.3 billion of liquidity at September 30 and in a strong financial position with one of the best balance sheets in the business. With our focus on mining safe profitable ounces, our efforts to reduce costs through our O4E and invest sustaining capital into our existing mines where it makes sense to do so, given the current commodity environment, we will continue. We manage the business for the long term and with our financial strength, we can make prudent investment choices for today and for the future, when commodity prices rebound. With that, operator, I will turn it back over to you for questions.

First one is on sustaining CapEx. You've obviously, as you said, you've fully managed all these projects, which is great. Looking to 2016, do you have, I know you haven't given any guidance, but is there a level of sustaining CapEx that you will be targeting? Is that something reasonable around $800 million?

Andrew, we're in the midst of our budgeting process right now and it would be premature to give you any specific guidance. In the past, we've talked generally about $1 billion a year. Not just for sustaining, but for those other expansionary capital things that we spend money on, such as advancing the permitting at places like El Morro and the engineering work at Camino Rojo. Things like that. If you were thinking in terms of around $1 billion overall, that would probably make sense. But of course, in a lower gold price environment, we look to find ways to bring those numbers down, and that's what the budgeting process is all about right now and what we're going through. So we'll have those numbers for you early in the new year.

This is George. We're expecting to see further ramp-up of Mariana Central, and that's where the higher grade ore is at Cerro Negro. Right now, we're processing low-grade stockpiles. Those are depleting and expected to be depleted around the beginning of the year, and at the same time, we continue to see the underground mines ramp up. Mariana Central, as it continues to ramp up, those grades will increase.

Chuck, I'm sorry you seem to be everybody's favorite short this morning. On Cochenour, can you give us some indication as to what you're seeing down there? We understand the ore bodies is in different shape to what it was before, but does that mean that it's going to be similar levels of profitability once you get there or is it in a different configuration, such that profitability is going to be different?

There are really two parts to the deposit we're focused on. At the tram level, where we had the first access for drilling, that's where the orientation is a bit different. Our original scoping was a long-hole mining method. That's still intact. So from a cost perspective and profitability, we have the same expectations. The upper area, which was the target for the acquisition to begin with, that's the heart of the deposit, we're getting great drilling results there, and our focus next year will be on that part of the lower body and again be able to advance our earnings and planning around that development work. Overall, I would tell you our expectations haven't changed. It's just the timing.

I will take that, John. We were all very focused on that, and it was quite dangerous, because it was headed right toward Manzanillo, where we have our concentrate warehouse and loading facilities. Fortunately, the hurricane turned at the last moment and missed Manzanillo, and we had some very slight damage there and nothing that impacted our concentrate loading or any of the boats. There was actually a ship in port at the time being loaded. And then, as the storm went through the rest of Mexico, yes, we got some more rain at Penasquito, but nothing that impacted us, and it essentially missed Filos and El Sauzal.

It's actually Chris Terry. Two questions to close out on the D&A that Lindsay spoke about. Would you expect that next year's going to be at a similar run rate to the upgraded guidance to the end of Q4? Is it going to be sometime before that then comes down with exploration success like you said? The second question may be for Chuck, just more of a strategic nature. With the costs coming out of the industry and you've done a really good job at continuing to strip those out and generating free cash flow now, if we do see, and you're right about the gold price starting to bottom out, and we do see the price rise, where will you spend the marginal dollar from here? Is it on a combination of debt payback, new projects, dividends, or more exploration spend? Or do you have a priority out of those that are listed?

I will take the first part of the DD&A. Again, we're getting our budgets together for 2016. I don't expect that to be higher. It will be lower because I don't anticipate impairments of stockpiles which are costing $10 or so an ounce. Also, we feel pretty good about replacement of reserves that will affect the denominator which should drive that number down. Generally speaking, it should be lower, but we're still working on that.

As far as how we manage increasing cash flow in a rising gold price environment, the one thing I can tell you that we're absolutely certain of is that we're not going to make the same mistakes that the industry made in the past cycle, where we lowered cutoff grades and chased top-line growth at the detriment of margin growth and instead just allowed the cost to go up concurrent with gold price. That's not what our investors are looking for. They've made that very clear. Certainly, I've been around long enough to understand that. And so when we see the gold price move, we're going to be holding the line and focusing on increasing cash flow, rather than increasing revenues. And so how we spend that, it's always a combination. Certainly, there will be more exploration as our portfolio continues to be enhanced. We'll have more exploration to spend. We have organic projects already in the pipeline that we're very excited about, that we're working on. Things like HG Young at Red Lake, the metallurgical enhancement project down at Penasquito. We've got Camino Rojo. We've got El Morro. So we've got some great organic projects that we will continue to advance, and the more cash flow we have, the more that we can bring those along.

George, I want to get a feel for how you think the mining rate at Cerro Negro is going to trend over the next year or so. With the reserve or below-grade stockpiles gone, you're going to need to fill the mill. I'm wondering how that's going to happen.

As I stated, we're looking to continue to ramp up both underground mines. Eureka, we're headed to the 1800 ton a day sort of rate. Mariana Central is approaching 1,000 tons a day today and we're headed towards 1,500 tons a day. So we're expecting both of these mines to ramp up. Eureka is a pretty mature mine. Mariana Central is moving in that direction. We have some minor challenges with voids at Mariana Central that have impacted that ramp-up, but we're getting through that. We're basically filling the holes with plastic pipe, in order to be able to control the blasting. So we're pretty confident you're going to see those two ramp up. Then, longer-term, it's about bringing the next mine into production. We will be looking at Mariana Norte where that mine is already restarted, as well as the exploration success we're seeing around the Mariana Central complex and all of that is in flux with our good exploration results and our planning for next year. So short-term, you're going to see both of these underground mines ramp up a bit and longer term, it's bringing new production into play.

Sounds like next year, you're going to be running around 3,300 tons a day?

I would say we will be starting the year out around that rate and looking to ramp up further.

I want to return to Cochenour as well. I believe there was a plan there for production ramp-up through 2016, but that seems to be changing. I'm just trying to get a sense of how you think production or mine output from Cochenour is going to go from here?

It's early days right now with Cochenour. Unfortunately, the lower part of the mine is going to ramp up a bit slower than we expected. As I stated, we're focused now on touching the heart of the deposit, the reason for the acquisition, next year. Trying to predict how quickly that will ramp up will be dependent upon that development and what we see. What I'd describe to you now is that the ramp-up over the next couple of years has slowed down a bit, but I think the endpoint is the same.

If I can add, it's not just something that's material to even the Red Lake camp, let alone the overall production profile, because we only had a few thousand ounces in the plan for 2016 anyway. Now, George and the guys are going to be focused very hard on getting that mine development done right, based on the different configuration that we've seen. We would certainly expect to see the production ramping up in late next year and into 2017. Remember, it's all about profitable ounces, and that's what we're focused on. And while ounces are shorthand for performance in our business, we're trying to change that, frankly, in the way we talk internally about cash flow. And our cash flow will and is continuing to improve.

I wanted to ask a question about the change in working capital. Obviously, you are healthy with the cash flow. Can you give us an idea of how that's going to be going forward? Have you gotten any plans to continue that trend, or is it one quarter it will be positive, one quarter negative?

Patrick, we're always trying to reduce our working capital, but we've had two great quarters, and we see it continuing for a while. At the end, it's timing of cash flows and a couple of things, the timing of say when you pay the taxes or you get refunds. In our case too, to a large extent, did the ship leave the warehouse on time, and am I going to get paid for it? That's the concentrate out of Penasquito. Some of those things, predominantly those two things, will always impact working capital, and we always focus on reducing that amount, but I can't always guarantee that it will be positive, but it's been strong for the last two or three quarters, and we see that continuing. But again, sometime in 2016, you'll have negative working capital as those cash flows don't come in on a quarterly basis as anticipated or change over the quarterly basis. That's what working capital is supposed to do. We focus on it. $257 million is a reasonable amount to run the business on. I don't think accessing the revolver will be necessary; it seems you believe that $300 million of cash isn't sufficient to operate the company, but that's not the case. Having the revolver available but unused is a luxury, and we don't expect to utilize it in the fourth quarter, if that’s your inquiry.

Thank you, Tanya, and I think that's the last of our questions, operator?

Thank you, everyone. I appreciate you joining us on the call today. I know you have a lot to do with a lot of companies reporting. To summarize, I would say that as planned, we've got increasing production, lower costs, and a sound balance sheet, delivering strong free cash flow well in excess of our dividends. We remain on track to continue those trends in the fourth quarter and into next year, even in the current gold price environment. We look forward to a strong finish to the year and updating you on our progress in the New Year. Thank you.