Newmont Mining (NYSE: NEM) recently released its Q3 earnings. Reporting net income from continuing operations of $169 million, Newmont reported an approximate 6% increase over the $159 million it reported during the same period last year. But there's much more to a company's quarterly performance than just one number, so let's dig in and mine the report for some of the more interesting nuggets.
Insight on Indonesia
Originally estimating the sale of its interests in PT Newmont Nusa Tenggara -- which operates the Batu Hijau copper and gold mine in Indonesia -- to occur during Q3, the deal is now expected to close during Q4. According to management, the delay is not on its end, claiming on the conference call that "the key outstanding item remaining is actually getting the concurrent sale or the sale of one of the partners."
With a total consideration of $1.3 billion -- $920 million in cash due at closing and $403 million in contingent payments -- the deal will help the company in its pursuit of reducing debt and concentrating its non-core assets. Estimating that Newmont's net debt-to-EBITDA ratio will be 1.1 following the deal's closing, management maintains a long-term target net debt-to-EBITDA ratio of 1.0.
Flowing in the right direction
Newmont had a lot to be happy about in the third quarter. One figure that stands out among the rest, though, is the increase the free cash flow. The company reported $240 million for Q3 -- a healthy 51% increase over the same period last year. The growth is impressive, but one shouldn't take this at face value. Instead, we need to dig a little further.
Commercial gold production has begun at the Merian mine in Suriname. Image source: Newmont Mining corporate website. Had the increase been tied to one factor, it would suggest that this could be a one-time event -- not an accurate indication of the company's overall performance.
First, we should expect to find an increase in operational cash flow, and we do. The company grew cash from operations 7% -- from $475 million to $509 million -- year over year. But Newmont can't take all the credit for the increase -- it owes a debt of gratitude to favorable gold prices. The company reported a 20% year-over-year increase in the net average realized gold price. Whereas the average price was $1,112 per gold ounce in Q3 2015, the company reported that the average price was $1,329 per gold ounce this past quarter.
The improved generation of operational cash doesn't explain the free cash flow growth alone, so let's turn to capital expenditures. In Q3, Newmont cut capex spending 6% year over year -- from $889 million to $832 million. Both the improvements in operational cash flow and capex spending are consistent with the free cash flow growth. But investors must remember that, even though, the operational improvements were noteworthy, the rise in the price of gold was also a strong factor.
The giving season is here
What to do with all the cash the company is generating? Besides paying down its debt, management intends to reward shareholders. For the first time in more than two years, Newmont will be raising its dividend. In fact, the company is doubling it, paying out $0.05 per share in the fourth quarter, as opposed to the $0.025 per share it had been distributing since June 2014.
Presumably, the dividend may rise again in the near future. On the company's conference call, management announced "an enhanced gold price-linked dividend policy starting in the first quarter of 2017." According to management, the new policy "increases the annual payout levels to provide additional upside to shareholders as gold prices increase."
The company, furthermore, has committed to increasing the dividend even if the price of gold were to fall. For example, management estimates that the payout in the first quarter of fiscal 2017 will be $0.075 per share. It attributes this motivation to revise the dividend policy to its confidence in being able to generate free cash flow even at lower gold price levels.
Improving its ability to generate free cash flow and rewarding investors by revising its dividend policy are just two of the reasons investors could consider the third quarter a success. It also demonstrates why the company is one of the more compelling opportunities for those looking to make some green from companies producing gold.
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