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Newmont Signs Letter Of Intent To Sell Midas Mine In North America
9/24/2013 9:54:00 AM
Newmont Mining ( NEM ) announced that it has signed a Letter of Intent (LOI) to sell its Midas gold mine operation in Nevada to Waterton Global Resource Management, Inc. The transaction is subject to certain conditions, including execution and delivery of an acquisition agreement, completion of confirmatory due diligence and receipt of all required regulatory and third party approvals. In case the proposed deal doesn't go through, the LOI will stand terminated on October 14, 2013, unless extended by mutual agreement of both parties.
Newmont's management said that the proposed sale is in line with the company's strategy to divest non-core assets in order to generate greater shareholder value. With mining costs shooting up, gold mining companies are trying to rationalize operations by focusing on value generation instead of production growth.
The Midas Mine
Midas is an underground gold mine located in north central Nevada which Newmont acquired through its merger with Normandy in 2002. The operations here consist of an underground mine, waste rock area, crushing plant, conventional mill, refinery, cyanide destruction circuit, tailings impoundment, and two settling ponds. There are also ancillary facilities like a maintenance shop, warehouse complex, administration and security building, and facilities for distributing diesel fuel, gasoline, and propane.
Why Newmont Is Selling Midas
Gold mining companies haven't had it good in the recent months. With the price of gold nosediving in international markets on talks of QE tapering, a lot of gold miners had to record massive impairments on the balance sheet in the second quarter. Newmont recorded an impairment of $1.8 billion.
A lower price of gold translates to lower dividends for shareholders as Newmont links dividends to free cash flow which got hit as the company doesn't hedge itself against fluctuations in gold prices. Faced with shareholder criticism, Newmont and other gold companies have vowed to focus on generating value for shareholders by cutting down on costs and wasteful expenditure and getting rid of non-core assets.
Attributable gold production in Nevada was reported at 383,000 ounces in Q2 2013. Production increased by 1% from the prior year comparable quarter due to new production from the Emigrant site as well as higher grade and throughput at Phoenix due to improved mill throughput in Nevada. However, the growth in production was offset to some extent due to lower grade of ore and lower production at Midas.
The reserves at Midas mine are very puny compared to those at Newmont's other properties in the region. At the end of 2012, while Newmont's Nevada mines had total proven gold reserves of 16.3 million ounces, Midas accounted for just 30,000 ounces of those. Even probable gold reserves at Midas stood at 20,000 ounces out of a total of 21.4 million ounces. Thus, we think that even though it may be a good asset, retaining Midas makes little sense for Newmont from a long term strategic perspective. Its funds and energies would be better directed at large scale, long term growth projects like Conga in Peru, Akyem in Ghana and Batu Hijau in Indonesia.
We have a Trefis price estimate for Newmont Mining of $22 .