Newmont Mining Corp's Priorities Mean Less Cash Returned to Shareholders

When reporting its fourth-quarter results, Newmont Mining announced its strategic capital allocation priorities. The company plans to maintain financial flexibility, invest in top development projects, and return capital to shareholders. What's important is that those priorities were named in order of significance. Returning capital to shareholders is in last place, and Newmont's dividend policy highlights this fact.

Dividend should decrease with current gold prices
The dividend policy links the distribution to gold prices. The company starts paying a $0.10 per-share dividend at a $1,200 per-ounce gold price and raises it to $0.20 per share at $1,300-$1,400 per ounce of gold. Going further, every $100 upside in the gold price increases the dividend by $0.20 per share.

For all of January and half of February, gold prices were below $1,200 per ounce. If there's no major price upside ahead, chances are that the average gold price for the quarter will remain below $1,300. This would lead to a $0.10 per-share dividend, a hefty 50% cut from the $0.20 per-share dividend that shareholders received last time.

Will Newmont be able to reduce its debt?
When Newmont states that it wants to maintain financial flexibility, it is primarily talking about reducing its $6.1 billion in debt. This is a significant sum to deal with. In its latest effort to push the debt maturities further into the future, Newmont secured a five-year term loan of $575 million. This loan refinances existing debt that comes due in July.

Newmont's operational cash flow in 2013 was $1.6 billion. If we look into 2014, it's hard to predict that this figure will increase substantially. Yes, Newmont has recently become more cost effective, but gold prices for the most part of 2013 were higher than they are now.

Newmont stated that it did not believe that using equity to pay off debt was a sound business practice and added that it had no intention of doing so. In comparison, Barrick Gold diluted its shares by 16% in November to reduce its debt load. Barrick Gold reduced the value of maturities for the next four years to $1 billion, but the overall debt remains high at $12.9 billion. The offering did not progress at a fast pace, but Barrick was finally able to sell its shares.

As Newmont wants to reduce its debt level but doesn't want to issue equity, it will have to do so with the help of its free cash flow. Capital expenditures this year are estimated between $1.3 billion and $1.4 billion. They will decline to $1 billion-$1.1 billion in 2015 and to $900 million-$1 billion in 2016. Does the company have enough free cash to reduce its debt and fund growth projects after we subtract capital spending from operational cash flow? Only if gold prices rise above current levels.

Problems in Indonesia continue
Another irritating fact is that Indonesia tax negotiations seem to lead nowhere. The country has imposed a progressive tax on copper-concentrate exports. This tax turns into a complete ban in 2017. Newmont has argued that this tax violates its existing contract of work, but to no avail.

As a result, Newmont must deliver its production to the country's only smelter at Gresik. Newmont stated that this smelter resumed operation after a maintenance shutdown, and that it expects to ship its concentrate to Gresik as soon as possible. Currently, half of production from Newmont's Batu Hijau mine could be placed at Gresik.

Several companies managed to receive the right to export concentrates from Indonesia, but neither Newmont nor Freeport-McMoRan Copper & Gold were among them. For Freeport-McMoRan, which operates a huge Grasberg mine deposit in the country, Indonesian operations are very important. Just like Newmont, Freeport plans to negotiate its way through the crisis, but it has had no success on this front so far.

Bottom line
Newmont's shareholders will receive less cash if current gold prices do not improve. What's more, the company's aim to reduce debt and fund several development projects does not combine well with returning cash to shareholders in the current environment. If you are an income-oriented investor, Newmont is probably not your choice.