Newmont Corporation — The full Newmonty

A summary of Newmont’s Q420 and FY20 results relative to both Edison’s prior forecast and also Q320 is provided in Exhibit 2. In general, production from mines in North America and South America were slightly below our forecasts – mostly as a result of continued low-level coronavirus-induced disruptions – while production in Africa was ahead of our expectations. Notable exceptions to the general trend of lower production in North and South America were Penasquito and Merian. Performance in Australia was mixed, with Boddington outperforming our expectations and Tanami fractionally underperforming them. Production and sales at Nevada Gold Mines and Pueblo Viejo were already known from Barrick’s preliminary full-year and fourth quarter production results announcement of 14 January 2021. Overall, however, both production and costs applicable to sales were closely in line with our expectations, as shown below:

From a financial perspective, both sales and costs applicable to sales were within 2% of our prior forecasts. Beyond that, the main variances in Newmont’s actual reported numbers relative to our previously forecast ones arose in reclamation, which experienced a sharp increase that was out of the range of normal quarterly outcomes, and the effective tax rate, which was below that most recently guided by management for the full year (38–42%) for both Q420 and FY20. In this case the increase in the reclamation and remediation charge was attributed to adjustments primarily related to increased costs at Yanacocha. In the event however, the lower tax charge almost exactly offset the higher reclamation and remediation charge such that profit after tax was also within 2% of our prior forecast. Beyond that, the only other major difference was in the minority charge, which was negative (ie minority partners sharing in a loss, rather than a profit), which resulted in net income attributable to Newmont stockholders that was 6.6% above our prior forecast for the full year.

The other major feature of the results was the dividend, set by the board at US$0.55/share for Q4, which is consistent with the company’s dividend policy at a gold price of US$1,800/oz. Readers are reminded that, at the time of its Q320 results in October, Newmont unveiled a new dividend framework whereby it formally re-based its dividend to a ‘base’ pay-out of US$1.00/share (or US$0.25/share per quarter), but also stated explicitly that it would return 40–60% of incremental attributable free cash flow to shareholders that it generated above a gold price of US$1,200/oz (cf a gold price at the time of writing of US$1,811/oz). Under the new framework, Newmont then seeks to adjust the ‘base’ pay-out according to the gold price in increments of US$300/oz, equating to incremental increases in the dividend of US$0.60/share per year (or US$0.15/share per quarter). Hence a sustainable gold price above US$1,800/oz should result in a dividend of US$0.55/share per quarter (being 0.25+0.15+0.15=0.55) – ie the quarterly dividend that it paid in Q420. Nevertheless, within this context, it is worth noting that, should Newmont decide to pay out nearer 60% of incremental attributable free cash flow to shareholders that it generates above a US$1,200/oz gold price, rather than 40%, then there is still scope for the quarterly dividend to remain at the higher level. In consequence, we have raised our dividend forecast for FY21 on the basis that the gold price being momentarily below US$1,800/oz is unlikely to result in any readjustment downwards in the quarterly distribution cf the Q420 level.

Quarterly forecasting of mining company profits is almost always a hostage to fortune. Nevertheless, with that caveat, Edison also offers its best estimate (given current information) of Newmont’s likely Q121e results in Exhibit 2, below:

In general, beyond Q420, Edison has left its financial forecasts substantially unchanged relative to those set out in our initiation note (The sustainable leader, published on 9 February). However, we have made some minor adjustments to account for the likelihood of some ongoing, low-level coronavirus-induced disruptions as well as the recent fall in the gold price, from US$1,828/oz at the time of our initiation to US$1,811/oz at the time of writing. Together with the operational adjustments, the 1.0% assumed decline in the gold price has resulted in a decline of 2.1% in our revenue forecast for FY21, which, for these purposes, has translated into a 4.5% decline in our pre-tax profit forecast and a 1.9% decline in our EPS forecast (on account of a change in our tax treatment of interest costs).

Note that our EPS forecast of US$0.59/share for Q121 and US$2.68/share for FY21 compare to the market consensus, as follows:

Although Edison’s forecasts are low within the context of the range of analysts’ expectations, we note that the average expected realised price of gold for Newmont in FY21 appears to be in the order of US$1,947/share, compared with our US$1,811/oz (ie the current spot price) for the remainder of the year, which may go some way to explaining the difference. In addition, Edison’s forecasts may be conservative with respect to tax in particular. Currently, we are forecasting an effective tax rate for FY21 of 39.6% compared to a guided range of 34–38%. Note that, the more the gold price rises, the more Newmont’s effective tax rate falls as lower tax operations contribute proportionately more to pre-tax profits. Finally, the balance of Newmont’s earnings between H121 and H221 is expected to be approximately in the proportion 47–48 to 52–53, all other things being equal.

In addition to the recent release of its financial results, on 10 February, Newmont announced the results of its annual resource and reserve estimation. Full details of the updated reserves and resources statement and of the changes in the categorisations of reserves and resources, by asset, are available on Newmont’s website. However, a very brief summary is provided below:

The following table summarises the year-on-year changes in Newmont’s attributable resources and reserves, by asset. Readers should note that, ordinarily, Newmont reports its resources exclusive of reserves. In this case however, we have aggregated reserves with resources in order to provide an indication of the full mineral inventory attributable to the company.

Inevitably, Newmont’s exploration activities were adversely affected by the COVID-19 pandemic, which required it, among other things, to prioritise drilling programmes in existing operations owing to travel restrictions. This constraint, in particular, affected its ability to progress greenfields exploration. Nevertheless, it was still able to achieve its target of replacing two-thirds of mining depletion 'via the drill bit’. Moreover, while headline reserves and resources declined by 1.9%, we estimate that they expanded by 5.3% if co- and by-products are also translated into gold equivalent ounces (GEOs). Relative to FY19, much of the increase in FY20 can be attributed to an expansion in copper resources, in particular, from 10.3Mt in FY19 to 11.9Mt (contained Cu) in FY20. Note that, for the purposes of Edison’s calculation, both co- and by-product reserves and resources are translated into GEOs at the prices indicated, whereas Newmont, in its official calculations, translates resources at slightly higher prices than reserves of US$1,400/oz Au, US$3.25/lb Cu, US$20/oz Ag, US$1.40/lb Zn and US$1.10/lb Pb.

As Newmont sees it, the challenge in discovering the next generation of mines is to be able to identify deeper, so-called ‘blind’ deposits that are under cover, rather than those originally discovered from outcrops (NB readers are directed towards Newmont’s Exploration update presentation to accompany its reserve and resource update for detailed information on this strategy). To this end, its philosophy towards exploration is to understand completely the geological systems in which it has a presence on both a regional and district scale, a goal that it believes cannot be achieved by operating a decentralised model. Immediate examples of domains with such multi-million ounce endowments include (but are not limited to) the Tintina Province in the Yukon, the Golden Triangle in British Columbia, the Carlin Trend, the Guiana Shield, the Superior Province in Canada, the Yilgarn, the West African Craton, the Nubian Shield and the Deseado Massif (Argentina/Chile), where, in addition to reserve expansion potential, Newmont’s existing presence in these complexes also makes them attractive from the perspective of offering synergies with existing operations. Within this context, it is worth noting that c 80% of Newmont’s reserves are located within easy trucking distance of an existing operating site and are therefore able to contribute relatively easily to low cost, value focused production for minimal investment.

Newmont had net debt on its balance sheet of US$1.2bn at end-FY20, which compares with US$1.8bn at end-Q320 and was considerably better than our expectation that it would remain broadly flat in Q4, not least owing to diligent control of working capital. This level of net debt equates to a gearing (net debt/equity) ratio of just 5.1% and a leverage (net debt/[net debt+equity]) ratio of 4.8%. Hereafter, we forecast that Newmont will generate cash from operations at a rate approaching US$5bn pa, of which around c US$2.2bn will be expended in capex and a further c US$1.8bn in dividends to shareholders, such that (all other things being equal) we would expect it to have net debt on its balance sheet of only US$286m as at end-Q421 (cf US$944m previously). On this basis, we would expect Newmont to be net debt free early in FY21, although this is subject to future investment decisions and may also be delayed depending on the extent to which the company buys back shares under its share buyback programme (sanctioned, so far, at a rate of US$1bn over the next 18 months). In the meantime, it boasts a dividend that puts it among the top five yielding large-cap global gold mining stocks globally and well in excess of the S&P 500 Index’s dividend yield, as well as having a share buyback programme of a similar order of magnitude.

In our initiation note (see The sustainable leader, published on 9 February 2021), we valued the company at US$76.34/share, based on nine measures across three different methodologies. Notwithstanding the adjustments that we have made to our short-term earnings expectations, we have elected to leave our valuation of Newmont unchanged relative to that in our earlier report and readers are directed towards this report to see more details of that valuation (see The sustainable leader published on 9 February).