Newmont Corporation — Building it piece by piece

Newmont Corporation (TSX: NEM)

Last close As at 02/03/2024

49.02

0.18 (0.37%)

Market capitalisation

USD37,024m

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Research: Metals & Mining

Newmont Corporation — Building it piece by piece

After a fourth quarter result that was 13.7% ahead of our expectations, we expect Newmont’s financial performance to be restrained in the first two quarters of FY22, principally as a result of lingering constraints owing to the coronavirus pandemic. However, we believe that it will then pick up again strongly and, at current gold prices, we have therefore upgraded our FY22 basic adjusted net EPS forecast by 7.8% (Exhibit 6).

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Metals & Mining

Newmont Corporation

Building it piece by piece

Q122 results preview

Metals & mining

21 April 2022

Price

US$82.59

Market cap

US$65,453m

Net debt (US$m) at end-December 2021

1,310

Shares in issue

792.5m

Free float

99.8%

Code

NEM

Primary exchange

NYSE

Secondary exchange

TSX

Share price performance

%

1m

3m

12m

Abs

11.7

29.4

25.4

Rel (local)

11.8

30.0

16.3

52-week high/low

US$85.42

US$53.27

Business description

Founded in 1916, Newmont Corporation is the world’s leading gold company with a world-class portfolio of assets in North and South America, Australia and Africa. It is the only gold producer in the S&P 500 Index, and is widely recognised for its ESG practices and as a leader in value creation, safety and mine execution.

Next events

Q122 results

22 April

Yanacocha Sulphides decision

H222

Q222 results

July 2022

Q322 results

October 2022

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Newmont Corporation is a research client of Edison Investment Research Limited

After a fourth quarter result that was 13.7% ahead of our expectations, we expect Newmont’s financial performance to be restrained in the first two quarters of FY22, principally as a result of lingering constraints owing to the coronavirus pandemic. However, we believe that it will then pick up again strongly and, at current gold prices, we have therefore upgraded our FY22 basic adjusted net EPS forecast by 7.8% (Exhibit 6).

Year end

Revenue (US$m)

PBT
(US$m)

EPS*
(US$)

DPS
(US$)

P/E
(x)

Yield
(%)

12/20

11,497

3,143

2.66

1.45

31.0

1.8

12/21

12,222

1,108

2.97

2.20

27.8

2.7

12/22e

12,962

3,682

3.01

2.20

27.4

2.7

12/23e

11,839

2,794

2.27

2.20

36.3

2.7

Note: *EPS is normalised, excluding amortisation of acquired intangibles and exceptional items.

Reserves and resources and sustainability reports

Newmont’s reserves and resources report – released at the same time as its FY21 results – showed that additions to reserves of 6.5Moz in FY21 amounted to 91.5% of mining depletion of 7.1Moz during the year (before the company’s acquisition of Yanacocha’s minorities). This exceeded its target of 80%. After its buy-out of Yanacocha’s minorities, aggregate reserves and resources at Newmont increased by 12.6Moz to 208.0Moz. Subsequently, on 14 April, Newmont launched its 2021 sustainability report as part of its suite of reports on ESG practices showing, among other things, zero work-related fatalities for the third year in a row.

Valuation: Commanding the dividend heights

Using a real discount rate of 6.2%, our ‘terminal’ valuation of Newmont (based on updated guidance) at end-FY27 is US$76.95/share cum-dividend (cf US$82.38/share previously). This is close to Newmont’s current share price of US$82.59. However, note that this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY27. The valuation would increase to US$82.59/share (ie the current share price) if the growth in real cash flows after FY27 amounts to just 0.4% per annum (ie materially below the minimum of 2.0% per annum that would be expected from the average historical annual increase in the real price of gold of 2.0% pa). Assuming 2.0% per annum real increases in cash flows beyond FY27, our valuation in FY27 increases to US$111.60 cum-dividend and to US$85.50/share as at the start of FY22. This valuation is also conservative in that it assumes that the long-term price of gold will decline from current levels to US$1,524/oz in real terms by FY27 (before levelling out). If the gold price remains at current levels in real terms (US$1,950/oz at the time of writing), our valuation would increase to US$104.16/share cum-dividend in FY27 and to US$81.73/share in FY22. In the meantime, in both historical and relative terms, Newmont remains materially cheap with respect to its dividend yield. Based on consensus forecasts, we calculate that Newmont’s share price would have to rise by an average of 27.5% for its dividend yield to match those of its peer group. Based on our forecasts, we estimate its share price would have to rise 25.8%.

Q421 summary

In general, Newmont’s mines outperformed our prior expectations in Q421, with positive variances in output in Australia, Africa and Nevada more than offsetting a negative variance in North America (owing to continued absenteeism at its Canadian mines in particular relating to lingering concerns surrounding the coronavirus pandemic), albeit at slightly higher costs. A summary of the operational highlights of the quarter relative to our prior expectations is provided in Exhibit 1. From a geographical perspective, the only continent to noticeably outperform our prior expectations in terms of costs was Australia, which demonstrated a solid recovery from the challenges surrounding the commissioning of autonomous haulage at Boddington in Q321.

Exhibit 1: Newmont Q421 operational results, actual compared to prior forecasts

Region

Production (koz)

Costs applicable to sales (US$/oz)

Q121

Q221

Q321

Q421e

Q421

Variance
(%)

FY21

Q121

Q221

Q321

Q421e

Q421

Variance
(%)

FY21

North America

413

397

384

450

404

-10.2

1,598

736

769

800

751

883

+17.6

796

South America

174

189

188

182

182

0.0

733

791

721

958

825

860

+4.2

832

Australia

269

299

274

318

339

+6.6

1,181

750

764

788

731

724

-1.0

755

Africa

205

202

210

220

245

+11.4

862

758

763

886

678

786

+15.9

799

Nevada

303

284

308

349

377

+8.0

1,272

745

753

768

734

753

+2.6

755

Sub-total

1,364

1,371

1,364

1,519

1,547

+1.8

5,646

752

755

830

745

802

+7.7

785

Pueblo Viejo (40%)

91

78

85

79

71

-10.1

325

Total (attributable) gold

1,455

1,449

1,449

1,598

1,618

+1.3

5,971

Source: Newmont Corporation, Edison Investment Research. Note: Totals may not add up owing to rounding.

In financial terms, the main feature of the results was a US$1.6bn expense relating to reclamation and remediation charges resulting from adjustments to non-operating Yanacocha sites, only about half of which was deemed ‘exceptional’. However, this was itself offset by the minority’s share of the charge, which resulted in adjusted net income being 13.7% above our prior forecast for the quarter (US$624m cf US$549m).

A full analysis of Newmont’s Q421 financial performance relative to both our prior forecasts and Q321 results is provided in the exhibit below.

Exhibit 2: Newmont quarterly income statement, Q420–Q421 cf prior Edison forecast

US$m
(unless otherwise indicated)

Q420

Q121

Q221

Q321*

Q321

(reported)

Q421e*

Q421*

Q421

(reported)

Change**
(%)

Variation
***
(%)

Variation
***
(units)

Sales

3,381

2,872

3,065

2,895

2,895

3,167

3,390

3,390

17.1

7.0

223

Costs and expenses

 

 

 

– Costs applicable to sales

1,355

1,247

1,281

1,367

1,367

1,375

1,540

1,540

12.7

12.0

165

– Depreciation and amortisation

615

553

561

570

570

642

639

639

12.1

-0.5

-3

– Reclamation and remediation

250

46

57

38

117

55

752

1,626

1,878.9

1,267.3

697

– Exploration

69

35

52

60

60

75

62

62

3.3

-17.3

-13

– Advanced projects, research and development

30

31

37

40

40

43

46

46

15.0

7.0

3

– General and administrative

64

65

64

61

61

65

69

69

13.1

6.2

4

– Impairment of long-lived assets

20

0

0

0

0

0

0

0

N/A

N/A

0

– Care and maintenance

7

0

2

0

6

0

0

0

N/A

N/A

0

– Loss on assets held for sale

571

0

0

N/A

N/A

0

– Other expense, net

51

39

50

36

37

0

10

34

-72.2

N/A

10

Total

2,461

2,016

2,104

2,172

2,829

2,254

3,118

4,016

43.6

38.3

864

Other income/(expenses)

 

 

 

– Gain on formation of Nevada Gold Mines

0

0

 

 

 

– Gain on asset and investment sales, net

84

43

0

0

3

0

166

N/A

N/A

0

– Other income, net

3

(82)

50

23

(74)

0

(26)

19

-213.0

N/A

-26

– Interest expense, net of capitalised interest

(73)

(74)

(68)

(66)

(66)

(67)

(66)

(66)

0.0

-1.5

1

14

(113)

(18)

(43)

(137)

(67)

(92)

119

114.0

37.3

-25

Income/(loss) before income and mining tax

934

743

943

680

(71)

846

180

(507)

-73.5

-78.7

-666

Income and mining tax benefit/(expense)

(258)

(235)

(341)

(283)

(222)

(304)

(302)

(300)

6.7

-0.7

2

Effective tax rate (%)

27.6

31.6

36.2

41.6

(312.7)

36.0

167.8

(59.2)

303.4

366.1

132

Profit after tax

676

508

602

397

(293)

541

(122)

(807)

-130.7

-122.6

-663

Equity income/(loss) of affiliates

70

50

49

39

39

33

28

28

-28.2

-15.2

-5

Net income/(loss) from continuing operations

746

558

651

436

(254)

574

(94)

(779)

-121.6

-116.4

-668

Net income/(loss) from discontinued operations

18

21

10

11

11

15

15

36.4

N/A

15

Net income/(loss)

764

579

661

447

(243)

574

(79)

(764)

-117.7

-113.8

-653

Minority interest

(60)

20

11

(47)

(246)

25

(718)

(718)

1,427.7

-2,972.0

-743

Minority interest (%)

(7.9)

3.5

1.7

(10.5)

(101.2)

4.3

908.9

94.0

-8,756.2

21,037.2

905

Net income/(loss) attributable to stockholders

824

559

650

494

3

549

639

(46)

29.4

16.4

90

Adjustments to net income

32

35

20

11

480

0

(15)

670

-236.4

N/A

-15

Adjusted net income

856

594

670

483

483

549

624

624

29.2

13.7

75

Net income/(loss) per common share (US$)

 

 

 

Basic

 

 

 

– Continuing operations

1.005

0.672

0.799

0.605

(0.010)

0.688

0.785

(0.077)

29.8

14.1

0.097

– Discontinued operations

0.022

0.026

0.012

0.014

0.010

0.000

0.019

0.019

35.7

N/A

0.019

– Total

1.027

0.698

0.811

0.618

0.000

0.688

0.804

(0.058)

30.1

16.9

0.116

Diluted

 

 

 

 

– Continuing operations

1.002

0.671

0.797

0.604

(0.010)

0.687

0.783

(0.077)

29.6

14.0

0.096

– Discontinued operations

0.022

0.026

0.012

0.014

0.010

0.000

0.019

0.019

35.7

N/A

0.019

– Total

1.025

0.697

0.809

0.618

0.000

0.687

0.802

(0.058)

29.8

16.7

0.115

Basic adjusted net income per share (US$)

1.067

0.742

0.836

0.605

0.605

0.688

0.785

0.785

29.8

14.1

0.097

Diluted adjusted net income per share (US$)

1.065

0.741

0.834

0.604

0.604

0.687

0.783

0.783

29.6

14.0

0.096

DPS (US$/share)

0.550

0.550

0.550

0.550

0.550

0.550

0.550

0.550

0.0

0.0

0.000

Source: Newmont Corporation, Edison Investment Research. Note: *Estimated underlying excluding exceptional items. **Q421 vs Q321. ***Q421 vs Q421e.

Yanacocha Sulphides

Since the end of the year, Newmont has acquired the 48.65% interest in the Yanacocha Sulphides project that it did not previously own in two transactions:

On 8 February, the company announced that it had entered into a definitive purchase agreement to acquire Buenaventura’s 43.65% interest in Minera Yanacocha for US$300m plus contingent payments of up to a further US$100m, in part tied to metal prices. Simultaneously, Newmont also transferred its interest in the La Zanja joint venture to Buenaventura in exchange for royalties on any future production from La Zanja. It also contributed US$45m to Buenaventura to cover future closure costs at La Zanja.

On 12 April, Newmont announced that it had acquired the remaining 5% interest in Yanacocha that was outstanding from Sumitomo Corporation for US$48m such that its interest in the project is now 100%; this transaction is expected to close in Q222.

Consistent with the company’s district consolidation strategy, the acquisition enhances Newmont’s ownership of world-class assets, giving it control of the Yanacocha district ahead of its full funds development decision later this year. In the meantime, the company has confirmed that it is to invest US$0.5bn into the project in FY22.

As its name implies, the Yanacocha Sulphides project will develop the first phase of Yanacocha’s sulphide deposits, including an integrated processing circuit incorporating an autoclave. After a three-year development period (estimated FY23–25), the project is expected to add c 525koz gold equivalent per annum (in the ratio 45% Cu by value, 45% Au and 10% Ag) for the first five full years of production (FY27–31) at an all-in sustaining cost (AISC) of US$700–800/oz and an initial capital investment of c US$2.1bn. The first phase of the project will focus on developing the Yanacocha Verde and Chaquicocha deposits to extend Yanacocha’s operations beyond 2040, with the second and third phases having the potential to extend the mine’s life for multiple decades thereafter. Among other things, the Yanacocha sulphides project will increase Newmont’s copper output, supporting the world’s transition to a green economy.

After the development of the Yanacocha Sulphides project (and Ahafo North and Tanami Expansion 2, which have already been sanctioned), Newmont has a material pipeline of other potential projects for development, including Coffee, Akyem underground, Oberon (Tanami), the Sabajo extension at Merian, Galore Creek, Norte Abierto, Nueva Union, Apensu underground at Ahafo, Saddle North in Canada and Cerro Negro district expansions.

Medium- to long-term outlook

Ahead of its Q421/FY21 results, on 2 December, Newmont presented its medium- to long-term production outlook to investors. Unlike previous years, the company’s outlook for FY22 in particular assumed a US$1,800/oz gold price for both costs applicable to sales (CAS) and AISC to reflect higher costs from inflation, royalties and production taxes. In 2022, a further 5% cost escalation was also incorporated into direct operating cost assumptions to reflect labour, energy, material and supplies pricing. The FY22 and longer-term outlook also assumes a US$30/oz impact from production taxes and royalties attributable to higher gold prices.

A comparison of Newmont’s guidance with both its prior (December 2020) equivalent guidance and Edison’s (updated) production and cost assumptions for the period FY22–26 is provided in the table below:

Exhibit 3: Edison longer-term assumptions cf Newmont guidance*

FY22

FY23

FY24

FY25

FY26

Edison current

Production (Moz)

6.278

6.325

6,961

6,982

6.192

Cost applicable to sales (US$/oz)

809

796

751

748

802

Newmont guidance*

Production (Moz)

6.2

6.0-6.6

6.2-6.8

6.2-6.8

6.2-6.8

Cost applicable to sales (US$/oz)

820

740-840

700-800

700-800

700-800

Variance (%)

Production (%)

+1.3

In range

+2.4

+2.7

-0.1

Cost applicable to sales (%))

-1.3

In range

In range

In range

+0.3

Newmont previous guidance**

Production (Moz)

6.2–6.7

6.2–6.7

6.5–7.0

6.5–7.0

Cost applicable to sales (US$/oz)

650–750

625–725

600–700

600–700

Guidance change (%)

Production (mid-point)

-3.9

-2.3

-3.7

-3.7

Cost applicable to sales (mid-point)

+17.1

+17.0

+15.4

+15.4

Source: Newmont, Edison Investment Research. Note: *From 2 December 2021. **From 8 December 2020.

At the time of its acquisition of the Buenaventura stake in Yanacocha, Newmont updated its estimate of future attributable development capital guidance to account for the sulphides project, but noted that, ‘All other guidance metrics remain unchanged from long-term outlook as announced on December 2, 2021.’ Within this context, we estimate that Yanacocha will produce 225koz of gold in FY22 (on a consolidated basis), which will now translate into an attributable 211koz, rather than the 116koz that would otherwise have been expected prior to Newmont’s acquisition of the minority interests of Buenaventura and Sumitomo. Similarly, we estimate that Yanacocha will produce 215koz and 143koz gold in FY24 and FY25, respectively, which we therefore estimate will have the effect of enhancing group attributable production in those years by 105koz and 70koz relative to the situation if Newmont had not acquired the associated minority interests. Even without correction for these enhancements, we believe that the variances noted in Exhibit 6 in Edison’s attributable production forecasts for those years relative to Newmont’s guidance is immaterial.

As with previous guidance, Newmont’s outlook assumes that operations will continue without major COVID-19 related interruptions. To this end, the company continues to maintain wide-ranging protective measures for its workforce and neighbouring communities, including screening, physical distancing, deep cleaning and shielding for at-risk individuals. Together, these measures are expected to add c US$10/oz to AISC. If at any point the company determines that continuing operations pose an increased risk to its workforce or host communities, however, it reserves the right to reduce operational activities to the point of care and maintenance and the management of critical environmental systems alone.

In addition to revising our financial forecasts to reflect Newmont’s updated medium-term guidance, we have also updated our longer-term production assumptions to reflect Barrick’s 10-year production targets at Nevada Gold Mines (NGM), as set out in its 2021 Investor Day presentation. One aspect of NGM’s performance is of particular interest to investors, which is that in only one of the past 12 quarters has the open-pit material mined at NGM exceeded the FY21 reserve grade reported by Newmont. While the opposite is true for underground material, it nevertheless remains the case that, on average, the blended grade of material mined (and processed) in each of the past 12 quarters has been below the operation’s reserve grade in FY21 and below its reserve grade in FY20 in all but one quarter. Exhibit 4, below, serves to illustrate the point:

Exhibit 4: NGM mined and processed grade cf reserve and resource grades, Q421 and FY21

Open pits

Underground

Stockpiles

Average

Q421 mined grade (g/t)*

0.65

9.86

1.89

Q421 processed grade (g/t)*

1.90

FY21 reserve grade (g/t)**

1.26

8.90

2.33

3.00

FY21 resource grade (gt/)**

0.93

6.29

-

1.50

FY21 reserve & resource grade (g/t)***

1.03

7.69

2.33

2.06

Source: Newmont, Barrick. Note: *Reported by Barrick. **Reported by Newmont. ***Calculated by Edison.

There may be a number of reasons for this, including geology, mine sequencing and/or commercial imperatives. For example, Barrick may be deliberately taking advantage of the gold price environment to mine and process lower-grade material. This contrasts with Newmont’s reserves, which are calculated at a conservatively assumed gold price of just US$1,200/oz, which has the effect of increasing the grade of the material categorised as reserves (albeit at the expense of tonnage). However, one of the effects of this relatively low-grade mining is that, all other things being equal (and excluding ongoing exploration), the grade of the residual reserve material left unmined at the end of each successive year must increase. To some extent, this is evidenced by the fact that the reserve grade of material at NGM increased by 0.26g/t (or 9.5%) in FY21 relative to FY20. One of the potential consequences of this fact, however, is that it may have a material (upwards) effect on mining margins if the operation ever returns to mining reserve-grade ore (all other things being equal).

Q122 and FY22 forecasts by quarter

As in FY21, in FY22 Newmont expects both (higher) production and (lower) costs to be weighted towards the second half of the year – approximately in the ratio 47:53 – mainly as a result of ongoing disruptions relating to worker mobility and supply chains as a result of the coronavirus pandemic in North America, Australian and, to some extent, Africa as well.

In the light of Newmont’s Q421 results as well as its updated mine guidance and Barrick’s Q1 production update (dated 14 April 2022), we have therefore calculated the following operational forecasts for the company’s geographical regions for FY22:

Exhibit 5: Newmont Q122e-Q422e operational estimates

Region

Production (koz)

Costs applicable to sales (US$/oz)

Q122

Q222

Q322

Q422

FY22

Q122

Q222

Q322

Q422

FY22

North America

346

349

401

403

1,500

865

865

812

810

836

South America

166

181

235

238

820

989

991

772

777

867

Australia

319

320

381

381

1,400

771

771

649

649

705

Africa

248

248

277

277

1,050

866

866

775

775

818

Nevada

287

313

313

313

1,225

898

825

825

825

842

Sub-total

1,367

1,410

1,606

1,612

5,995

868

854

764

764

809

Pueblo Viejo (40%)

69

71

71

71

283

Total (attributable) gold

1,436

1,481

1,677

1,683

6,278

Source: Newmont Corporation, Edison Investment Research. Note: Totals may not add up owing to rounding.

Assuming a gold price of US$1,950/oz for the remainder of the year (cf US$1,819/oz for the full year, previously) and an effective tax rate for the year of 30–34%, this operational performance translates into financial forecasts for Newmont for FY22 as follows:

Exhibit 6: Newmont quarterly income statement, Q121–Q422e

US$m (unless otherwise indicated)

Q121

Q221

Q321

Q421

Q122e

Q222e

Q322e

Q422e

FY22e

FY22e

(prior)

Sales

2,872

3,065

2,895

3,390

2,898

3,092

3,470

3,501

12,962

12,317

Costs and expenses

– Costs applicable to sales

1,247

1,281

1,367

1,540

1,388

1,395

1,421

1,425

5,629

5,304

– Depreciation and amortisation

553

561

570

639

561

585

658

670

2,473

2,545

– Reclamation and remediation

46

57

117

1,626

43

43

43

43

172

174

– Exploration

35

52

60

62

70

70

70

70

280

260

– Advanced projects, research and development

31

37

40

46

43

43

43

43

170

146

– General and administrative

65

64

61

69

65

65

65

65

260

260

– Impairment of long-lived assets

0

0

0

0

0

0

0

0

0

0

– Care and maintenance

0

2

6

0

0

0

0

0

0

0

– Loss on assets held for sale

571

0

– Other expense, net

39

50

37

34

18

18

18

18

70

0

Total

2,016

2,104

2,829

4,016

2,186

2,218

2,317

2,333

9,054

8,688

Other income/(expenses)

– Gain on formation of Nevada Gold Mines

0

0

0

– Gain on asset and investment sales, net

43

0

3

166

0

0

– Other income, net

(82)

50

(74)

19

0

0

0

0

0

0

– Interest expense, net of capitalised interest

(74)

(68)

(66)

(66)

(60)

(62)

(60)

(44)

(225)

(152)

(113)

(18)

(137)

119

(60)

(62)

(60)

(44)

(225)

(152)

Income/(loss) before income and mining tax

743

943

(71)

(507)

652

812

1,094

1,125

3,682

3,476

Income and mining tax benefit/(expense)

(235)

(341)

(222)

(300)

(209)

(315)

(405)

(414)

(1,342)

(1,277)

Effective tax rate (%)

31.6

36.2

(312.7)

(59.2)

32.0

32.0

32.0

32.0

36.5

36.7

Profit after tax

508

602

(293)

(807)

443

497

688

711

2,340

2,199

Equity income/(loss) of affiliates

50

49

39

28

30

34

33

33

130

134

Net income/(loss) from continuing operations

558

651

(254)

(779)

473

531

721

744

2,470

2,332

Net income/(loss) from discontinued operations

21

10

11

15

0

0

Net income/(loss)

579

661

(243)

(764)

473

531

721

744

2,470

2,332

Minority interest

20

11

(246)

(718)

11

11

22

22

65

101

Ditto (%)

3.5

1.7

(101.2)

94.0

2.3

2.0

3.0

2.9

2.6

4.3

Net income/(loss) attributable to stockholders

559

650

3

(46)

463

521

700

722

2,405

2,231

Adjustments to net income

35

20

480

670

0

0

0

0

0

0

Adjusted net income

594

670

483

624

463

521

700

722

2,405

2,231

Net income/(loss) per common share (US$)

Basic

– Continuing operations

0.672

0.799

(0.010)

(0.077)

0.579

0.652

0.876

0.904

3.011

2.793

– Discontinued operations

0.026

0.012

0.010

0.019

0.000

0.000

0.000

0.000

0.000

0.000

– Total

0.698

0.811

0.000

(0.058)

0.579

0.652

0.876

0.904

3.011

2.793

Diluted

– Continuing operations

0.671

0.797

(0.010)

(0.077)

0.575

0.647

0.870

0.898

2.990

2.774

– Discontinued operations

0.026

0.012

0.010

0.019

0.000

0.000

0.000

0.000

0.000

0.000

– Total

0.697

0.809

0.000

(0.058)

0.575

0.647

0.870

0.898

2.990

2.774

Basic adjusted net income per share (US$)

0.742

0.836

0.605

0.785

0.579

0.652

0.876

0.904

3.011

2.793

Diluted adjusted net income per share (US$)

0.741

0.834

0.604

0.783

0.575

0.647

0.870

0.898

2.990

2.774

DPS (US$/share)

0.550

0.550

0.550

0.550

0.550

0.550

0.550

0.550

2.200

2.200

Source: Newmont Corporation, Edison Investment Research

This basic adjusted EPS forecast of US$3.011/share (vs US$2.793/share previously) for FY22 compares to the market consensus, by quarter, as follows:

Exhibit 7: FY22 basic adjusted EPS forecast, Edison versus consensus (US$/share)

Q122e

Q222e

Q322e

Q422e

Sum Q1–Q422e

FY22e

Edison forecast

0.579

0.652

0.876

0.904

3.011

3.011

Consensus forecast

0.72

0.87

0.92

0.90

3.41

3.35

High

0.78

1.15

1.18

1.17

4.28

4.27

Low

0.63

0.70

0.76

0.76

2.85

2.81

Source: Edison Investment Research, Refinitiv (21 April 2022)

Dividend

Newmont’s dividend for Q421 was maintained at US$0.55/share. At the time of its Q320 results in October 2020, Newmont unveiled a new dividend framework whereby it formally rebased its dividend to a ‘base’ pay-out of US$1.00/share (or US$0.25/share per quarter) at a gold price of US$1,200/oz, but also stated explicitly that it would return 40–60% of incremental attributable free cash flow that it generated above a gold price of US$1,200/oz to shareholders. Under the new framework, Newmont will augment the ‘base’ pay-out in increments of US$0.60–0.90/share per year (or US$0.15–0.225/share per quarter), evaluated in gold price increments of US$300/oz for gold prices above US$1,200/oz, with the goal of targeting 40–60% of incremental free cash flow above a gold price of US$1,200/oz returned to shareholders. Thus, a (sustainable) gold price at US$1,800/oz should (on this basis) result in a quarterly dividend of US$0.55/share, whereas a gold price below that level could result in one of US$0.40/share. However, it is worth noting that Newmont affords itself a degree of latitude in the level of the ultimate pay-out in that, should it 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 scope for the quarterly dividend to remain at the higher level even if the gold price dips below the US$1,800/oz level.

Valuation

Our approach to the valuation of Newmont has remained unchanged since our initiation note (see The sustainable leader, published on 9 February 2021) and readers are directed to this note for a fuller explanation of the methodologies involved. The following is an update of our valuation in light of Q421 financial results, our updated forecasts for FY22 and our longer-term assumption changes.

Absolute valuation and sensitivities

Newmont is a multi-asset company that has shown a willingness and desire to trade assets in the past to maintain production, reduce costs and maximise shareholder returns. As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY22, in the case of Newmont, we have opted to discount forecast dividends back over six years from the start of FY22, then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY27) based on the appropriate discount rate. In the normal course of events, we would exclude exploration expenditure from such a calculation on the basis that it is a discretionary investment. In the case of Newmont, however, we have included it in our estimate of future cash flows on the grounds that it will be a critical component of ongoing business performance in its ability to continually expand and extend the lives of the company’s assets via exploration.

In this case, in the light of Newmont’s updated cost and production guidance (see Exhibit 3), our estimate of Newmont’s ‘terminal’ pre-financing cash flow in FY27 has declined by 19.2%, from US$5.30/share in FY26 previously, to US$4.28/share in FY27 currently. On this basis, applying a (real) discount rate of 6.2% (calculated from a nominal expected equity return of 9% and increased long-term inflation expectations of 2.6162% cf 2.4158% previously, as defined by the US 30-year breakeven inflation rate – source: Bloomberg, 21 April), our terminal valuation of the company at end-FY27 is US$76.95/share cum-dividend (cf US$82.38/share previously). This is close to Newmont’s current share price of US$82.59. However, note that this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY27. The valuation would increase to US$82.59/share (ie the current share price) if growth in real cash flows after FY27 amounts to just 0.4% per annum (ie materially below the minimum of 2.0% per annum that would be expected from the average historical annual increase in the real price of gold of 2.0% pa). Assuming 2.0% per annum real increases in cash flows beyond FY27, our valuation in FY27 increases to US$111.60 cum-dividend and to US$85.50/share as at the start of FY22.

It should also be noted that our valuation is inherently conservative in that it assumes that the long-term price of gold will decline from current levels to US$1,524/oz in real terms by FY27 (before levelling out). If the gold price remains at current levels in real terms (US$1,950/oz at the time of writing), our valuation increases to US$104.16/share cum-dividend in FY27 and to US$81.73/share currently in FY22 (with the added assumption that mining at NGM does not then revert to the reserve grade in that year on account of the relatively high sustained level of the gold price).

Note that this (absolute) analysis inherently excludes any value to Newmont from its other development assets, such as Coffee, Galore Creek, Conga, Norte Abierto and Nueva Union, which together represent combined reserves and resources of 53.94Moz attributable to Newmont.

Relative Newmont valuation

Newmont’s valuation on a series of commonly used measures, relative to its peer group of the 10 largest publicly quoted senior gold producers, is as follows.

Exhibit 8: Newmont valuation relative to peers

Company

Ticker

P/E (x)

P/cash flow (x)

EV/EBITDA (x)

Yield (%)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Newmont (Edison)

NEM

27.4

36.3

40.1

14.4

14.5

13.6

10.5

12.4

11.4

2.7

2.7

1.9

Newmont (consensus)

NEM

25.5

26.1

27.2

13.4

13.1

12.9

10.5

10.4

10.6

2.5

2.5

2.2

Barrick

ABX

22.0

20.2

21.1

9.6

8.9

9.2

8.5

7.7

8.0

2.6

3.8

3.9

AngloGold

ANGJ

11.0

8.9

10.9

7.4

6.4

6.1

5.3

4.4

4.9

1.2

2.0

2.0

Polyus

PLZL MM

11.1

11.1

8.6

8.3

7.1

7.2

7.5

7.3

6.8

2.8

4.4

3.8

Gold Fields

GFI

14.7

13.6

14.0

8.3

8.1

7.3

6.5

5.9

5.8

2.3

2.5

2.5

Kinross

K

12.4

12.1

16.2

5.1

4.9

5.8

4.6

4.4

5.1

2.0

2.0

2.0

Agnico-Eagle

AEM

26.9

26.1

31.1

10.9

10.8

11.0

9.8

9.7

10.4

2.2

2.2

2.3

Newcrest

NCM AU

20.0

16.1

20.7

14.5

9.2

10.4

9.3

7.3

8.5

1.0

1.8

1.7

Harmony

HARJ

10.7

7.9

10.6

6.4

4.4

5.2

4.9

4.0

5.4

0.7

1.1

2.4

Endeavour (consensus)

EDV

14.4

14.3

12.6

5.7

6.0

5.6

5.3

5.5

5.2

2.3

2.6

3.0

Average (excl NEM)

15.9

14.5

16.2

8.5

7.3

7.5

6.9

6.2

6.7

1.9

2.5

2.6

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced on 21 April 2022.

From the table above, it can also be seen that while Newmont continues to command a premium rating relative to its peer group on most valuation measures, it remains materially cheap with respect to its dividend yield, despite the fact that its shares have risen by 45.5% since the time of our last note (see Q321 results in line with prior expectations, published on 10 November 2021). Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 27.5% for its dividend yield to match those of its peer group. Based on our forecasts, we estimate its share price would have to rise 25.8%.

As before, one further observation concerning the comparability of the above measures is merited. Given its policy of proportionately consolidating its interest in NGM and that it owns 100% interests in the majority of its remaining mining operations (with the notable exception of Merian), estimates of cash flow in particular are also close to estimates of cash flow attributable to shareholders (Newmont estimates that 99.8% of free cash flow was attributable to the company in FY21). This is in contrast to a number of its peers, where earnings and cash flow from assets not 100%-owned tend to be fully consolidated and therefore may not so easily approximate cash flow attributable to shareholders, making direct comparison using these measures either difficult or, potentially, misleading.

Historical valuation

Based on Newmont’s average historical P/E ratio of 23.9x current year earnings over the past nine years, from FY13 to FY21, and its average historical yield of 2.0% over the same timeframe, a summary of our updated valuation of the company over 16 measures of value over the next four years is as follows:

Exhibit 9: Newmont valuation summary (US$/share in years shown)

Basis of valuation

FY22e

FY23e

FY24e

FY25e

Historical

Share price implied by Edison EPS forecast (US$/share)

71.88

54.28

49.10

37.87

Historical

Share price implied by Edison DPS forecast (US$/share)

109.98

109.98

79.99

79.99

Historical

Share price implied by consensus EPS forecast (US$/share)

77.58

76.39

73.52

73.28

Historical

Share price implied by consensus DPS forecast (US$/share)

108.48

104.98

98.48

102.48

Average (US$/share)

91.98

86.41

75.27

73.41

Source: Edison Investment Research (underlying consensus data: Refinitiv, 21 April 2022).

Reserves and resources

In addition to its financial results, on 24 February, Newmont also 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 brief summary is provided below:

Despite 7.1Moz in attributable depletion, aggregate reserves and resources declined by just 1.1Moz on a like-for-like basis (ie excluding the subsequent Yanacocha transactions with Buenaventura and Sumitomo).

Additions to reserves of 6.5Moz amounted to 91.5% of mining depletion of 7.1Moz during the year (before the Yanacocha transactions), exceeding Newmont’s target of 80%.

Over 90% of gold reserves are in top-tier jurisdictions, with 36% of the total in North America, 33% in South America, 19% in Australia and 12% in Africa.

Net reserve increases (ie after depletion and revisions) were recorded at Ahafo, Nevada Gold Mines, Éléonore and Merian; gross reserve increases (ie before depletion and revisions) were also recorded at Tanami and Cerro Negro.

Significant exposure to other metals includes copper with 15.1bn lbs (6.8m metric tonnes) in reserves, 17.8bn lbs (8.1Mt) in measured and indicated resources and 8.6bn lbs (3.9Mt) in inferred resources.

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 to provide an indication of the full mineral inventory attributable to the company.

Exhibit 10: Newmont attributable resources and reserves, by asset, FY21 versus FY20

Asset

Category

Reserves & resources (FY20)

Reserves & resources (FY21)

Change (units)

Tonnes

(kt)

Grade

(g/t)

Contained gold (koz)

Tonnes

(kt)

Grade

(g/t)

Contained gold (koz)

Tonnes

(kt)

Grade

(g/t)

Contained gold (koz)

CC&V

Total

319,200

0.47

4,820

208,100

0.47

3,150

-111,100

0.00

-1,670

Musselwhite

Total

14,400

5.49

2,540

16,400

5.01

2,640

2,000

-0.48

100

Porcupine

Total

211,600

1.51

10,290

205,800

1.49

9,880

-5,800

-0.02

-410

Éléonore

Total

13,300

5.05

2,160

17,000

5.09

2,780

3,700

0.03

620

Penasquito

Total

815,500

0.44

11,430

659,800

0.44

9,270

-155,700

0.00

-2,160

Noche Buena

Total

30,000

0.36

350

22,600

0.36

260

-7,400

-0.01

-90

Sandman

Total

0

0.00

0

0

0.00

0

0

0.00

0

Coffee

Total

62,300

1.18

2,370

62,300

1.18

2,370

0

0.00

0

Galore Creek

Total

650,900

0.25

5,300

650,900

0.25

5,300

0

0.00

0

Conga*

Total

474,700

0.59

8,970

474,700

0.59

8,970

0

0.00

0

Yanacocha*

Total

275,500

0.86

7,650

250,000

0.90

7,220

-25,500

0.03

-430

Merian

Total

185,800

1.07

6,410

167,200

1.16

6,260

-18,600

0.09

-150

Cerro Negro

Total

20,700

7.63

5,080

19,900

7.49

4,790

-800

-0.15

-290

Pueblo Viejo

Total

174,400

2.03

11,380

170,400

1.99

10,900

-4,000

-0.04

-480

Nueva Union

Total

704,000

0.46

10,490

704,000

0.46

10,490

0

0.00

0

Norte Abierto

Total

1,642,600

0.51

26,800

1,642,500

0.51

26,810

-100

0.00

10

Aqua Rica

Total

419,200

0.16

2,210

419,200

0.16

2,210

0

0.00

0

Alumbrera

Total

0

0.00

0

0

0.00

0

0

0.00

0

Boddington

Total

836,800

0.60

16,240

838,300

0.61

16,390

1,500

0.00

150

Tanami

Total

76,900

4.07

10,070

80,400

3.84

9,920

3,500

-0.24

-150

Ahafo

Total

163,200

1.95

10,230

173,300

1.99

11,080

10,100

0.04

850

Ahafo North

Total

62,500

2.24

4,500

69,300

2.15

4,800

6,800

-0.09

300

Akyem

Total

63,200

1.70

3,460

56,100

1.80

3,250

-7,100

0.10

-210

Nevada

Total

464,600

2.19

32,680

536,500

2.06

35,570

71,900

-0.13

2,890

Total

Measured & proven

1,323,300

0.97

41,390

1,267,500

0.96

39,070

-55,800

-0.01

-2,320

Total

Indicated & probable

4,841,900

0.79

122,490

4,681,300

0.81

122,040

-160,600

0.02

-450

Total

Inferred

1,516,100

0.65

31,550

1,495,900

0.69

33,200

-20,200

0.04

1,650

Total

Total

7,681,300

0.79

195,430

7,444,700

0.81

194,310

-236,600

0.02

-1,120

Source: Newmont, Edison Investment Research. Note: *Shown at 51.35% attributable interest (ie prior to Buenaventura and Sumitomo transactions).

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’.

In FY22, Newmont’s attributable exploration expenditure for managed operations is expected to be c US$250m with a focus on extending mine life, developing districts and discovering new opportunities in the most favourable jurisdictions. Hence, 80% of its investment will be dedicated to near-mine expansion programmes and the remaining 20% allocated to the advancement of greenfield projects. In addition, Newmont’s share of exploration investment for its non-managed joint ventures is expected to total c US$45m. Geographically, the company expects to make approximately 38% of its investment in North America, 23% in South America, 17% in Australia and 22% in Africa and other locations.

The exploration challenge in the long term

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 (readers are directed towards Newmont’s 2021 Exploration update presentation for detailed information on this strategy). Its philosophy towards exploration is therefore 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 in Chile/Argentina, where, in addition to reserve expansion potential, Newmont’s existing presence also makes them attractive from the perspective of offering synergies with existing operations. In 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.

Exhibit 11: Financial summary

Accounts: US GAAP, Yr end: December, USD: Millions

 

 

2018A

2019A

2020A

2021A

2022E

2023E

2024E

2025E

Income statement

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

7,253

9,740

11,497

12,222

12,962

11,839

12,023

11,664

Cost of sales

 

 

(4,093)

(5,195)

(5,014)

(5,435)

(5,629)

(5,482)

(5,777)

(5,786)

Gross profit

 

 

3,160

4,545

6,483

6,787

7,333

6,357

6,247

5,878

SG&A (expenses)

 

 

(244)

(313)

(269)

(259)

(260)

(260)

(260)

(260)

R&D costs

 

 

(350)

(415)

(309)

(363)

(450)

(450)

0

0

Other income/(expense)

 

 

(406)

(253)

(831)

(2,101)

(242)

(242)

(83)

(83)

Exceptionals and adjustments

Exceptionals

 

(424)

2,220

214

(2,258)

0

0

0

0

Depreciation and amortisation

 

 

(1,215)

(1,960)

(2,300)

(2,323)

(2,473)

(2,587)

(3,236)

(3,451)

Reported EBIT

 

 

945

3,994

3,451

1,382

3,907

2,817

2,667

2,084

Finance income/(expense)

 

 

(207)

(301)

(308)

(274)

(225)

(24)

(103)

1

Reported PBT

 

 

738

3,693

3,143

1,108

3,682

2,794

2,565

2,086

Income tax expense (includes exceptionals)

 

 

(419)

(737)

(515)

(932)

(1,212)

(949)

(860)

(765)

Reported net income

 

 

380

2,884

2,791

233

2,470

1,845

1,705

1,320

Basic average number of shares, m

 

 

533

735

804

799

799

799

799

799

Basic EPS (US$/share)

 

 

0.64

3.82

3.52

1.46

3.01

2.27

2.06

1.59

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

2,584

3,734

5,537

5,963

6,381

5,404

5,904

5,535

Adjusted EBIT

 

 

1,369

1,774

3,237

3,640

3,907

2,817

2,667

2,084

Adjusted PBT

 

 

1,162

1,473

2,929

3,366

3,682

2,794

2,565

2,086

Adjusted EPS (US$/share)

 

 

1.35

1.32

2.66

2.97

3.01

2.27

2.06

1.59

Adjusted diluted EPS (US$/share)

 

 

1.34

1.32

2.66

2.96

2.99

2.26

2.04

1.58

 

 

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

12,258

25,276

24,281

24,124

24,046

23,859

22,822

20,872

Goodwill

 

 

58

2,674

2,771

2,771

2,771

2,771

2,771

2,771

Other non-current assets

 

 

3,122

5,752

5,812

5,973

5,973

5,973

5,973

5,973

Total non-current assets

 

 

15,438

33,702

32,864

32,868

32,790

32,603

31,566

29,616

Cash and equivalents

 

 

3,397

2,243

5,540

4,992

4,427

4,369

5,683

7,564

Inventories

 

 

630

1,014

963

930

1,211

1,106

1,124

1,090

Trade and other receivables

 

 

254

373

449

337

391

357

362

352

Other current assets

 

 

996

2,642

1,553

1,437

1,437

1,437

1,437

1,437

Total current assets

 

 

5,277

6,272

8,505

7,696

7,466

7,270

8,606

10,442

Non-current loans and borrowings

 

 

3,608

6,734

6,045

6,109

5,617

5,203

5,203

5,203

Other non-current liabilities

 

 

3,808

8,438

8,076

9,940

9,920

9,900

9,791

9,682

Total non-current liabilities

 

 

7,416

15,172

14,121

16,049

15,537

15,103

14,994

14,885

Trade and other payables

 

 

303

539

493

518

507

494

521

522

Current loans and borrowings

 

 

653

100

657

193