Newmont Corporation — Empowering sustainability

Attributable gold production at Newmont decreased by 8% in Q122 to 1,344koz from the prior year quarter primarily due to lower mill throughput at CC&V, Tanami, Porcupine and Nevada Gold Mines, lower ore grades milled at Peñasquito, Pueblo Viejo, Éléonore and Porcupine, and a build-up of in-circuit inventory. These decreases were partially offset by higher grade ore milled at Boddington and higher production at Yanacocha owing to Newmont’s buyout of the minority shareholders during the quarter, which we estimate added 21koz gold to attributable production.

In general, production was slightly below our prior expectations and costs slightly above, as lingering coronavirus-related constraints on production in North America were exacerbated by an upsurge of the omicron strain of the virus in Australia and Africa. The main exception to this pattern was South America, which had previously been seriously disrupted by the virus, where production was ahead of our expectations at all three mines (but Yanacocha in particular, where tonnes stacked increased by more than 50% relative to Q421) at lower costs. Production at Nevada Gold Mines and Pueblo Viejo had been pre-released by Barrick and was therefore almost exactly in line with our prior forecasts. A summary of the operational highlights of the quarter relative to our prior expectations is provided in Exhibit 1.

Notwithstanding lower production and higher costs, generally, relative to our prior expectations, basic EPS was within 6% of our forecasts, though it also included a one-off, exceptional US$130m charge for pension settlements (included in ‘other income’, below) which, when stripped out, resulted in Newmont’s adjusted net EPS exceeding our forecast by a material 19.0%.

A full analysis of Newmont’s Q122 financial performance relative to both our prior forecasts and Q421 results is provided in the exhibit below.

As in FY21, Newmont expects both (higher) production and (lower) costs to be weighted towards the second half of the year in FY22 – approximately in the ratio 47:53 – mainly due to ongoing disruptions relating to worker mobility and supply chains in North America, Australia and Africa.

In the light of Newmont’s Q122 results, we have revised our production and cost estimates for the remainder of the year to the following (by geographical region):

Assuming a gold price of US$1,823/oz for the remainder of the year (cf US$1,950/oz 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:

This basic adjusted EPS forecast of US$2.818/share (vs US$3.011/share previously) for FY22 compares to the market consensus, by quarter, as follows:

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’ payout 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’ payout 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 payout 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 (ie US$0.55/share) even if the gold price dips below the US$1,800/oz level.

Newmont regards its ESG practices as being ‘woven into the fabric of [the] company’ and, on 14 April 2022, consistent with its tradition of setting and reporting against publicly recognised targets, it published its 19th annual sustainability report for 2021 as part of a suite of reports on the company’s ESG practices in key areas that include health, safety and security, human rights, the environment, social acceptance, governance and inclusion and diversity.

The report was written in accordance with the GRI 2016 Universal Standards Core option, the GRI Mining and Metals Sector Supplement, the Sustainability Accounting Standards Board’s Metals and Mining standards and is externally assured by an independent third party. In addition, it aligns with ICMM’s Mining Principles: Performance Expectations and the World Gold Council’s Responsible Gold Mining Principles. The full report is available on Newmont’s website. However, a summary of the highlights of the report is as follows:

As a consequence, Newmont’s sustainability efforts continue to be recognised by a number of independent organisations, including:

In addition to its sustainability report, on Wednesday 18 May, Newmont will unveil only its second annual climate report (the maiden report having been published last year). The report has been prepared according to the standards of the TCFD and, in this case, is expected to include a detailed pathway as to how Newmont will achieve its 2030 emissions reduction targets validated by the SBTi, which is a partnership between CDP (an international non-profit organisation based in the UK, Japan, India, China, Germany and the US that helps companies and cities disclose their environmental impacts), the United Nations Global Compact, the World Resources Institute and the World Wide Fund for Nature. Among other functions, the SBTi provides guidance across sectors and industries as to how climate targets may be met. In addition to its emissions reduction targets and policies being scientifically validated as feasible and achievable, the climate report will also align Newmont with the Paris Agreement, which is a landmark in the multilateral climate change process in that, for the first time, it brings together all nations in a common cause to undertake ambitious efforts to combat climate change and adapt to its effects. It is a legally binding international treaty that was adopted by 196 parties at COP 21 in Paris, on 12 December 2015, and entered into force on 4 November 2016. Its goal is to limit global warming to well below 2°C (preferably to 1.5°C) compared with pre-industrial levels by requiring countries to aim to reach a goal of peaking greenhouse gas emissions as soon as possible in order to achieve a climate-neutral world by mid-century.

In Newmont’s case, its pathway to achieving its emissions reduction targets has two principal parts:

In addition to its greenhouse gas and emissions reduction targets, Newmont’s 2021 climate change report is also expected to assess its biodiversity and water management targets and to align these with its climate policies and targets.

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 Q122 financial results and our updated forecasts for FY22.

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 wake of Q122 results, our estimate of Newmont’s ‘terminal’ pre-financing cash flow in FY27 has increased by a modest 2.6%, from US$4.28/share previously, to US$4.39/share. On this basis, applying a (real) discount rate of 6.36% (calculated from a nominal expected equity return of 9% and decreased long-term inflation expectations of 2.4867% cf 2.6162% previously, as defined by the US 30-year break-even inflation rate – source: Bloomberg, 12 May), our terminal valuation of the company at end-FY27 is US$77.76/share cum-dividend (cf US$76.95/share previously). This is at a 18.8% premium to Newmont’s current share price of US$65.45. However, note that this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY27. The valuation increases to US$111.51/share in the event that growth in real cash flows after FY27 amounts of 2.0% per annum (ie the minimum that might be expected from the average historical annual increase in the real price of gold of 2.0% pa) and to US$84.82/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 instead remains at current levels in real terms (US$1,823/oz at the time of writing), our valuation increases to US$91.45/share cum-dividend in FY27 and to US$72.37/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.

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.

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 cheap with respect to its dividend yield in a majority of instances. Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 19.8% for its dividend yield to match those of its peer group. Based on our forecasts, we estimate its share price would have to rise 19.6%.

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.

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: