Newmont Corporation — Q321 results in line with prior expectations

In general, Newmont’s financial results for Q321 were very close to our prior expectations (see our note Teething trouble at Boddington irrelevant, published on 26 October 2021). 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 was Australia (albeit, our prior expectations had been downgraded in October in response to Newmont’s 5 October update, principally relating to the challenges surrounding the commissioning of autonomous haulage at Boddington). However, this was more than offset by a shortfall in production at Newmont’s North American operations, which continued to be beset by absenteeism at its Canadian mines in particular, relating to lingering concerns surrounding the coronavirus pandemic.

At the level of the individual mines, five (Penasquito, Merian, Cerro Negro, Boddington and Tanami) performed better than our expectations, while the remaining eight performed worse, in general, affected by some combination of lower tonnes processed, lower grades, lower recoveries and/or higher unit costs.

In financial terms, one of the major features of the results was a loss of US$571m on assets held for sale relating to the pending sale of the Conga mill, which was classified as ‘held for sale’ during the quarter. This item affected profits, the tax charge and the minority interest to a material degree. Exhibit 2, below, presents Newmont’s Q321 results both as they were reported and also with Edison’s best estimate of the same results with all exceptional items stripped out. Either way, adjusted net income of US$483m was almost exactly in line with our prior forecast of US$480m. However, two further features of the results are notable: (1) a higher underlying effective tax rate (41.6%) during the quarter than the 34–38% guidance range provided by Newmont for the full year; and (2) a loss attributable to minority interests. In and of itself, the first of these features is not surprising, given that, in general, Newmont’s effective tax rate falls in periods of high profitability as lower tax operations contribute proportionately more to pre-tax profits (and vice versa). While not explicit, the second of these features almost certainly reflected the financial performance of Yanacocha (51.35% owned by Newmont), where costs rose materially during the quarter as it continued to manage the effects of COVID-19.

A full analysis of Newmont’s Q321 financial performance relative to both our prior forecasts and Q221 results is provided in the exhibit below.

In FY21, both (higher) production and (lower) costs were hitherto expected by Newmont to be weighted towards H221 (approximately in the ratio 47:53), with this effect being most pronounced in the first and last quarters of the year, reflecting rising grade profiles, in particular at Boddington and Ahafo. However, the challenges associated with the commissioning and ramp up of the autonomous haulage system at Boddington in Q321 in conjunction with the ongoing disruptions from the coronavirus pandemic in North America in particular have now caused Newmont to update its FY21 guidance to 6.0Moz of gold produced (cf 6.2–6.8Moz previously) at a cost applicable to sales of US$790/oz (cf US$750/oz previously) and an all-in sustaining cost of US$1,050/oz (cf US$970/oz previously). In mitigation, Newmont reduced its guidance for capex for the full year, from US$1,800m to US$1,650m (on an attributable basis), with the saving being achieved via the deferral of US$150m in development capex relating to the Tanami expansion (TE 2) effectively into FY24. Co-product gold equivalent production guidance (principally derived from Penasquito and Boddington) was left unchanged at 1.3Moz AuE.

Notwithstanding the reduction in overall production guidance for the full year, production in Q421 is still expected to increase as a result of higher grades at Boddington and Ahafo (which will also be volume driven by productivity improvements from the change in underground mining method at Subika to sub-level shrinkage), with additional contributions from Merian, Musselwhite, Porcupine and CC&V. At the same time, management is confident that Boddington will reap the benefits of the implementation of its autonomous haulage system (AHS) in Q4. Despite Western Australia experiencing record rainfall in October (among other things, delaying access to the high-grade areas of the pit), management reports that AHS has achieved an effective utilisation (EU) rate of 68% – albeit on an inter-shift basis – which is the same as the target rate for the driver operated fleet, with further increases budgeted for the remainder of the quarter. In the light of Newmont’s Q321 results as well as its updated guidance for FY21, we have revised our operational forecasts for the company’s geographical regions for Q421 as follows:

At an unchanged gold price of US$1,793/oz assumed in Q4, our very fractionally revised, updated financial forecasts for Newmont for Q421 and FY21, by quarter, are therefore now as follows:

Note that, on an underlying basis, Newmont’s effective tax rate for the year will amount to 36.2%, compared with the 44.8% shown in the exhibit above (including exceptional losses) and Newmont’s guidance of 34–38%. After our revisions for the remainder of the year, our basic adjusted EPS forecast of US$2.867/share (vs US$2.879/share previously) for FY21 compares to the market consensus, as follows:

Newmont’s dividend for Q321 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, notwithstanding the gold price dipping below the US$1,800/oz level. In consequence, we have left our dividend forecasts for Q421 and FY21 unchanged on the basis that we believe the gold price temporarily dipping below US$1,800/oz is unlikely to result in any readjustment in the quarterly distribution.

In addition to its financial results, Newmont also reported some signs of longer-term cost pressure, in particular in relation to materials, energy and labour. In some cases these are likely to be mitigated in the future (eg as Australia expands its vaccination programme), albeit not entirely extinguished. Newmont will provide detailed longer-term cost and production guidance to the market in December. In the meantime, however, Edison has revised its longer-term production and cost assumptions (relative to Newmont’s last formal guidance as of 8 December 2020) as follows:

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 Q321 financial results, updated forecasts for FY21 and our longer-term (cost) assumption changes.

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 FY21, in the case of Newmont, we have opted to discount forecast dividends back over six years from the start of FY21, then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY26) 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.

Notwithstanding the changes to our short-term forecasts for FY21, our estimate of Newmont’s pre-financing cash flow in FY26 has increased slightly since our last note to US$5.30 per share (cf US$5.14/share previously and US$1.22/share in FY18). On this basis, applying a (real) discount rate of 6.4% (calculated from a nominal expected equity return of 9% and slightly reduced long-term inflation expectations of 2.4158% cf 2.4192% previously, as defined by the US 30-year breakeven inflation rate – source: Bloomberg, 10 November), our terminal valuation of the company at end-FY26 is US$82.38/share (cf US$80.01/share previously). However, note that this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY26.

In conjunction with forecast intervening dividends, this terminal value then discounts to a net present value of US$73.78/share (cf US$71.57/share previously) at the start of FY21.

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 53.93Moz attributable to Newmont. It is also conservative in its assumption of zero growth in cash flows after FY26.

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.

In comparing this table with the equivalent table in our last note on Newmont (Teething trouble at Boddington irrelevant, published on 26 October 2021), it can be seen there has been a de-rating of the majority of companies since that the date of that report and a de-rating of all ten companies, on average, over the majority of years. Nevertheless, 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. Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 93.6% for its dividend yield to match those of its peer group. Based on our forecasts, we estimate its share price would have to rise 96.3%.

As before, one further observation concerning the comparability of the above measures is merited. Given its policy of proportionately consolidating its interest in Nevada Gold Mines and that it owns 100% interests in the majority of its remaining mining operations (with the exceptions of Yanacocha and Merian), estimates of cash flow in particular are also close to estimates of cash flow attributable to shareholders (Newmont estimates that 97% of free cash flow was attributable to the company in Q321). 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.

A summary of our updated valuation of Newmont over 29 measures of value across three different methodologies (absolute, historical and peer group) over the next five years is shown in Exhibit 9.