Newmont Corporation — Re-evaluating prospects with respect to guidance

Newmont Corporation (TSX: NEM)

Last close As at 22/06/2024

49.02

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Research: Metals & Mining

Newmont Corporation — Re-evaluating prospects with respect to guidance

Newmont’s Q4/FY22 results, released on 23 February, exhibited stronger production than we had anticipated, albeit accompanied by costs that failed to decline as much as we had hoped. Nevertheless, both production and costs for the full year met the company’s guidance to within its usual tolerance range of ±5%. In addition to its Q4/FY22 results, Newmont also provided updated medium-term guidance for production, costs and capex to FY27 to reflect recent inflationary pressures within the industry, and this note updates both our forecasts and valuation to reflect the company’s updated guidance. In the meantime, Newmont’s potential merger with Newcrest clearly remains alive, with the potential to transform the company if it is successfully brought to fruition.

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

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Metals & Mining

Newmont Corporation

Re-evaluating prospects with respect to guidance

Q4/FY22 results and five year guidance

Metals & mining

14 March 2023

Price

US$45.12

Market cap

US$35,825m

Net debt (US$m) at end-December 2022

(excluding US$880m in time deposits etc)

3,255

Shares in issue

794.0m

Free float

99.8%

Code

NEM

Primary exchange

NYSE

Secondary exchange

TSX

Share price performance

%

1m

3m

12m

Abs

(6.6)

(4.3)

(41.3)

Rel (local)

0.2

(0.2)

(36.0)

52-week high/low

US$85.4

US$37.8

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

Q123 results

April 2023

Q223 results

July 2023

Analyst

Lord Ashbourne

020 3077 5724

Newmont Corporation is a research client of Edison Investment Research Limited

Newmont’s Q4/FY22 results, released on 23 February, exhibited stronger production than we had anticipated, albeit accompanied by costs that failed to decline as much as we had hoped. Nevertheless, both production and costs for the full year met the company’s guidance to within its usual tolerance range of ±5%. In addition to its Q4/FY22 results, Newmont also provided updated medium-term guidance for production, costs and capex to FY27 to reflect recent inflationary pressures within the industry, and this note updates both our forecasts and valuation to reflect the company’s updated guidance. In the meantime, Newmont’s potential merger with Newcrest clearly remains alive, with the potential to transform the company if it is successfully brought to fruition.

Year

end

Revenue (US$m)

PBT
(US$m)

EPS*
(US$)

DPS
(US$)

P/E
(x)

Yield
(%)

12/21

12,222

1,108

2.97

2.20

15.2

4.9

12/22

11,915

(51)

1.85

2.05

24.4

4.5

12/23e

12,372

2,381

2.14

1.60

21.1

3.5

12/24e

11,827

1,727

1.51

1.40

29.8

3.1

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

Medium-term guidance little changed

In general, it may be seen that Newmont has reduced its production guidance by approximately 300koz (or 5%) per annum in FY23–25 (largely due previously communicated to delays at Tanami Expansion 2 and Ahafo North where first production is now expected in H225), but by only 100koz (or 1.5%) by FY26, while it has increased its cost guidance by c US$150/oz (or c 20%) in the near term, but by only US$50/oz (or 6.7%) in the longer term. Edison has now brought its production and cost forecasts into line with the company’s guidance. Even with these adjustments, however, our estimate of FY23 EPS has increased by 21.6%, while our valuation has declined only modestly (see below). Otherwise, readers should note that our basic adjusted EPS estimate of US$1.51/share for FY24 (above) is predicated on a (real) gold price of US$1,681/oz. At US$1,868/oz, this estimate increases to US$2.44/share (close to the consensus) and the dividend to US$1.60/share.

Valuation: Still well in excess of the share price

In the light of our revisions, our ‘terminal’ pre-financing cash flow has increased by 7.5% to US$3.89/share, albeit achieved one year later in FY28, rather than US$3.54/share in FY27 previously. Using a real discount rate of 6.52% (cf 6.51% previously), our valuation of the company is US$47.30/share (cf US$50.14/share previously), based on a long-term (real) gold price of US$1,524/oz (cf a current price of US$1,868/oz) and assuming zero growth in real cash flows beyond FY27, but US$66.59/share (cf US$68.47/share) if even very modest 2.0% growth per year in real cash flows is assumed (ie the minimum that might be expected from the average historical annual increase in the real price of gold of 2.0% pa). These valuations would rise to US$60.02/share and US$84.80/share, respectively, if the gold price remains at today’s levels. In the meantime, consensus EPS and DPS estimates for FY2325 imply a share price of US$75.43/share, while Edison’s more conservative estimates imply a share price of US$59.46/share.

Q4/FY22 results

Newmont’s Q4/FY22 results, released on 23 February, exhibited stronger production than we had anticipated, albeit accompanied by costs that generally stuck at higher levels then we had forecast, especially at its African operations. As a result, production and costs for the full year met the company’s guidance of 6.0Moz at a cost applicable to sales of US$900/oz to within its usual tolerance range of ±5%. Six of Newmont’s mines (Musselwhite, Yanacocha, Merian, Tanami, Ahafo and Akyem) outperformed our production expectations for the three-month period, while seven performed in line. As a consequence, the ratio of production in H2 compared to H1 was 52:48, which was exactly in line with the company’s prior guidance.

A summary of Newmont’s production and cost results for the full year, by geographical area and by quarter, relative to our prior expectations is presented in the table below:

Exhibit 1: Newmont Q122–Q422 operational results

Region

Production (koz)

Costs applicable to sales (US$/oz)

Q122

Q222

Q322

Q422e

Q422

Var.

(%)

FY22

FY22e

Q122

Q222

Q322

Q422e

Q422

Var.

(%)

FY22

FY22e

North America

309

316

404

383

387

+1.0

1,416

1,412

995

1,124

980

923

921

-0.2

999

1,002

South America

198

210

185

197

217

+10.2

810

790

921

982

1,145

986

1,098

+11.4

1,034

1,003

Australia

282

366

296

330

338

+2.4

1,282

1,274

764

710

754

697

797

+14.3

755

729

Africa

198

243

254

278

299

+7.6

994

973

871

838

917

679

994

+46.4

911

821

Nevada

288

290

266

323

324

+0.3

1,169

1,168

899

1,035

1,104

958

934

-2.5

989

1,002

Sub-total

1,275

1,425

1,405

1,511

1,565

+3.6

5,671

5,617

890

932

968

847

940

+11.0

933

911

Pueblo Viejo*

69

70

81

65

65

0.0

285

285

Total (attrib.)

1,344

1,495

1,486

1,576

1,630

+3.4

5,956

5,902

Source: Newmont Corporation, Edison Investment Research. Note: Totals may not add up owing to rounding. Var. = variance (Q422a cf Q422e). *NEM 40% interest.

In addition to outperforming our production expectations, Newmont also achieved a gold price that was 1.6% higher than that prevailing over the quarter, at US$1,758/oz (cf US$1,731/oz). It also sold approximately 1.0% more gold than it produced, which, combined with the production outcome, led to a 2.4% (or US$282m) positive variance in sales relative to our forecasts, albeit this was almost exactly counterbalanced by a US$274m (or 4.4%) negative variance in costs. Financial results beyond this in Newmont’s official accounts were distorted by two material exceptional charges relating to impairments and also reclamation and remediation. However, Exhibit 2 (below) strips these (and all other adjusting items) out of their individual line items to present Newmont’s results for both the quarter and the full year on an underlying basis (marked with an asterisk and highlighted in bold). In this context, it may be seen that, in as much as Newmont’s results were below our expectations (which were anyway at the top of the analysts’ range), this could be almost entirely attributed to a negative variance of US$57m in ‘other income, net’ and a US$27m negative variance in the interest expense for the quarter. In almost all other respects, Newmont either met, or exceeded, our expectations.

Exhibit 2: Newmont quarterly income statement, Q421–Q422

US$m (unless otherwise indicated)

Q421

Q122

Q222

Q322

Q422e

(prior)

Q422

(reported)

Q422*

Var.**

(%)

FY22*

FY22e

(prior)

Var.**

(%)

Sales

3,390

3,023

3,058

2,634

2,918

3,200

3,200

9.7

11,915

11,633

2.4

Costs and expenses

 

 

– Costs applicable to sales

1,540

1,435

1,708

1,545

1,506

1,780

1,780

18.2

6,468

6,194

4.4

– Depreciation and amortisation

639

547

559

508

594

571

571

-3.9

2,185

2,208

-1.0

– Reclamation and remediation

1,626

61

49

53

46

758

58

26.1

221

209

5.7

– Exploration

62

38

62

69

69

62

62

-10.1

231

238

-2.9

– Advanced projects, research and development

46

44

45

80

43

60

60

39.5

229

212

8.0

– General and administrative

69

64

73

73

73

66

66

-9.6

276

283

-2.5

– Impairment of long-lived assets

0

0

0

0

0

1,317

-

N/A

0

0

N/A

– Care and maintenance

0

0

0

0

0

0

0

N/A

0

0

N/A

– Loss on assets held for sale

0

0

0

0

0

0

0

N/A

0

0

N/A

– Other expense, net

34

35

22

11

6

17

12

100.0

80

74

8.1

Total

4,016

2,224

2,518

2,339

2,337

4,631

2,609

11.6

9,690

9,418

2.9

Other income/(expenses)

 

 

– Gain on formation of Nevada Gold Mines

0

0

0

0

0

0

0

N/A

0

0

N/A

– Gain on asset and investment sales, net

166

0

0

0

0

61

0

N/A

0

0

N/A

– Other income, net

19

(109)

(75)

56

56

40

(1)

-101.8

(129)

(72)

79.2

– Interest expense, net of capitalised interest

(66)

(62)

(57)

(55)

(26)

(53)

(53)

103.8

(227)

(200)

13.5

Other income total

119

(171)

(132)

1

30

48

(54)

-280.0

(356)

(272)

30.9

Income/(loss) before income and mining tax

(507)

628

408

296

611

(1,383)

537

-12.1

1,869

1,943

-3.8

Income and mining tax benefit/(expense)

(300)

(214)

(33)

(96)

(195)

(112)

(196)

0.5

(539)

(538)

0.2

Effective tax rate (%)

(59.2)

34.1

8.1

32.4

32.0

(8.1)

36.5

14.1

28.8

27.7

4.1

Profit after tax

(807)

414

375

200

415

1,495

341

-17.8

1,330

1,404

-5.3

Equity income/(loss) of affiliates

28

39

17

25

10

26

26

160.0

107

91

17.6

Net income/(loss) from continuing operations

(779)

453

392

225

425

(1,469)

367

-13.6

1,437

1,495

-3.9

Net income/(loss) from discontinued operations

15

16

8

(5)

11

11

N/A

30

19

57.9

Net income/(loss)

(764)

469

400

220

425

(1,458)

378

-11.1

1,467

1,514

-3.1

Minority interest

(718)

21

13

7

9

19

19

111.1

60

50

20.0

Ditto (%)

94.0

4.5

3.3

3.2

2.0

(1.3)

5.0

151.3

4.1

3.3

Net income/(loss) attributable to stockholders

(46)

448

387

213

416

(1,477)

359

-13.7

1,407

1,464

-3.9

Adjustments to net income

670

98

(25)

(1)

0

1,825

(11)

N/A

61

72

-15.3

Adjusted net income

624

546

362

212

416

348

348

-16.3

1,468

1,536

-4.4

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

Basic

– Continuing operations

(0.077)

0.545

0.477

0.275

0.525

(1.874)

0.438

-16.6

1.735

1.821

-4.7

– Discontinued operations

0.019

0.020

0.010

-0.006

0.000

0.014

0.014

N/A

0.038

0.024

57.5

– Total

(0.058)

0.565

0.487

0.268

0.525

(1.860)

0.452

-13.9

1.773

1.845

-3.9

Diluted

 

– Continuing operations

(0.077)

0.544

0.477

0.274

0.524

(1.872)

0.438

-16.4

1.733

1.819

-4.7

– Discontinued operations

0.019

0.020

0.010

-0.006

0.000

0.014

0.014

N/A

0.038

0.024

57.3

– Total

(0.058)

0.564

0.487

0.268

0.524

(1.858)

0.452

-13.7

1.770

1.843

-3.9

Basic adjusted net income per share (US$)

0.785

0.689

0.456

0.267

0.525

0.438

0.438

-16.6

1.849

1.936

-4.5

Diluted adjusted net income per share (US$)

0.783

0.688

0.455

0.267

0.524

0.438

0.438

-16.4

1.847

1.933

-4.4

DPS (US$/share)

0.550

0.550

0.550

0.550

0.400

0.400

0.400

0.0

2.050

2.050

0.0

Source: Newmont Corporation, Edison Investment Research. Note: *Underlying. Var** = Variance (actual compared to expected).

Notwithstanding its performance relative to Edison’s expectations, Newmont’s performance for the quarter was very much in line with the market consensus, as shown below:

Exhibit 3: FY22 basic adjusted EPS forecast, Edison versus consensus (US$/share)

Q122

Q222

Q322

Q422e

Q422

Variance

(%)

FY22e

FY22

Variance

(%)

Edison forecast

0.689

0.456

0.267

0.525

0.438

-16.6

1.936

1.849

-4.4

Consensus forecast

0.689

0.456

0.267

0.460

0.438

-4.8

1.840

1.849

+0.5

High

0.689

0.456

0.267

0.520

0.438

-15.8

1.960

1.849

-5.7

Low

0.689

0.456

0.267

0.410

0.438

+6.8

1.610

1.849

+14.8

Source: Edison Investment Research, Refinitiv (prior forecasts 21 February 2023)

Medium- to long-term outlook

Concurrent with its Q422/FY22 results, Newmont presented its medium- to long-term production outlook to investors. A comparison of Newmont’s guidance with both its prior (December 2021) equivalent guidance and Edison’s (updated) production and cost assumptions for the period FY23–27 is provided in the table below:

Exhibit 4: Edison longer-term assumptions cf Newmont guidance*

FY23

FY24

FY25

FY26

FY27

Edison previous

Production (Moz)

6.195

6.976

6.996

6.191

6.744

Cost applicable to sales (US$/oz)

907

736

732

786

701

Edison current

Production (Moz)

5,979

6,255

6,428

6,381

6,416

Cost applicable to sales (US$/oz)

946

886

823

813

806

Edison change (%)

Production

-3.5

-10.3

-8.1

+3.1

-4.9

Cost applicable to sales

+4.3

+20.4

+12.4

+3.4

+15.0

Newmont guidance*

Production (Moz)

5.7–6.3

5.9–6.5

5.9–6.5

6.1–6.7

6.1–6.7

Cost applicable to sales (US$/oz)

870–970

850–950

780–880

750–850

750–850

Edison cf Newmont

Production

Mid-range

Mid-range

Upper range

Mid-range

Mid-range

Cost applicable to sales

Upper range

Mid-range

Mid-range

Mid-range

Mid-range

Newmont previous guidance**

Production (Moz)

6.0–6.6

6.2–6.8

6.2–6.8

6.2–6.8

Cost applicable to sales (US$/oz)

740–840

700–800

700–800

700–800

Guidance change (%)

Production (mid-point)

-4.8

-4.6

-4.6

-1.5

N/A

Cost applicable to sales (mid-point)

+16.5

+20.0

+10.7

+6.7

N/A

Source: Newmont, Edison Investment Research. Note: *From 23 February 2023. **From 2 December 2021.

In general, it may be seen that Newmont has reduced its production guidance by approximately 300koz per annum (albeit declining to only 100koz by FY26), while it has increased its cost guidance by c US$150/oz (or c 20%) in the near term, albeit by just c US$50/oz (or 6.7%) in the longer term. Edison has now brought its production and cost forecasts into line with the company’s guidance, involving the changes shown. As a result, Edison’s forecasts are now, in general, in the middle of the range of guidance provided by Newmont, with the exception of FY23 costs (for which Edison is at the high end of the range) and FY25 production, when Ahafo North and the Tanami Expansion 2 project are anticipated to be coming on stream (and for which Edison is also at the top end of the range).

In addition to cost and production guidance for FY23–27, Newmont has also provided capex guidance as follows:

Exhibit 5: Newmont capex guidance, FY23–27 (US$m)

US$m

FY23

FY24

FY25

FY26

FY27

Sustaining capex

1,000–1,200

1,000–1,200

1,000–1,200

1,000–1,200

1,000–1,200

Development capex

1,200–1,400

1,200–1,400

800–1,000

500–700

300–500

Total

2,200–2,600

2,200–2,600

1,800–2,200

1,500–1,900

1,300–1,700

Source: Newmont

However, while Newmont’s production guidance over the next decade includes production from the Yanacocha Sulphides project (effectively from H227), its development capital outlook only includes spend related to Yanacocha Sulphides for FY23 and FY24 ahead of an investment decision planned for late 2024, but not thereafter. In order to match production with capex therefore, Edison has added our estimate of development capital expenditure related to the Yanacocha Sulphides project for years beyond FY24 to Newmont’s guidance for development capital expenditure in those years, such that our estimates for total capital expenditure over the next five years (inclusive) is as follows:

Exhibit 6: Edison estimate of NEM capex*, FY23–27 (US$m)

US$m

FY23

FY24

FY25

FY26

FY27

Estimated capex

2,450

2,400

2,375

2,716

1,701

Source: Edison Investment Research. Note: *Including Yanacocha Sulphides capex for FY25–27.

Readers’ attention is drawn to the uplift in Edison capex estimates compared with the mid-range of guidance of US$375m in FY25, US$1,016m in FY26 and US$201m in FY27 (total US$1,572m), which we believe is consistent with Newmont’s Yanacocha Sulphides project capex estimate of c US$2bn.

FY23 forecasts by quarter

Whereas in FY22, Newmont anticipated production to be weighted towards the second half of the year in the approximate ratio 47:53 H1:H2, in FY23, it expects production to be weighted towards the second half of the year in the ratio c 45:55.

In the light of Newmont’s Q422 results as well as its updated guidance, we have calculated the following operational forecasts for the company’s geographical regions for FY23:

Exhibit 7: Newmont Q123–Q423e operational estimates

Region

Production (koz)

Costs applicable to sales (US$/oz)

Q123e

Q223e

Q323e

Q423e

FY23e

Q123e

Q223e

Q323e

Q423e

FY23e

Updated

North America

311

296

341

334

1,283

1,015

1,062

918

1,028

1,004

South America

194

216

224

224

857

1,121

1,060

1,060

1,098

1,084

Australia

267

295

365

340

1,267

940

851

694

760

800

Africa

188

196

347

285

1,015

1,251

1,195

677

824

924

Nevada

290

290

307

325

1,211

986

986

938

897

950

Sub-total

1,250

1,293

1,584

1,507

5,634

1,045

1,017

841

914

946

Pueblo Viejo (40%)

86

86

86

86

345

Total (attributable) gold

1,336

1,379

1,670

1,593

5,978

Prior

North America

326

319

312

305

1,263

1,145

1,182

1,221

1,261

1,201

South America

200

200

200

200

798

980

980

980

980

980

Australia

337

345

352

381

1,415

714

697

686

645

684

Africa

276

286

296

304

1,163

684

660

638

621

650

Nevada

287

287

305

322

1,200

1,092

1,092

1,040

996

1,053

Sub-total

1,426

1,437

1,465

1,512

5,840

921

917

905

885

907

Pueblo Viejo (40%)

89

89

89

89

355

Total (attributable) gold

1,515

1,526

1,554

1,601

6,195

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

Assuming a gold price of US$1,868/oz for the remainder of the year (cf US$1,749/oz for the full year, previously) and an effective tax rate for the year of 34% (in the middle of guidance of 32–36%), this operational performance translates into financial forecasts for Newmont for FY23 as follows:

Exhibit 8: Newmont quarterly income statement, Q123–Q423e

US$m (unless otherwise indicated)

Q123e

(prior)

Q123e

Q223e

(prior)

Q223e

Q323e

(prior)

Q323e

Q423e

(prior)

Q423e

FY23e

FY23e

(prior)

Sales

2,848

3,029

2,869

2,804

2,918

3,337

2,998

3,202

12,372

11,633

Costs and expenses

– Costs applicable to sales

1,502

1,568

1,506

1,574

1,515

1,585

1,527

1,633

6,361

6,051

– Depreciation and amortisation

571

521

579

553

597

665

617

651

2,390

2,364

– Reclamation and remediation

90

90

90

90

90

90

90

90

359

358

– Exploration

69

56

69

56

69

56

69

56

225

276

– Advanced projects, research and development

43

69

43

69

43

69

43

69

275

170

– General and administrative

73

69

73

69

73

69

73

69

275

292

– Impairment of long-lived assets

0

0

0

0

0

0

– Care and maintenance

0

0

0

0

0

0

0

0

0

0

– Loss on assets held for sale

– Other expense, net

18

18

18

18

18

18

18

18

70

70

Total

2,365

2,390

2,377

2,428

2,404

2,551

2,435

2,585

9,954

9,580

Other income/(expenses)

– Gain on formation of Nevada Gold Mines

0

– Gain on asset and investment sales, net

0

– Other income, net

56

40

56

40

56

40

56

40

160

224

– Interest expense, net of capitalised interest

(25)

(50)

(23)

(49)

(22)

(51)

(19)

(46)

(196)

(89)

31

(10)

33

(9)

34

(11)

37

(6)

(36)

135

Income/(loss) before income and mining tax

515

628

525

366

548

775

599

611

2,381

2,188

Income and mining tax benefit/(expense)

(212)

(214)

(216)

(125)

(224)

(264)

(240)

(208)

(810)

(892)

Effective tax rate (%)

41.2

34.0

41.0

34.0

40.8

34.0

40.1

34.0

34.0

40.8

Profit after tax

303

415

310

242

324

512

359

403

1,572

1,296

Equity income/(loss) of affiliates

32

51

31

39

30

38

30

38

166

123

Net income/(loss) from continuing operations

335

465

341

281

355

550

389

441

1,737

1,419

Net income/(loss) from discontinued operations

0

Net income/(loss)

335

465

341

281

355

550

389

441

1,737

1,419

Minority interest

5

13

5

9

5

9

5

7

38

20

Ditto (%)

1.6

2.7

1.6

3.1

1.5

1.6

1.4

1.7

2.2

1.5

Net income/(loss) attributable to stockholders

329

453

335

272

350

541

383

434

1,700

1,398

Adjustments to net income

0

0

0

0

0

0

0

0

0

0

Adjusted net income

329

453

335

272

350

541

383

434

1,700

1,398

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

Basic

– Continuing operations

0.415

0.570

0.423

0.343

0.440

0.682

0.483

0.546

2.141

1.761

– Discontinued operations

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

– Total

0.415

0.570

0.423

0.343

0.440

0.682

0.483

0.546

2.141

1.761

Diluted

– Continuing operations

0.412

0.566

0.420

0.341

0.437

0.677

0.479

0.542

2.126

1.748

– Discontinued operations

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

– Total

0.412

0.566

0.420

0.341

0.437

0.677

0.479

0.542

2.126

1.748

Basic adjusted net income per share (US$)

0.415

0.570

0.423

0.343

0.440

0.682

0.483

0.546

2.141

1.761

Diluted adjusted net income per share (US$)

0.412

0.566

0.420

0.341

0.437

0.677

0.479

0.542

2.126

1.748

DPS (US$/share)

0.400

0.400

0.400

0.400

0.400

0.400

0.400

0.400

1.600

1.600

Source: Newmont Corporation, Edison Investment Research

This basic adjusted EPS forecast of US$2.141/share (vs US$1.761/share previously) for FY23 compares to the market consensus, by quarter, as follows:

Exhibit 9: FY23 basic adjusted EPS forecast, Edison versus consensus (US$/share)

Q123e

Q223e

Q323e

Q423e

Sum Q1–Q423e

FY23e

Edison forecast

0.570

0.343

0.682

0.546

2.141

2.141

Consensus forecast

0.410

0.480

0.640

0.610

2.140

2.120

High

0.690

0.820

0.930

1.020

3.490

3.450

Low

0.180

0.210

0.260

0.220

0.870

0.860

Source: Edison Investment Research, Refinitiv (13 March 2023)

Readers’ attention is drawn to the relatively wide range of consensus forecasts for FY23, which we would attribute to varying gold price assumptions.

Dividend

Newmont’s dividend framework remains the same as that set out in Q320, whereby it formally rebased its dividend to a ‘base’ payout of US$1.00/share (or US$0.25/share per quarter), albeit this has now been recalibrated to a gold price of US$1,400/oz – being the price at which it calculates its reserves (cf US$1,200/oz previously). Its intention is that this will represent a stable base dividend at reserve pricing of US$1.00/share. It will then review the incremental portion of the dividend on an annual basis, considering the cash flows that it expects to generate at higher gold prices and provide an incremental dividend range that it would expect to pay in addition to its base dividend. This will typically be evaluated in gold price increments of US$300/oz from the ‘base’ level of US$1,400/oz with the expectation that every US$300/oz by which the gold price exceeds this level in FY23 will result in the base dividend being augmented by approximately US$0.10–0.20/share per quarter (or US$0.40–0.80/share per annum), all other things being equal. For the full year therefore, Newmont has a targeted payout range of US$1.40–1.80/share. As such, its dividend of US$0.40/share for Q422 was exactly at the mid-point of this range on an annualised basis. This gives rise to a number of possibilities for future quarterly dividends in FY23:

The lower end of Newmont’s FY23 targeted dividend of US$1.40/share could be rationalised as four quarterly payments of US$0.35/share; however, we think that it is unlikely that the company will want to cut its quarterly payout from the fourth quarter’s level unless the gold price is notably below the US$1,700/oz level.

The higher end of Newmont’s FY23 targeted dividend of US$1.80/share could be rationalised as four payments of US$0.45/share. This must be regarded as a possibility, given the current level of the gold price, but comes with the risk that a gold price decline below US$1,700/oz later in the year might require a subsequent cut in the quarterly dividend payment, which we believe management would wish to avoid.

The lower end of Newmont’s FY23 targeted dividend of US$1.40/share could also be rationalised as two payments of US$0.25/share or two of US$0.45/share; again however, we do not believe that management would want to cut the level of the quarterly dividend from the fourth quarter’s level of US$0.40/share unless it was necessitated by a fall in the gold price.

In its philosophy, Newmont has made a virtue of a stable dividend. At the same time, we believe that its payout of US$0.40/share in Q422 signals that future quarterly payments at the same level (ie US$0.25/share per quarter ‘base’ dividend plus US$0.15/share per quarter ‘incremental’ dividend) are acceptable. As a consequence, at gold’s current level above US$1,700/oz, we anticipate that Newmont’s FY23e quarterly dividend level will remain at least US$0.40/share per quarter. Should the gold price move away from this level however, we think that the following dividend payout rates are possible (subject to cash flow, cash requirements, inflation etc):

Exhibit 10: Edison estimate of NEM FY23 dividend payout rates with respect to gold price

Gold price

(US$/oz)

Estimated dividend payout rate

(US$/share per quarter)

1,250–1,550

0.25

1,550–1,700

0.35

1,700–1,850

0.40

1,850–2,000

0.45

2,000–2,150

0.55

Gold price

(US$/oz)

1,250–1,550

1,550–1,700

1,700–1,850

1,850–2,000

2,000–2,150

Estimated dividend payout rate

(US$/share per quarter)

0.25

0.35

0.40

0.45

0.55

Source: Edison Investment Research.

For the moment, we have also made these assumptions the basis of our FY24 dividend forecast of US$1.40/share (in combination with our gold price forecasts presented in Exhibit 13), although we note that the board assesses the variable component of the dividend annually in alignment with its business planning cycle and considering the prevailing macroeconomic environment and the required level of reinvestment in the business. As such, it is worth reminding investors that the dividend framework is non-binding and that the declaration and payment of future quarterly dividends remains at the discretion of Newmont’s board of directors and will depend, among other things, on the company’s financial results, cash flow, cash requirements and future prospects, etc.

Reserves and resources

In addition to its financial results, on 23 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 7.2Moz in attributable depletion, aggregate reserves and resources increased by 13.37Moz, albeit 13.4Moz (gross) and 12.98Moz (net) of the change could be accounted for by three assets (highlighted in bold in the table below) subject to either acquisition or disposal by Newmont.

Additions to reserves of 8.6Moz more than covered depletion of 7.2Moz during the year (exceeding Newmont’s target – see below).

Excluding acquisitions and disposals, reserves would have increased organically from 92.8Moz to 93.0Moz, while measured and indicated resources would have increased by 0.6Moz to 68.9Moz and inferred resources would have declined by 1.0Moz to 32.2Moz (all stated after depletion).

Reserves of 96.1Moz account for 46.3% of Newmont’s total attributable mineral inventory of 207.68Moz.

Over 90% of gold reserves are in top-tier jurisdictions, with 33% of the total in North America (cf 36% previously), 39% in South America (cf 33%), 17% in Australia (cf 19% previously) and 11% in Africa (cf 12% previously).

Significant exposure to other metals, including copper with 15.7bn lbs in reserves (cf 15.1bn lbs previously), 17.9bn lbs in measured and indicated resources (cf 17.8bn) and 8.6bn lbs in inferred resources (cf 8.6bn lbs).

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 11: Newmont attributable resources and reserves, by asset, FY22 versus FY21

Asset

Category

Reserves & resources (FY21)

Reserves & resources (FY22)

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

208,100

0.47

3,150

248,100

0.42

3,330

40,000

-0.05

+180

Musselwhite

Total

16,400

5.01

2,640

17,300

5.07

2,820

900

0.06

+180

Porcupine

Total

205,800

1.49

9,880

179,300

1.67

9,610

-26,500

0.17

-270

Éléonore

Total

17,000

5.09

2,780

14,400

5.29

2,450

-2,600

0.21

-330

Penasquito

Total

659,800

0.44

9,270

712,100

0.40

9,100

52,300

-0.04

-170

Noche Buena

Total

22,600

0.36

260

21,500

0.36

250

-1,100

0.00

-10

Coffee

Total

62,300

1.18

2,370

61,100

1.21

2,370

-1,200

0.02

0

Galore Creek

Total

650,900

0.25

5,300

717,300

0.24

5,440

66,400

-0.02

+140

Conga*

Total

474,700

0.59

8,970

924,300

0.59

17,470

449,600

0.00

+8,500

Yanacocha*

Total

250,000

0.90

7,220

487,000

0.89

13,910

237,000

-0.01

+6,690

Merian

Total

167,200

1.16

6,260

149,400

1.36

6,530

-17,800

0.19

+270

Cerro Negro

Total

19,900

7.49

4,790

19,500

7.70

4,830

-400

0.22

+40

Pueblo Viejo

Total

170,400

1.99

10,900

160,200

2.00

10,320

-10,200

0.01

-580

Nueva Union

Total

704,000

0.46

10,490

704,000

0.46

10,490

0

0.00

0

Norte Abierto

Total

1,642,500

0.51

26,810

1,642,500

0.51

26,810

0

0.00

0

Aqua Rica

Total

419,200

0.16

2,210

0

0.0

0

-419,200

-0.16

-2,210

Boddington

Total

838,300

0.61

16,390

787,900

0.60

15,160

-50,400

-0.01

-1,230

Tanami

Total

80,400

3.84

9,920

86,100

3.55

9,830

5,700

-0.29

-90

Ahafo

Total

173,300

1.99

11,080

158,400

2.12

10,790

-14,900

0.13

-290

Ahafo North

Total

69,300

2.15

4,800

75,700

2.14

5,220

6,400

-0.01

+420

Akyem

Total

56,100

1.80

3,250

51,300

1.92

3,160

-4,800

0.11

-90

Nevada

Total

536,500

2.06

35,570

599,900

1.96

37,790

63,400

-0.10

+2,220

Total

Measured & proven

1,267,500

0.96

39,070

1,189,800

0.94

36,140

-77,700

-0.01

-2,930

Total

Indicated & probable

4,681,300

0.81

122,040

5,060,300

0.83

135,410

379,000

0.02

13,370

Total

Inferred

1,495,900

0.69

33,200

1,567,200

0.72

36,130

71,300

0.03

2,930

Total

Total

7,444,700

0.81

194,310

7,817,300

0.83

207,680

372,600

0.01

13,370

Source: Newmont, Edison Investment Research. Note: *Shown at 51.35% attributable interest (ie prior to Buenaventura and Sumitomo transactions) in FY21. Numbers may not add up owing to rounding.

Newmont’s ongoing target is to replace approximately two-thirds of its mining depletion through additions ‘via the drill bit’, with 100% replaced over a five year period, including acquisitions.

In FY23, Newmont’s attributable exploration expenditure for managed operations is expected to be c US$200m (cf US$250m in FY22) plus a further US$25m for its share of its non-managed joint ventures’ exploration (cf US$45m). Approximately 80% of the total will be dedicated to near-mine expansion programmes with a focus on extending mine life, developing districts and discovering new opportunities in the most favourable jurisdictions. The remaining 20% will be allocated to the advancement of greenfields projects (unchanged cf FY22).

Geographically, the company expects to make approximately 32% of its investment in North America (cf 38% in FY22), 30% in South America (cf 23%), 20% in Australia (cf 17%) and 18% in Africa and other locations (cf 22%). The table below briefly summarises the percentage of Newmont’s exploration budget accounted for by each region compared to the percentage of its reserves currently accounted for by each region.

Exhibit 12: Newmont percentage of group attributable reserves cf FY23 exploration budget

Region

Percent of group attributable reserves

(%)

Percentage of exploration budget

(%)

North America

33

32

South America

39

30

Australia etc

17

20

Africa etc

11

18

Total

100

100

Source: Newmont, Edison Investment Research.

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.

Valuation

As outlined earlier in this note, Edison’s forecasts for production and costs applicable to sales have now been brought into line with Newmont’s guidance over the next five years, while our forecast for capex (including the Yanacocha Sulphides project) is as shown in Exhibit 6. Otherwise, our approach to the valuation of Newmont has remained unchanged since our initiation note in February 2021 (see The sustainable leader, published on 9 February 2021). Our longer-term gold price forecasts (in real terms) remain unchanged – and relatively conservative – as follows:

Exhibit 13: Edison (real) gold price forecast, FY24–27 (US$/oz)

Year

FY24e

FY25e

FY26e

FY27e

Gold price forecast (US$/oz)

1,681

1,617

1,554

1,524

Source: Edison Investment Research

Absolute valuation and sensitivities

In our methodology, we have opted to discount forecast dividends back over six years from the start of FY23 and then to apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY28 – when forecast capex is forecast to fall back from ‘elevated’ to ‘ambient’ levels) based on the appropriate discount rate. We would normally 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 the wake of our adjustments, our forecast of Newmont’s operational and pre-financing cash flows over the next six years is as follows:

Exhibit 14: Edison forecast of NEM operating & pre-financing cash flows, FY17–28e (US$m)

Source: Newmont (historical figures), Edison Investment Research (forecasts)

Readers should note the decline in forecast operational and investing cash flows in FY26, which corresponds with our estimate of peak capex, including Yanacocha Sulphides, in particular (see Exhibits 5 and 6).

On the basis of these cash flow estimates, our estimate of ‘terminal’ pre-financing cash flow is now US$3.89/share in FY28 (cf US$3.62/share in FY27 previously). Applying a (real) discount rate of 6.52% (calculated from a nominal expected equity return of 9% and decreased long-term inflation expectations of 2.3303%, cf 2.2305% previously, as defined by the US 30-year break-even inflation rate – source: Bloomberg, 7 March) to this estimate, our terminal valuation of the company at end-FY28 is US$59.74/share (cf US$54.74/share at end-FY27 previously) or US$47.30/share in FY23 (cf US$50.14/share previously). However, this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY28. The terminal valuation would increase to US$87.91/share (cf US$79.99/share previously) if growth in real cash flows after FY28 amounts to just 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 the valuation at the start of FY23 to US$66.59/share (cf US$68.47/share previously). It also compares with results of US$60.02/share (assuming 0% long-term growth in cash flows beyond FY28) and US$84.80/share (assuming 2% growth in long-term cash-flows beyond FY28) if the gold price remains at current levels in real terms (US$1,868/oz), effectively indefinitely (with the added refinement that mining at Nevada Gold Mines 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 62.58Moz attributable to Newmont.

Relative Newmont valuation

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

Exhibit 15: Newmont valuation relative to peers*

Company

Share price

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)

US$45.12

NEM

21.1

29.8

29.7

8.7

8.2

8.1

7.9

7.9

7.5

3.5

3.1

3.1

Newmont (consensus)

US$45.12

NEM

21.3

18.2

17.9

9.2

8.6

8.9

7.5

6.9

6.6

4.0

3.8

4.0

Barrick

C$23.38

ABX

21.2

17.1

16.3

7.4

6.9

6.5

7.3

6.3

6.3

2.4

3.6

3.9

AngloGold

ZAR347.96

ANGJ

12.3

9.9

9.6

6.1

5.4

6.2

4.9

4.2

4.3

1.4

2.3

2.4

Gold Fields

US$10.54

GFI

14.5

8.6

9.6

5.9

5.0

4.8

5.2

3.6

4.0

2.7

3.5

3.4

Kinross

C$5.20

K

13.9

11.9

9.9

3.9

3.9

4.1

5.1

5.1

4.7

2.9

3.0

2.9

Newcrest

A$24.74

NCM AU

19.8

20.8

19.2

9.9

9.0

9.0

7.6

7.8

7.4

2.4

1.4

1.4

Harmony

ZAR64.69

HARJ

9.8

7.1

6.4

4.7

3.1

3.2

4.3

3.6

3.7

0.8

0.7

3.4

Endeavour (consensus)

C$29.46

EDV

14.4

12.8

11.4

5.0

4.6

4.2

4.7

4.3

4.0

4.1

4.1

4.4

Average (excl NEM)

15.1

12.6

11.8

6.1

5.4

5.4

5.6

5.0

4.9

2.4

2.6

3.1

Source: Edison Investment Research, Refinitiv. Note: *Consensus and peers priced on 13 March 2023

From the table above, it can 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 at least 13 out of 21 instances (ie 61%) over the next three years based on Edison forecasts. Based on consensus forecasts, it is cheap in 18 out of 21 instances (85%). As such, we estimate that Newmont’s share price would have to rise by 44.3% for its dividend yield to match those of its peer group, based on consensus estimates. Based on our forecasts, we estimate its share price would have to rise by 18.4%.

As before, one further observation is merited concerning the comparability of the above measures. 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 notable exception of Merian), estimates of cash flow in particular are also close to estimates of cash flow attributable to shareholders (Newmont estimates that 94.9% of free cash flow was attributable to the company’s shareholders in FY22). 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 24.6x current year earnings over the past 10 years, from FY13 to FY22, and its average historical yield of 1.9% over the same timeframe (excluding special dividends), a summary of our updated valuation of the company over 12 measures of value over the next three years is as follows:

Exhibit 16: Newmont valuation summary (US$/share in years shown)

Basis of valuation

FY23e

FY24e

FY25e

Historical

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

52.66

37.20

37.34

Historical

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

83.48

73.05

73.05

Historical

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

52.11

60.96

61.95

Historical

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

94.44

89.74

93.39

Average (US$/share)

70.67

65.24

66.43

Source: Edison Investment Research (underlying consensus data: Refinitiv, 13 March 2023)

Exhibit 17: Financial summary

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

 

 

2018

2019

2020

2021

2022

2023e

2024e

2025e

Income statement

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

7,253

9,740

11,497

12,222

11,915

12,372

11,827

11,719

Cost of sales

 

 

(4,093)

(5,195)

(5,014)

(5,435)

(6,468)

(6,361)

(6,335)

(6,123)

Gross profit

 

 

3,160

4,545

6,483

6,787

5,447

6,011

5,492

5,596

SG&A (expenses)

 

 

(244)

(313)

(269)

(259)

(276)

(275)

(275)

(275)

R&D costs

 

 

(350)

(415)

(309)

(363)

(460)

(500)

0

0

Other income/(expense)

 

 

(406)

(253)

(831)

(2,101)

(2,411)

(269)

(254)

(79)

Exceptionals and adjustments

 

(424)

2,220

214

(2,258)

(2,210)

0

0

0

Depreciation and amortisation

 

(1,215)

(1,960)

(2,300)