Newmont Corporation — Sustainable in several senses

We include in this note our full and updated 2023 quarter-by-quarter forecasts. This is in advance of the release of detailed five-year guidance by Newmont, which will be provided alongside Q4 results on 23 February 2023. We also include updated estimates for Q4 and FY22 ahead of the full year results. We note that our 2023 numbers are somewhat preliminary in nature (guidance was originally expected in early December but was rescheduled to February) and subject to revision if guidance varies materially from our expectations.

We expect performance in 2023 to be comparable to 2022 in terms of production and costs. However, we have smoothed our estimate of development capex over that timeframe, notwithstanding Newmont’s move to rephase its capex structure at Yanacocha, including a US$350m investment for a new water treatment plant in FY23 and FY24, which we expect to be charged to reclamation and remediation in the income statement. As a consequence, we have increased our estimates for reclamation and remediation spend in those years, which can now be seen in Exhibit 2, which presents our quarterly forecasts for FY23 for the first time.

In general terms, we expect Newmont’s guidance presentation to cover its continued push towards sustainable, decarbonised gold mining operations via the continued development of electrified autonomous vehicles and battery powered underground mining operations. In terms of gold production, an emphasis on maintaining 6Moz pa attributable production levels (closer to 7.5–8Moz pa on a GEO basis) for the next decade is likely in our view. Our production forecast is for a slight increase in 2023 (6.2Moz) from 2022 levels (5.9Moz on our estimates). In the longer term, we see Newmont able to grow attributable gold production towards 7.0Moz in both FY24 and FY25 before tapering to 6.7Moz in FY27.

Currently, we do not see any major change in capital allocation policy. However, we do see the potential for Newmont to recalibrate its base dividend payment from a base gold price of US$1,200/oz to US$1,400/oz (which would match reserve calculations) as a reflection of industry inflation (albeit, this may ultimately wash out through higher gold prices and be reflected in the variable component of the dividend payment in due course).

Newmont’s dividend for Q322 was maintained at US$0.55/share, following its dividend framework 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) 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 above this level to shareholders (evaluated in gold price increments of US$300/oz). Since Q320, this has resulted in Newmont augmenting its ‘base’ payout of US$0.25/share per quarter by two increments of US$0.15/share per quarter to reflect a gold price of US$1,800/oz (ie 1,200+(2×300)). Hence, it paid out a dividend of US$0.55/share (ie 0.25+(2×0.15)) in Q322, despite the gold price averaging US$1,730/oz in the same timeframe.

Moving forward, the dividend framework is set to remain unchanged. However, Newmont has always reserved the right to reconsider its dividend level on an annual basis (rather than the framework) and recent company comments suggest that Newmont may be considering recalibrating its base gold price level from US$1,200/oz to US$1,400/oz (in line with the price at which its reserves are calculated).

This being the case, we believe that it is possible that shareholders may, in the near future, see their ‘base’ payout augmented by only one gold price increment of US$300/oz to reflect a gold price of US$1,700/oz (ie 1,400+(1×300)), and therefore receive a dividend of US$0.40/share per quarter (ie 0.25+(1×0.15)) where previously they had received a dividend of US$0.55/share per quarter (ie 0.25+(2×0.15)). It should be highlighted, however, that this is assuming no structural rise in the gold price. A sustainable gold price above US$2,000/oz, for example, may be expected to result in dividends being returned to the US$0.55/share per quarter level.

At this point, ahead of any potential fresh guidance in February, we have reduced our dividend forecasts for Q422 and FY23 to reflect our thinking above (note that we had always assumed that Newmont’s dividend would reduce in FY24 on account of our longer-term gold price assumptions, so this revision merely brings the reduction forward by 15 months). We note that the gold price rallied strongly into the end of 2022 and may exceed our estimates. Dividends remain, as always, at the discretion of management and difficult to predict, but we do see Newmont maintaining a balanced capital allocation policy with continued support of growth beyond 6Moz production levels and decarbonising/automating operations, both of which are long-term value creative uses of capital as well.

Newmont will release Q422 and full year results along with guidance on 23 February 2023. We have updated our numbers ahead of this release (as well as incorporating previously released Q3 actuals into our estimates).

As was the pattern in FY21, Newmont expects both (higher) production and (lower) costs to have been weighted towards the second half of the year in FY22, approximately in the ratio 48:52, largely driven by higher grades. Hence, we expect production to increase by 6% in Q4 with costs acting inversely, decreasing by 13%.

On 17 January 2023, Barrick released preliminary Q4 results confirming production and sales for Pueblo Viejo and Nevada Gold Mines (NGM); we have updated our forecasts accordingly (Exhibit 3). Barrick outlined Pueblo Viejo was slightly below expected production; however, it finished the year well above guidance.

After incorporating Newmont’s Q322 results and Barrick’s Q4 preliminary data, our revised production and cost estimates for the full year results are presented below (by geographical region):

Using the average gold price for Q422 of US$1,731/oz (cf US$1,676/oz previously) and an effective tax rate for Q4 of 32% (in line with guidance for the full year), this operational performance translates into financial estimates for Newmont for FY22 as follows:

Our basic adjusted EPS forecast of US$1.936/share (cf US$1.832/share previously) for FY22 compares to the market consensus, by quarter, as follows:

Basic adjusted EPS for the first three quarters of FY22 amounted to US$1.412/share. Within this context, we observe the relatively wide range of forecasts for both Q4 and, in particular, FY23 and note that detailed cost and production guidance from management will be provided on 23 February, alongside FY22 results. However, readers should note that Newmont, in its Q3 results, raised the possibility of impairing a number of its assets in Q4. These include Cripple Creek & Victor (US$470m carrying value), Porcupine (US$340m) and Cerro Negro (US$460m). Should these impairments be made, it would inevitably affect the appearance of Q4 and FY22 results, although it would not affect Newmont’s underlying performance, as forecast by Edison in Exhibits 4, 5 and 9.

Attributable gold production at Newmont decreased by 0.5% in Q322 in comparison to Q222, to 1,487koz, with costs applicable to sales increasing 3.9% to US$968oz. However, We estimate a strong Q4 to close out the year with gold production of 1,576koz at a cost of US$847/oz (Exhibit 3). Newmont is on track to achieve FY22 results of c 5,902koz of attributable gold production with costs applicable to sales of c US$911/oz (as shown in Exhibit 3).

In general, Q3 production was slightly below our prior expectations and costs slightly above as lingering COVID-19 related constraints were replaced with increasing inflationary pressures, affecting labour costs and commodity input costs, including higher fuel and energy costs. This was most notable in South America and Australia, whereas a strong dollar kept costs down in North America. A minimal impact was apparent in Africa, which operated close to our expectations in all respects. Production at Peñasquito (North America) exceeded estimates materially, aided by an increased grade quarter-on-quarter, producing 182koz gold (cf our 126koz prior forecast), which helped offset quarter-on-quarter decreased output at the Australian operation. All other assets performed largely in line with our estimates.

A summary of the operational highlights of the quarter relative to our prior expectations is provided in Exhibit 6.

Our approach to the valuation of Newmont was outlined in our initiation note (see The sustainable leader, published on 9 February 2021).

In our methodology, we have opted to discount forecast dividends back over five years from the start of FY23, then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY27) 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.

Edison has taken a conservative approach to our medium-term estimates for Newmont, while keeping long-term estimates relatively unchanged. In the wake of our adjustments, our ‘terminal’ pre-financing cash flow in FY27 has increased from US$3.54/share previously, to US$3.62/share. On this basis, applying a (real) discount rate of 6.62% (calculated from a nominal expected equity return of 9% and decreased long-term inflation expectations of 2.2305%, cf 2.1456% previously, as defined by the US 30-year break-even inflation rate – source: Bloomberg, 02 February) our terminal valuation of the company at end-FY27 is US$54.74/share (cf US$52.73/share previously) or US$50.14/share in FY23. However, this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY27. The terminal valuation increases to US$79.99/share in the event that growth in real cash flows after FY27 amounts to 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$68.47/share. This is also almost equal to the result (US$70.76/share) if the gold price remains at current levels in real terms, effectively indefinitely (with the added refinement 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 seven largest publicly quoted senior gold producers, is as follows:

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 19 out of 21 instances (ie 91%) over the next three years. Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 46.0% for its dividend yield to match those of its peer group. Based on our forecasts, we estimate its share price would have to rise 49.5%.

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 1.7% over the same timeframe (excluding special dividends), a summary of our updated valuation of the company over 16 measures of value over the next four years is as follows: