Newmont Mining Corporation (NEM), the second largest gold producer in the world, reported Q3 2013 adjusted EPS of $0.46 beating consensus estimates of $0.32 by staggering 44%. We adjusted the headline EPS of $0.86 primarily for a gain on the sale of NEM's investment in Canadian Oil Sands Ltd. for $280 million pre-tax. The company had already pre-announced production; it was the lower than expected costs that mainly drove the beat.
The Colorado based company offers good value to long-term and income investors. NEM's business strategy has three main points. The first of which is to secure the gold franchise by running its existing business more efficiently and effectively. The second is to strengthen the portfolio by building longer-life, lower-cost portfolio of gold and copper assets, and finally enable the strategy by developing the capabilities and systems that create competitive advantage.
NEM, a globally diverse operated, has a strong base of production and reserves. The company operates in some of the safest regions relative to peers. Newmont has low valuation relative to spot gold prices and future upside to production and reserves from new projects.
Both of company's development projects, Akyem in Ghana and Phoenix Copper Leach (expansion of the Phoenix mine) project in Nevada have achieved commercial production, on schedule and on budget.
Company's Akyem project in Ghana was completed in September on schedule and $38 million below budget with first production in October. In the first five years its annual production is estimated to be 350,000 to 450,000 ounces per year at costs applicable to sales (CAS) of $500-$650 per ounce (all in sustaining cash costs of $750-$850 per ounce). The mine should produce 50,000 100,000 ounces in 2013. Grades are in-line with management expectations. NEM has been stockpiling higher grade material in advance of processing, however expects to beat normalized levels through the first five years.
The Phoenix copper leach was also completed on time and on budget in September and produced first copper cathode in October. Its annual production is estimated at 20 million pounds in the first five years on average at costs applicable to sales of $1.75-$2.00 per pound. In 2013, attributable production is forecasted to be 4.0-5.0 million pounds of copper.
Among NEM's pending projects, the company has rescheduled its Ahafo mill expansion due to permitting delays and to explore options to improve project economics. The project is being pushed out, however pending the approval of the EIS and receipt of permits a construction decision could come as early as 2014.
Another of company's pending project, Merian in Suriname, is estimated to production 350,000-450,000 ounces per year. The company continues to work toward finalizing a mineral agreement with the government of Suriname and receipt of various related government approvals before NEM's Board of Directors decide whether to proceed with construction of the project.
Newmont's Conga project in Peru is estimated to produce 300,000-350,000 ounces per annum. Focus remains on building the Chailhuagon water reservoir, completing the last engineering activities, and accepting delivery of the main equipment purchases.
Gold Linked Dividend Revised Down But Yield Still Attractive
The Colorado based NEM has a gold price-linked dividend policy and has a forward annual dividend yield of 2.93%. In comparison Barrick Gold (ABX) has a dividend yield of 1.1% and Goldcorp (GG) of 2.5%. Newmont's dividend policy is structured so that dividends paid may increase or decrease based on the London PM Fix average price of gold for the quarter. Since the average gold price in third quarter dropped to $1326 per ounce down from $1415 in second quarter, the company revised down its quarterly dividend to $0.20 from $0.25 in the previous quarter. The dividend is payable on December 27, 2013, to holders of record at the close of business on December 5, 2013. Despite a cut in dividend, NEM still has a very attractive dividend yield of 2.9%.
Valuation & Financials
NEM is trading at attractive valuations. It has a forward P/E of 16.0, the same as S&P 500. NEM has a price-to-book ratio of 1.1 compared to its own 5-years average of 2.2. It has price-to-sales ratio of 1.5, compared to historical average of 2.9 and industry average of 2.2. The company has price-to-cash flow ratio of 6.4, compared to industry average of -5.9 and the historical 3-years average of 9.3.
The company has $1.5 billion in cash and cash equivalents and total debt of $6.5 billion. NEM has $2.5 billion in debt repayments through 2019 and doesn't plan to issue anymore equity or debt at this stage.
We have a buy rating on NEM. Newmont is a globally diverse operated, has a strong base of production and reserves. The company operates in some of the safest regions relative to peers. NEM has low valuation relative to spot gold prices and future upside to production and reserves from new projects. The biggest U.S. gold producer is focused primarily on quality over quantity and has a production potential of 4.8-5.7 million ounces by 2016. Among company's key expansion projects Akyem has already started production, Merian is a potential 2016 start-up, and Long Canyon in Nevada in 2017. NEM's Conga project in Peru also provides an attractive return at $1,300 per ounce of gold and $3.0 per pound of copper; however something needs to change in Peru on the political side of the equation for the project. In the meantime, the delays in the project have been an advantage for Newmont, since it is not burdened by the debt that would have been required to build the new mine and this has freed up cash-flows for better cash flowing assets.
Newmont through its Full Potential program is also expected to cut down it's all in sustaining cash costs by $125 per ounce by 2015. The company is expected to save further 5-10% through operating cost efficiencies, 15-20% on sustaining capital, 10-15% on supply chain and 15-25% on reduced global G&A. NEM is also trading at attractive valuations and despite a cut in dividend still has an attractive dividend yield of 2.9%. NEM represents a good investment opportunity for long term and income investors.