Can Newmont's Outperformance Continue?

| About: Newmont Mining (NEM)

Summary

NEM delivered a strong 2014 and is up 35% YTD;

The company continues to deliver on its strategic plan;

The company continues to strengthen its portfolio and create shareholder value.

Compared to its peers, Newmont Mining (NYSE:NEM) delivered a strong 2014 on all fronts, including operational performance, an improved balance sheet, and exploration success. The company's strong performance continues in 2015 as well. NEM reported 1Q15 adjusted EPS of $0.46, topping Street estimates of $0.23 by 100%. This was NEM's fourth consecutive beat. Strong production numbers, lower costs, and lower exploration expenses all contributed to better than expected results. Cash flow per share of $1.25 and free cash flow of $341 million also came in better than expected.

The world's second largest gold producer reported gold production of 1.213 million ounces. Nevada, Ahafo, and Batu Hijau reported strong production figures, while Kalgoorlie's production was light. Both cash costs of $609 per ounce (guidance $660-$710 per ounce) and all-in-sustaining-cash costs [AISC] of$849 per ounce (guidance $960-$1020) came in lower than expected as the company benefited from lower oil prices and weaker foreign currencies compared to USD. NEM should continue to benefit from these tailwinds for the rest of the year. NEM also maintained its full year production guidance of 4.55-4.94 million ounces of gold at cash costs of $660-$710 per ounce.

Gary Goldberg Continues To Deliver

NEM continues to deliver on its strategy since the new CEO, Gary Goldberg, took charge in 2013. Firstly, the new CEO focused on improving underlying business through cost reductions. NEM has managed to cut AISC by 18% to $849 per ounce. Both sustained cost improvements and higher grades have contributed to this Y/Y improvement. As I mentioned earlier, lower oil prices and favorable exchange rates have also helped the business and the company should continue to see benefits of these two factors for the rest of the year.

· Strengthening Portfolio

Secondly, Newmont continues to strengthen the portfolio by investing in internal opportunities. Commercial production at Correnso already started earlier this year on time and on budget. The company remains on schedule to deliver first production at Turf Vent Shaft in late 2015. Located 27 miles north of Carlin, Nevada, Turf Vent project will add higher grades ore at Mill 6 at Carlin. The project will cut mine costs for NEM and unlock an additional 3 million ounces of resources in greater Leeville over the 11-year mine life. Similarly, Merian will start production in early 2016 and the company's newest project Long Canyon in 2017.

In addition to Merian and Long Canyon, which are both underexplored, NEM's low cost Australian assets could also open new opportunities for the company. In addition, Tanami and Waihi have good potential to add reserves and resources and extend the mine life. At Yanacocha, NEM and its partner Buenaventura (NYSE:BVN) are considering a number of options to extend the mine life past 2018 with Project Integral. All these projects/mines provide the company a number of opportunities to add NAV to its current project portfolio.

· Creating Shareholder Value

The third part of Newmont's new strategy under Goldberg is to create shareholder value and the company continues to make progress in this regard as well. In the most recent quarter, NEM generated $815 million in adjusted EBITDA, representing a 65% increase from the same quarter last year. The company also prepaid $200 million in debt and generated positive free cash flow for fourth straight quarter. Collectively, NEM has reduced net debt by $1.4 billion since 1Q14.

Balance Sheet Improvement

Newmont has also improved its balance sheet considerably in the past year. As I said earlier, the company in the past 12 months has reduced net debt by $1.4 billion with relatively equal contributions from asset sales and free cash flow. However, important thing is the production increases have more than offset assets divestments. NEM's net debt as of end of 1Q15 stands at $3.9 billion. NEM maintains an investment grade rating and has no significant debt due until 2019.

The company also extended its revolving credit facility to 2020, giving itself additional flexibility. The revolver has only one covenant: maximum net debt to book capital of 62.5%. NEM, as of end of 1Q15, stood at 22.7%. Going forward, the company remains on track to pay down addition $750 million in debt by end of 2015.

Conclusion

NEM is up 35% YTD; still it is trading at attractive valuation compared to peers. NEM is trading at a P/E ratio of 21.5 compared to its 5-year average of 31.5. The company has a higher than average mine lives, which should support a higher cash flow multiple going through. The company continues to deliver on its strategic plan and create shareholder value. As the company continues to demonstrate operational consistency, cut costs, and improve balance sheet, it should continue to outperform peers in 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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