Newmont Goldcorp: Trying To Digest Its Mega-Merger

Jul. 31, 2019 5:19 PM ETNewmont Corporation (NEM), NGT:CAGOLD, ABX:CA21 Comments

Summary

  • Newmont Goldcorp posted its second quarter of 2019 results on July 25. Revenues were $2.26 billion.
  • Gold production was higher this quarter with 1,587k Oz of gold, including Goldcorp's assets and the JV with Barrick Gold.
  • Newmont Goldcorp remains one of the best plays in the gold mining sector and should be considered as a long-term investment. I recommend adding on weakness.

The image above: Twin Creeks Mine in Nevada USA

Investment Thesis

Newmont Goldcorp (NYSE:NEM) is the world's largest gold producer after the company completed the merger with Goldcorp. Newmont Goldcorp that I own with my other two long-term gold miners constitute my core long-term "gold miners," including Agnico Eagle (AEM) and Barrick Gold (GOLD).

Newmont Goldcorp produced 1.587M Au Oz during the second quarter of 2019.

It is crucial to own a few solid gold miners in your long-term portfolio. Investors often use gold miners as a hedge against inflation/US dollar. It is the traditional narrative behind why I am holding a permanent gold position, including stable gold miners like Newmont Goldcorp.

I generally allocate between 5% and 8% of my total portfolio to precious metals - gold, platinum, and palladium mainly.

The mighty dollar continues to be firm this year, but the gold price had strongly rallied when the Fed changed its strategy from tightening to now easing.

This change in strategy pushed the entire gold industry into bullish territory overnight. However, unfortunately for shareholders, Newmont Goldcorp has underperformed its peers significantly as the one-year chart below is painfully showing compared to Barrick Gold or Agnico Eagle.

ChartData by YCharts

Newmont dropped sharply in reaction to the recent merger with Goldcorp and in a lesser extent with the JV with Barrick that I will present later. Goldcorp's assets are below standard, and Newmont is beginning to understand how troubled they were and how long it will take to fix the problem. Already Tom Palmer, who will soon take over as new CEO, said in a telephone interview:

"It’s going to take us 24 to 36 months to really get those assets performing to the level that we’d expect, but the underlying infrastructure, the underlying ore bodies, are really good."

Also, a few technical issues arose, such as the temporary shutdown of the operations at the Penasquito Mine in Mexico and a fire in April at Musselwhite mine, that have been a definite drag for the company.

The Penasquito mine produced 272,000 ounces of gold in 2018 for Goldcorp. The gold production for 2Q'19 was a meager 14K Oz. Newmont now anticipates consolidated production of 165,000 ounces of gold from Penasquito in 2019.

The investment strategy has been the same for quite a long time. Newmont Goldcorp remains one of the best play in the gold mining sector and should be considered as a long-term investment. However, it is essential to trade short term about 20%-30% of your position due to the volatility of the price of gold, which can rally or sell off overnight.

The new results are confirming my long-term position, and I still consider Newmont Goldcorp as the right candidate for a long-term investment. However, the acquisition of Goldcorp has been a disappointment due to the quality of the assets, and I believe the new company will struggle for a while longer before properly incorporating Goldcorp's assets and make them attractive. Thus, a few quarters of patience is required.

Newmont Goldcorp assets' portfolio worldwide

Source: NEM presentation

Newmont Goldcorp: Financials and Production in 2Q 2019. The raw numbers

Newmont Mining 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Total Revenues in $ Billion 1.82 1.66 1.73 2.05 1.80 2.26
Net Income in $ Million 192 292 -145 2 87 -25
EBITDA $ Million 637 633 222 668 645 589
Profit margin % (0 if loss) 10.6% 38.1% 0 0.1% 4.8% -0.03
EPS diluted in $/share 0.36 0.54 -0.27 0.00 0.16 -0.03
Cash from operations in $ Million 263 399 425 740 571 299
Capital Expenditure in $ Million 231 258 274 269 225 380
Free Cash Flow In $ Million 32 141 151 471 346 -81
Total Cash $ Billion 3.17 3.18 3.13 3.45 3.60 1.85
Long-term Debt in $ Billion 4.10 4.06 4.04 4.04 4.05 6.10
Dividend per share in $ 0.14 0.14 0.14

0.14

Special dividend of $0.88 paid in May 1st

0.14

0.14
Shares Outstanding (diluted) 535 535 535 535 534 768

Source: Company filings and Morningstar.

Gold Production details

1 - All-In Sustaining Costs or AISC

All-in Sustaining Costs or AISC (co-product) has increased significantly this quarter to $1,016 per ounce with the incorporation of Goldcorp. It is difficult to draw any conclusion so early in the process of merging with Goldcorp. We need a few more quarters to analyze the situation objectively.

Gold production was higher this quarter with 1,587k Oz of gold.

Note: Newmont is also producing other metals (e.g., copper, silver, etc.)

Presentation of Newmont Mining production in two charts

1 - Total Gold Production since 1Q'15 to 2Q'19.

The second quarter of 2019 attributable production includes Goldcorp's assets and the JV with Barrick.

2 - Gold Production in 2Q'19 per producing mine including Goldcorp and the JV Barrick/Newmont.

Newmont Revenues were $2.26 Billion in 2Q'19

Newmont Goldcorp posted its second quarter of 2019 results on July 25. Revenues were $2.26 billion

Gold price realized increased $25 this quarter compared to 2Q'18 with $1,317/Oz, and we should all expect a significant increase in 3Q'19.

Newmont Free Cash Flow

NEM's free cash flow is impressive at $887 million yearly ("TTM") with a loss of $81 million in 2Q'19.

The company is paying a $0.56 per share in dividend or a yield of 1.49%.

Newmont Net Debt was $4.25 billion at the end of June

Newmont Mining's net debt is now $4.25 billion. With a net debt-to-adjusted EBITDA of 0.21x, the company is showing an excellent position.

What has changed is that starting this quarter, Newmont will be a different company due to two majors events:

  1. Newmont's merger with Goldcorp in April.
  2. Creation of a 38.5% (Newmont)/61.5% joint venture with Barrick Gold in Nevada.

Newmont Goldcorp paid off $1.5 billion of Goldcorp at closing and completed the exchange of Goldcorp senior notes. On April 24, Moody's had a favorable comment about Newmont Goldcorp:

Source: NEM presentation

Conclusion and Technical Analysis

Newmont Goldcorp posted a meager adjusted profit well below analysts' expectation primarily due to the mega-merger with Goldcorp and the start of a new JV with Barrick Gold in Nevada. Greenwood Village said:

"Integration costs associated with the Goldcorp merger and the Nevada JV. Higher costs due to shutdowns at two mines acquired in the Goldcorp deal, Penasquito and Musselwhite. Higher sustaining capital investments for the Goldcorp assets. Higher spending for growth projects."

Furthermore, Newmont is reducing full-year gold production from 7M Oz in June to now 6.5M Oz in 2019 (mid-point) and 7.4M Oz in 2020.

Outgoing CEO Gary Goldberg said in the conference call:

"Sustainable gold production, targeting between 6 million and 7 million ounces per year with another $1.5 billion of annual revenue from copper, zinc, lead and silver production and the financial flexibility needed to continue investing in profitable growth and delivering an industry-leading dividend."

Technical Analysis (short term)

NEM is forming, in my opinion, an ascending channel pattern with line resistance at $40 (time to sell about 15% for cash and wait for retracement) and line support not indicated by Finviz above that I see at approximately $36.75 (I recommend adding at this level or eventually waiting for the long-term support at $36 depending on the price of gold).

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This article was written by

Fun Trading profile picture
20.46K Followers
As an experienced investor, I will help you stay on task more efficiently.

I am a former test & measurement doctor engineer (geodetic metrology). I was interested in quantum metrology for a while.

I live mostly in Sweden with my loving wife.

I have also managed an old and broad private family Portfolio successfully -- now officially retired but still active -- and trade personally a medium-size portfolio for over 40 years.

“Logic will get you from A to B. Imagination will take you everywhere.” Einstein.

Note: I am not a financial advisor. All articles are my honest opinion. It is your responsibility to conduct your own due diligence before investing or trading.

Disclosure: I am/we are long NEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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