Newmont: Buy The Dips
Summary
- Newmont released its Q4 and FY2021 results last month, reporting annual gold production of ~5.97 million ounces at all-in sustaining costs of $1,062/oz.
- While these costs were above estimates, the company had another challenging year, having to implement a new haulage fleet at Boddington and dealing with COVID-19 headwinds across the portfolio.
- The good news is that the 5-year guidance points to ~7% growth in annual GEO production (FY2026 vs. FY2022) at declining costs.
- Based on the fact that Newmont continues to be one of the safest ways to get precious metals exposure with a diversified portfolio, relatively low volatility, and an attractive dividend, I would view pullbacks below $59.30 as buying opportunities.
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The Q4 and FY2021 Earnings Season for the Gold Miners Index (GDX) has finally begun, and Newmont Corporation (NYSE:NEM) was one of the first companies to report its results. Overall, the company reported a solid Q4 performance helped by higher production from Musselwhite, Boddington, Tanami, and Ahafo. Meanwhile, though costs were higher and will remain elevated in FY2022, Newmont is confident that it can steadily grow production with a declining cost profile. Given NEM's position as one of the safest ways to get precious metals exposure, I would view pullbacks below $59.30 as buying opportunities.
Nevada Gold Mines Operations (Company Presentation)
Newmont released its Q4 and FY2021 results last month, reporting quarterly production of ~1.62 million ounces of gold at all-in sustaining costs of $965/oz on a by-product basis. This helped push annual gold production to ~5.97 million ounces for the year, a slight increase from ~5.91 million ounces of gold in FY2020. While free cash flow was down on a year-over-year basis (~$2.61 billion vs. ~$3.59 billion), it's important to note that capex was much higher ($0.35 billion), and Newmont had a challenging year due to inflationary pressures and COVID-19 headwinds which impacted costs and total production. Let's take a closer look below:
Newmont - Quarterly Gold Production (Company Filings, Author's Chart)
Looking at the chart above, we can see that Newmont saw relatively flat production on a year-over-year basis (1.62 million ounces vs. 1.63 million ounces). However, output still remains nearly 10% below Q4 2019 levels. It's important to note, though, that these two periods are not entirely comparable, with a ~102,000-ounce headwind from Red Lake and Kalgoorlie, which were sold to Evolution Mining (OTCPK:CAHPF) and Northern Star (OTCPK:NESRF). It's also worth noting that while Newmont has seen an improvement in production year-over-year, COVID-19 is still not completely in the rear-view mirror even as case counts have improved, with a brief shutdown at the massive Tanami Mine last year in Australia.
Newmont - Gold-Equivalent Ounce Production (Company Filings, Author's Chart)
Moving to gold-equivalent ounce (GEO) production, we did see an increase in production year-over-year, with Q4 production coming in at ~317,000 GEOs. This is substantially better on a one-year and two-year basis (Q3 2019: 236,000 GEOs), helped by higher silver/zinc grades mined at Penasquito and higher copper grades mined at Boddington. If we combine gold and GEO production, Newmont's production was only down slightly on a two-year basis (~2.07 million GEOs vs. ~1.94 million GEOs) despite shedding two operations, KCGM and Red Lake.
Newmont - Quarterly Production by Mine (Company Filings, Author's Chart)
Looking at the portfolio a little closer, we can see that Newmont benefits from significant diversification, with multiple operations globally, and none of these operations contribute more than 25% to annual production. The exception on the above chart is the Nevada Gold Mines Joint-Venture shared with Barrick (GOLD). Still, this JV is made up of multiple operations, and no single complex (Carlin nor Cortez) makes up more than 25% of Newmont's attributable production. This distinction makes Newmont much more attractive than smaller peers with 2-3 mines, given that any potential issue at one mine is not magnified.
If we dig into the Q4 results, the stand-out performers were Boddington (~194,000 ounces), Ahafo (~148,000 ounces), Penasquito (~166,000 ounces), Tanami (~145,000 ounces), and Musselwhite, which saw production hit a multi-year high of ~47,000 ounces. This was partially offset by lower production from Cerro Negro, Merian, and Aykem. Meanwhile, though Yanacocha was only a minor contributor in the period (~38,000 ounces), production from this asset is expected to grow considerably beginning this year.
This is because Newmont recently announced that it would be acquiring Buenaventura's (BVN) ~43.65% stake in Yanacocha for $300 million, and total consideration of up to $400 million (last $100 million tied to higher metal prices). This is a huge deal and a wise move by the company, increasing its exposure to this massive Peruvian gold-copper asset to 95.0% (~52% previously). The company also noted that there's the possibility it could pick up the last 5% from Sumitomo to assume full ownership of the asset.
Yanacocha Mine - Peru (Company Presentation)
While sentiment surrounding Peru remains negative, Newmont certainly paid the right price for this asset to adjust for risk. This is because NEM paid less than 0.50x NPV (5%) for BVN's stake. On a reserve and resource basis, Newmont's total gold reserves at Yanacocha have increased from ~3.57 million ounces of gold to ~6.60 million ounces, while its measured, indicated & inferred resources have increased to a combined ~7.8 million ounces of gold. Even if we ignore the added resources, this means that Newmont paid essentially $100/oz on the gold reserves at an existing operation and got all the upside (measured & indicated, and inferred gold ounces + copper reserves/resources) for free.
Yanacocha Mine (Company Presentation)
While Newmont will have to commit more capital to fund Yanacocha Sulfides (increased ownership), the payback is huge, with incremental production growth of over 500,000 GEOs per annum for the first five years of production (2027-2031) at industry-leading all-in sustaining costs (sub $800/oz). As it stands, Yanacocha Sulfides is expected to extend the mine life at this asset past 2040. Based on exploration upside, a mine life out to 2050 doesn't look like a stretch, with multiple untested targets on the property, and many of the deposits open at depth.
Finally, while the Autonomous Haulage Fleet (AHF) had a rocky start at Boddington due to heavy rainfall, shovel reliability, and operational delays associated with management bench hygiene, the Autonomous Haulage Fleet appears to be delivering on expectations. This is evidenced by the fleet already logging one million kilometers and moving over 45 million tonnes of material. Notably, vehicle damage has declined 50% year-over-year, while tire damage has increased 93%. Most importantly, workers are safer, with lower risks associated with fatigue.
Autonomous Haulage Fleet - Boddington (Company Presentation)
Given the solid performance of the fleet, there's a possibility autonomous haulage fleets could be rolled out at other major projects like Penasquito long-term. Penasquito is no stranger to automation, with autonomous drills (Epiroc Pit Vipers) already active at the mine. It's also possible that there are further productivity gains ahead outside of what was initially outlined at Boddington. Overall, this is great news for Newmont, given that the lackluster performance and guidance cut at Boddington was a bit of a disappointment previously that may have left some question marks about whether productivity would come in at expected levels.
Newmont - Average Realized Silver/Copper Prices (Company Filings, Author's Chart)
Looking at the chart above, we can see that while the weaker silver price was a slight headwind on a year-over-year basis during Q4, Newmont's copper exposure at Boddington picked up the slack. This was based on Newmont enjoying a much higher realized copper price in Q4 ($4.54/lb vs. $3.54/lb) and benefiting from higher copper grades mined at Boddington. If we look ahead to Q1, I would expect to see a similar average realized copper price and a slightly higher average realized silver price, with silver appearing to have found a floor near $22.50/oz.
Newmont - All-in Sustaining Cost Margins (Company Filings, Author's Chart)
Finally, moving over to margins, Newmont reported AISC margins of $833/oz in Q4, an 8% decline on a year-over-year basis (Q4 2020: $895/oz). This was partially related to slightly higher costs in the period ($965/oz vs. $957/oz) but mostly related to difficult year-over-year comps related to the gold price. The good news is that we should see an improvement in margins in Q1 and Q2 2022, given that Newmont will be lapping easier year-over-year comps from the gold price. This is evidenced by the chart below, which shows the gold price averaging $1,792/oz in H1 2021, and likely to come in closer to $1,875/oz in H1 2022.
Gold Futures Price (TC2000.com)
Outlook & Earnings Trend
Moving over to Newmont's 5-year outlook, we can see that while costs are expected to remain elevated in FY2022 ($1,050/oz), costs are forecasted to decline to $970/oz in FY2024 through FY2026. This will be helped by Newmont's continued work to improve costs through its Full Potential Program, which includes the deployment of Payload Management at Penasquito. The decline in costs is also helped by higher-margin projects coming online, like Ahafo North, which is expected to provide incremental production of ~300,000 ounces over its first five years at costs below $700/oz.
Newmont Five Year Guidance (Company News Release)
If we look at the five-year guidance from a production standpoint, we can see that Newmont's annual attributable production is expected to increase from ~7.5 million GEOs in FY2022 to ~8.0 million GEOs in FY2024, FY2025, and FY2026. This represents ~6% production growth over the next few years, driven by increased production from the Tanami Expansion, Goldrush (Nevada Gold Mines Joint-Venture), and Ahafo North.
While this growth certainly pales in comparison to many names in the mid-tier and intermediate producer space, this is respectable growth for a company of Newmont's size, with the possibility of continued growth with Yanacocha Sulfides later in the decade. When it comes to opportunities for incremental production growth longer-term, Coffee (Yukon) and Saddle North (British Columbia) are smaller opportunities that should have modest upfront capex requirements.
For those unfamiliar, Newmont acquired Saddle North through the acquisition of GT Gold, with zero share dilution attached to the deal given that it was done for ~$311 million in cash. The project is home to indicated resources of 1.81 billion pounds of copper, 3.47 million ounces of gold, and nearly 8 million ounces of silver. On top of this, the project has another 3 billion pounds of copper in the inferred category, plus an additional 5.4 million ounces of silver and 11.6 million ounces of silver, making it one of the more attractive gold-copper porphyries globally. Let's take a look at Newmont's earnings trend below:
Newmont Five-Year Guidance (Company Presentation)
As shown in the chart below, Newmont has seen steady growth in annual earnings per share since the Goldcorp acquisition, increasing annual EPS from $1.32 to $2.96 last year. This growth in annual EPS has been helped by a large buyback program that was announced in 2019 ($1.0 billion), combined with higher metals prices, and offset by COVID-19 headwinds and inflationary pressures. Notably, despite continued headwinds last year, Newmont managed to increase its earnings by more than 10% to $2.96 (FY2020: $2.66) and is set to deliver continued growth in annual EPS this year. This is based on current FY2022 estimates of $3.36.
Newmont - Earnings Trend & Forward Estimates (FactSet.com, Author's Chart)
If we look out longer-term, we can see that Newmont has a respectable compound annual EPS growth rate of ~15% from FY2014 to FY2022 estimates ($3.36 vs. $1.09), with this figure sitting closer to 13% based on FY2023 estimates of $3.42. This is a solid earnings growth rate for a company of Newmont's size in a cyclical industry and one of the better earnings trends sector-wide. Assuming the gold price can average $1,925/oz or higher in FY2022 and FY2023, which wouldn't be much of a stretch based on current spot prices, there looks to be some upside to current earnings estimates of $3.36 and $3.42, respectively.
Valuation
Looking at the chart below, we can see that Newmont has historically traded at ~23.8x earnings, with this premium valuation justified by it being the largest gold miner globally with solid operating margins (~20%) and a diversified portfolio (multiple assets in multiple continents). I would argue that a more conservative earnings multiple is 22, given that Newmont is a cyclical stock and while COVID-19 headwinds have subsided, they are still present in some jurisdictions.
Newmont - Historical Earnings Multiple (FASTGraphs.com)
Based on what I believe to be a conservative earnings multiple of 22 and FY2023 annual EPS estimates of $3.42, I see a fair value for the stock of $75.20 per share. This points to ~10% upside from current levels at $69.00 but assumes a gold price of $1,900/oz or lower. I would argue that this gold price assumption is conservative based on where real rates are sitting, at a reading of negative 7% currently. Having said that, with only 10% upside to fair value ($1,875/oz gold price), I don't see this as a low-risk buying opportunity at $69.00 per share.
Negative Real Rates (YCharts.com, Author's Chart)
Moving over to the technical picture, we can see that Newmont is trying to poke its head out above a massive resistance level and recorded a new all-time high annual close last year ($62.02). This is a very bullish development, with breakouts of this magnitude (30+ years) being very rare, and often leading to multi-year advances. Among S&P 500 (SPY) companies, it's hard to find any stocks recently completing 15+ year breakouts, with one of the only stocks that fits this bill being Qualcomm (QCOM).
Newmont Yearly Chart (TC2000.com)
As shown below, Qualcomm confirmed a 20-year breakout at the end of 2020 and has since gained ~30% from January 2021, and ~60% from its breakout level. Obviously, there is no guarantee that Newmont will record a similar performance, but among all S&P-500 companies, I would argue that Newmont has the best-looking yearly chart, given how hard it is to find breakouts of this size which typically lead to sustainable advances. When we combine this with Newmont's very attractive dividend yield (~3.2%) that pays investors to wait, NEM makes for an attractive core holding.
Qualcomm Yearly Chart (TC2000.com)
With Newmont up more than 20% off its lows and trading at ~20x FY2023 earnings estimates, the value proposition is less compelling than when I noted to buy the stock below $55.00 per share last year. However, with Newmont continuing to pay one of the highest dividend yields sector-wide and having one of the best production profiles given its leading diversification, I see the stock as a staple for investors looking to add precious metals exposure to their portfolio. For now, I remain neutral on the stock, but I would view any pullbacks below $59.30 as buying opportunities.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLD, NEM either through stock ownership, options, or other derivatives. 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.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (68)
a value standpoint. Good luck with your investments.
