Newmont: Keep Calm And Let The Dividends Flow
- NEM is a global miner with top-tier assets.
- NEM has Baa1 (Stable) credit rating and has a well-balanced capital allocation strategy.
- NEM has plenty of reserves and a strong exploration program, which combines with its improving efficiencies to offer a strong profitability outlook over the next decade and beyond.
- NEM's current valuation hinges heavily on the outlook for gold.
- We believe current macroeconomic forces are very bullish for gold.
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Newmont Corporation (NYSE:NEM) is a U.S.-based global mining business with top-tier assets in North America, South America, Australia, and Africa.
While precious metals miners have a notorious reputation for being value destroyers and some think that gold prices are at a cyclical peak, we take the opposite view on both arguments and think that NEM is a lower risk way to benefit from higher gold prices due to its:
1) High Quality Portfolio
2) Strong Balance Sheet
3) Lengthy Production Profile
3 Reasons Why To Like Newmont
1) High Quality Portfolio Of Mines
NEM is a true blue-chip miner, in large part thanks to its world-class assets like the Penasquito mine.
After acquiring Goldcorp in April 2019, forming a joint venture with Barrick Gold (GOLD) in their adjacent Nevada assets, and selling its Red Lake and KGCM mines, NEM owns the largest gold reserves in the world at top-tier assets located in the U.S., Argentina, Australia, Canada, the Dominican Republic, Ghana, Mexico, Peru, and Suriname.
It is also aggressively moving to improve its operational efficiencies, including improving upon Goldcorp's inferior operational methods at its former mines, harvesting ~$500 million in combined annual synergies through its joint venture with Barrick, and further enhancing the remainder of its portfolio, giving it All-In Sustaining Cost per ounce of ~$1,000.
With significant gold reserves being mined using cutting-edge methods from diversified and fairly operationally-friendly locales, NEM presents an attractive risk profile for investing in gold. Furthermore, with ~12% revenue exposure to other commodities such as silver (~5%), copper (~2%), and other materials (~5%), the miner offers a little bit of diversification outside of just gold.
2) Strong Balance Sheet
Further strengthening its risk profile, NEM's Baa1 (stable) credit rating from Moody's signals a very strong balance sheet that should protect it against significant downside and impairment should gold prices collapse and/or in the unlikely event that several of its mines simultaneously run into operational or geopolitical challenges.
As of the end of its most recent quarter, NEM had total liquidity of $8 billion and over $5 billion in cash-on-hand. Furthermore, its net debt to adjusted EBITDA was a mere 0.2x. Finally, it reported a whopping $2.6 billion in free cash flow in FY2021, giving it substantial financial flexibility at current gold prices.
NEM's recent dispositions and strong free cash flow generation have enabled it to pay off virtually all of the debt it took on to acquire Goldcorp in 2019.
Given its newfound financial strength, Newmont recently announced a new capital allocation strategy that we believe is very prudent for a miner in its position:
- A stable $1 per share dividend given a base-case $1,200/ounce gold price (1.7% dividend yield at the current share price)
- An additional dividend that consists of 40%-60% of the incremental cash flow generated at gold prices above $1,200 per ounce.
- At current gold prices above $1,800 per ounce, management expects to pay between $2.20-$2.80 per share in dividends this year (3.7%-4.7% dividend yield at the current share price, or 4.2% at the midpoint).
- At $2,100 per ounce, management expects to pay a dividend between $2.80-$3.70 per share (4.7%-6.2% dividend yield at the current share price, or 5.5% at the midpoint).
- Management may then decide to deploy remaining free cash flow towards debt repayment, share buybacks, and/or special dividends, depending on market conditions.
NEM completed $525 million in buybacks in 2021 and paid out $1.8 billion in dividends during the year, leading the gold sector in shareholder returns.
This approach shows that NEM is dedicated to serving shareholder interests while also scaling it according to the current price of gold to avoid overextending their balance sheet.
3) Lengthy Production Profile
We also really like that NEM has considerable production visibility as it expects to steadily improve its attributable gold production to ~8 million gold equivalent ounces per year through 2030. Furthermore, they have an extensive exploration and project pipeline that they expect will enable them to sustain production into the 2040's.
The company also enjoys significant copper upside through its Galore Creek and Norte Abierto joint venture projects. They also improved near-term production potential by recently acquiring GT Gold as well as Buenaventura's interest in Yanacocha, increasing Newmont's ownership in one of the largest and most productive gold mines in South America.
Finally, management is working tirelessly to maximize their profitability and extract the maximum value from its assets by working to drive new efficiencies.
With global geopolitical and macroeconomic risks soaring, gold is once again having a moment in the sun. We believe that NEM is one of the most attractive risk-adjusted ways to invest in gold because:
- Its mining operations give us significant leverage to potential further appreciation in gold
- Its significant free cash flow yield and significant to dividends gives us confidence that management will not recklessly misallocate our profits while rewarding us with an attractive dividend yield
- Its increasingly low AISC, strong balance sheet, and top-notch portfolio give us confidence in protection against the downside
- Its large reserves also give us confidence that NEM will be able to remain in production long enough for our gold thesis to play out.
That said, all equities come with risks, especially ones that are so leveraged to a commodity and investors should keep this in mind when investing here. While many of these risks were allayed through our recent interview of NEM, no bet is 100% sure, so diversification is warranted here.
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This article was written by
Samuel Smith is Vice President at Leonberg Capital and manages the High Yield Investor Seeking Alpha Marketplace Service.
Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point and a Masters in Engineering from Texas A&M with a focus on Computational Engineering and Mathematics. He is a former Army officer, land development project engineer, and lead investment analyst at Sure Dividend.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOLD 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.
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