Image Source: Newmont Corporation – January 2020 IR Presentation
By Callum Turcan
Back on January 13 (link here), we added Newmont Corporation (NEM) to our Dividend Growth Newsletter portfolio with a modest weighting as part of our shift towards more defensive names in light of rising exogenous headwinds to global economic activity. Some important considerations include Newmont increasing its quarterly payout to $0.25 per share from $0.14 per share, which is expected to be declared at the level in April 2020 (the fourth quarter of 2019 dividend, as management puts it, will be paid out in March 2020 at $0.14 per share). As of this writing, Newmont would yield ~2.2% at the new annualized dividend rate. We like Newmont’s dividend coverage and its Dividend Cushion ratio sits at a solid 2.2x, keeping in mind that ratio is based on its expected future dividend obligations (we have modeled in the large announced payout increase and single-digit annual payout increases on a per share basis going forward).
Another important consideration is that Newmont (back on January 13) traded near ~$42.50 per share, well below our fair value estimate of $46 per share. Since then, shares of NEM have nearly converged with our fair value estimate as of this writing, and we see room for Newmont to run higher towards the upper bound of our fair value estimate range (which sits at $62 per share) over time. We like to find high quality companies that ideally are trading decently below their fair value estimate before adding those ideas to our newsletter portfolio, particularly companies whose stock price are supported by favorable technicals of late, and Newmont was a prime example of that.
Gold Reserve and Resource Update
On February 13, Newmont provided an operational update that included its gold reserves, gold resources, some of its expectations for 2020, reserves and resources relating to its non-gold portfolio (copper, zinc, silver, lead), and other important considerations. In particular, Newmont highlighted how its gold ‘Mineral Reserves’, which includes its ‘Measured’, ‘Indicated’, and ‘Preferred’ gold resources (please note here that ‘Measured’ resources are extremely likely to be recovered in an economical manner, while ‘Indicated’ resources have a reasonable likelihood, but not a near certain one, that those resources are going to be recovered in an economical manner and ‘Inferred’ could potentially be recovered in an economical manner but there’s greater risk to those assumptions), stood at 100.2 million ounces at the end of 2019. Measured and Indicated resources represented over three-quarters of those gold resources, which is good, and Inferred resources represented the remainder.
Newmont’s gold Mineral Reserves at the end of 2019 were up sharply from 65.4 million ounces at the end of 2018 due to Newmont’s acquisition of Goldcorp and by establishing a joint-venture in Nevada with Barrick Gold (GOLD), which we covered in this article here. However, please note that Newmont sold off its 50% stake in Kalgoorlie Consolidated Gold Mines (‘KCGM’) through a deal that closed in January 2020 for ~$800 million in cash and is in the process of selling its Red Lake stake for ~$375 million in cash (along with up to ~$100 million in potential contingent payments tied to future exploration successes) in a deal that is expected to close in the first quarter of 2020. Pro forma for those completed and planned divestitures, Newmont’s adjusted gold Mineral Reserves stood at 95.7 million ounces at the end of 2019.
Newmont sees its current operating gold assets and resource base supporting stable production over the coming decade and then some at production levels of 6 million ounces of gold per year. Those future expected production streams are supported but Newmont’s “Boddington, Tanami, Ahafo, Peñasquito, and Nevada Gold Mines, and further enhanced from our eight other operating mines and equity ownership in Pueblo Viejo” which we appreciate.
As Newmont has an industry-leading gold reserve and resource base, we view this gold miner as one of the best around. Around 88% of its gold reserves are situated in the Americas and Australia, limiting its exposure to civil tensions relative to more volatile places in the world. There are some real risks here as it relates to protests, regulatory hurdles, etc., but those risks are manageable, in our view.
Other Metals Update
Pivoting now to Newmont’s other metals segment. The company added significant copper resources to its portfolio through additions at the NuevaUnión and Norte Abierto projects in South America, added significant silver resources to its portfolio largely due to additions at Peñasquito (which primarily is a silver mine in Mexico) along with additions elsewhere, declared zinc and lead resources for the first time due to additions from Peñasquito, and also declared marginal molybdenum resources for the first time due to additions at the NuevaUnión project. The company notes that at the end of 2019, it was sitting on 63 million ‘gold equivalent ounces’ (‘GEO’) and please note “Gold Equivalent Ounces [are] calculated using Mineral Reserve pricing [assumptions] and metallurgical recoveries for each metal on a site by site basis” according to its press release.
What makes these non-gold resources important is that Newmont has exposure to the metals of the future considering the significance copper (transmission systems, wind turbines, solar panels) and zinc (widespread uses across multiple industries, including automotive) have regarding the green energy transmission. Lead is used in lead acid car batteries for conventional automobiles, but isn’t used as one of the primary components to make lithium ion batteries which are widely used in electric vehicles (‘EVs’), and molybdenum is primarily used in the steel making industry to make steel alloys that can withstand extreme heat and other factors. In other words, Newmont’s other metals portfolio has exposure to both the technologies of the past/present and the future.
Financial Update
Management noted in the press release covering Newmont’s update that the firm would spend ~$230 million on its attributable exploration expenses this year, a decline of roughly 13% from 2019 levels as the firm realizes $25 million in synergies from its acquisition of Goldcorp and another $10 million in savings are expected to be generated from the aforementioned divestitures. Please note that Newmont’s exploration program had plenty of successes in 2019:
Additions before revisions of 7.4 million ounces [of gold in 2019] through exploration exceeded the Company’s target demonstrating drilling success and the prospectivity across the portfolio. Notable reserve additions for the year included: 2.5 million equity ounces from NGM, 1.5 million ounces at Tanami, 0.7 million equity ounces at NuevaUnión, 0.5 million ounces at Merian and 0.4 million ounces at Ahafo underground. Additions nearly offset depletion of 7.7 million contained ounces, which corresponds to Newmont’s 2019 attributable production outlook of 6.3 million ounces.
Concluding Thoughts
We continue to like Newmont in our Dividend Growth Newsletter portfolio and view its strong technicals of late as a sign that investors are beginning to price in the substantial upside the gold miner offers. Its dividend growth trajectory looks bright and we’ll have more to say on the name after Newmont reports its fourth quarter and full-year earnings for 2019 on February 20 before the market opens.
Diversified Mining Industry – BHP FCX NEM RIO SCCO VALE WPM
Related: GLD, SLV, GOLD
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Callum Turcan does not own shares in any of the securities mentioned above. Newmont Corporation (NEM) is included in the simulated Dividend Growth Newsletter portfolio. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.