Image Source: Newmont – Third Quarter 2019 Earnings IR Presentation
We are in the process of updating our models on Newmont in light of recent events.
By Callum Turcan
Newmont Corporation (NEM) announced a huge boost to its dividend on January 6, with its quarterly payout growing by 79% to $0.25 per share from $0.14 previously. As of this writing, that’s good for a forward-looking yield of ~2.4%. Additionally, the company reiterated its commitment to buying back its stock now that the merger between Newmont and Goldcorp is firmly in the rear view mirror (Newmont Corporation used to be known as Newmont Goldcorp Corporation, a name that was shortened this year). We continue to like the name as one of the top gold mining plays.
Please note that the financial performance of Newmont is heavily influenced by the price of gold, which has performed very well over the past year (up $250-$300 per troy ounce) with the futures curve indicating the market is in contango (gold futures are trading higher than spot gold prices). However, should gold sell off for any reason, such as a reduction in global geopolitical tensions, that would materially impact Newmont’s financial performance. In light of recent events (particularly regarding US and Iran), it seems highly unlikely global geopolitical tensions will be dissipating anytime soon.
Financial Overview
At the end of September 2019, Newmont had $2.7 billion in cash and cash equivalents on hand versus $0.6 billion in short-term debt and $6.1 billion in long-term debt, on top of material long-term obligations relating to its mining activities. That net debt position is meaningful but manageable. Newmont generated ~$1.65 billion in net operating cash flow during the first nine months of 2019 while spending ~$1.05 billion on capital expenditures, allowing for ~$0.6 billion in free cash flows during this period. While that didn’t fully cover its dividend payouts during this period, please note that Newmont paid a substantial special dividend as part of its merger agreement with Goldcorp in 2019.
Going forward, investors appear eager to see how Newmont performs as a combined entity, keeping volatile gold prices in mind. Synergies are a key consideration here, as Newmont is targeting $365 million in annualized pre-tax cost savings by the end of 2021. The company is already exceeding guidance, as you can see in the graphic below.
Image Shown: Newmont is ahead of schedule when it comes to realizing cost savings via synergies due to the Newmont-Goldcorp merger. Image Source: Newmont – Third Quarter 2019 Earnings IR Presentation
Synergies will better enable Newmont to generate free cash flow in any gold pricing environment, and the recent dividend increase highlights management’s confidence in the company’s future free cash flows given the increased dividend obligations. We caution that those enlarged dividend obligations will need to contend with Newmont’s net debt load and share buyback program. Management has guided for material capital expenditure reductions from 2020 to 2024, which we will cover later on, and that should allow for material free cash flow expansion.
Canada Update
Newmont owns the underground Musselwhite gold mine in Ontario, Canada, that sits below Lake Opapimiskan. Ore is processed on-site and the mine was expected to house 1.85 million ounces of gold reserves (proven and probable) as of June 2017. Production at the mine was negatively impacted for most of 2019 due to a conveyer catching on fire, which led to a power shutdown which in turn shut down the pumps needed to move and keep water out of the mine. Here’s what management had to say on the issue during Newmont’s quarterly conference call covering the third quarter of 2019 (emphasis added):
“At Musselwhite, rehabilitation work is nearing completion, and we recently executed contracts for engineering, construction and the installation of a new conveyor system. Whilst the replacement of the conveyor is underway, we are getting ahead on development and building inventory to sustainable levels. As we head into the next year we plan to have three or four stopes available at one time. And going forward, very importantly, our plan is to be 18 months ahead on development work…
We expect to begin recognizing production and sales in the second quarter of 2020, once the mill is processing the stockpile material we are currently trucking to surface. And we will back to normal operations in early October when we bring the conveyor back online. The Musselwhite materials handling project is tracking to be fully operational by mid-2020 with the shaft installation nearing commission and dry commissioning of the new crushing and conveyor systems well underway.”
Before this happened, Newmont (Goldcorp at the time) was in the process of competing a $90 million materials handling upgrade that would improve the way ore is moved to the crusher by constructing a raise bore winze. That was expected to allow the mining operator to boost production by 20% while cutting down on operating costs by 10%, with the project slated to be completed in the first quarter of 2019 when announced back in 2016. That start-up date has since been delayed, but with rehabilitation work ongoing, Newmont aims for the Musselwhite mine to reach full production by early-October (with the material handling project set to be completed and operational by the middle of this year).
Image Shown: Newmont expects production at its Musselwhite gold mine will resume this year. Image Source: Newmont – Third Quarter 2019 Earnings IR Presentation
Guidance
In the upcoming graphic down below, please note the stable nature of Newmont’s expected gold production base and the decline in its forecasted operating costs under two different metrics; cost applicable to sales (‘CAS’) and all-in sustaining costs (‘AISC’). Production of other metals (including copper, zinc, lead, and silver) is expected to increase over the coming years. What’s also very important to note is that Newmont expects its capital expenditures (sustaining plus development) to drop materially from 2020 to 2024 as development spending rolls off.
Image Shown: Newmont is targeting a flat gold production profile and reduced operating costs over the coming years. Image Source: Newmont – 2020 Guidance IR Presentation
Nevada JV
Newmont and Barrick Gold Corporation (GOLD) formed a joint venture in Nevada last year, Nevada Gold Mines LLC. As the operator, Barrick owns 61.5% of the joint venture with Newmont owning the remainder. By joining forces, unlocking synergies and realizing material economies of scale, the duo aim to save enormous sums going forward. Here’s what Barrick’s press release had to say:
The joint venture is an historic accord between the two gold mining companies, which have operated independently in Nevada for decades, but have previously been unable to agree terms for cooperation. The joint venture will allow them to capture an estimated $500 million in average annual pre-tax synergies in the first five full years of the combination, which is projected to total $5 billion pre-tax net present value1 over a 20-year period…
1. Represents the NPV of pre-tax synergies projected over a twenty-year period, assuming consensus commodity prices and a 5% discount rate. Based on Barrick estimates.
Before the joint venture was established, Barrick had been in the process of attempting to acquire Newmont in large part to capture the aforementioned synergies. No agreeable deal could be reached so Barrick made a hostile bid for Newmont, an ~$18 billion bid that was terminated after both sides agreed to form the joint venture. Considering the size of the expected synergies and the strong likelihood many of those cost savings will be realized, it’s easy to understand why Barrick wanted Newmont’s gold mining operations in Nevada. Furthermore, US gold mining assets aren’t exposed to the kinds of turmoil mining operations in some other regions of the world are forced to contend with (turmoil that can be caused by geopolitical, domestic, and other forces).
Concluding Thoughts
Newmont’s outlook is improving, aided by rallying gold prices, material synergies, and expectations for meaningful capital expenditure reductions as various mining projects are completed. We appreciate management seeking to reward income investors by pushing its annual dividend payout up to $1.00 per share, which as of this writing is good for a ~2.4% yield on a forward-looking basis. We are in the process of updating our model on Newmont in light of recent events.
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. 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.