Newmont Corporation (TSX: NGT), formerly known as Newmont Goldcorp Corp, is the world's leading gold mining company with Largest gold reserves in the industry. The group also produces copper, silver, zinc and lead. The company's assets are located in North America, South America, Australia, and Africa. Newmont is the only gold producer listed in the S&P 500 Index. As of December 31st, 2019, the group's attributable proven and probable gold reserves were 100.2 million ounces with an aggregate land position of approximately 26,400 square miles.

Investment Rationale

• Solid Performance in Second Quarter of FY20: In the second quarter the group has delivered a solid financial performance with USD 984 million in adjusted EBITDA and USD 388 million in free cash flow, both increased substantially over the prior-year quarter. The group safely and efficiently executed restart plans at the mines previously in care and maintenance, and Newmont's world-class portfolio is well-positioned to deliver an even stronger second half of 2020. The ongoing favourable gold price environment amplifies the group's free cash flow generation. The group's discipline around capital allocation would not change as it continues to invest in profitable projects and provide while maintaining a strong balance sheet.

• Superior Free Cash Flow Generation Across Cycles: The company has consistently generated free cash regardless of the economic cycles. This reflects the resilience of its business model and its world-class asset in top-tier junctions. Also, every USD 100/oz increase in the gold prices has bolstered the group's free cash flow by USD  400 million, which shows the superior competitive advantage of the company against the industry peers.

Source: Company Presentation

• Creating Value for Shareholders: The group’s last 12 projects have delivered an Internal Rate of Return (IRR) of 30%, which is significantly higher. The IRR measures how well a project, capital expenditure or investment performs over time. Further, the group delivered USD 400M FCF/annum per USD 100 increase in gold prices and reported USD 1.4 billion of Free Cash Flow for the FY19. The group reported ~ USD 1 billion of free cash flow by the end of H1FY20, which reflects strong liquidity.

Source: Company Presentation

• Recent price correction provides an opportunity to accumulate: The recent price fall in the stock, led by a reduction in the price of underlying asset “Gold” is offering a good entry point to the investors. We believe that the recent correction in the gold prices is temporary, and the yellow metal is likely to move higher in the wake of heightened uncertainty over global economic recovery. Further, despite a gold price correction over the past few trading session, the company’s average gold realised prices would be higher than the previous quarter and significantly higher on a YoY basis, with a lower cost per ounce. Consequently, the group’s margin and cash flow are likely to increase in the near term.

• Strong Investment Grade Balance Sheet: The company maintain a robust balance sheet with investment-grade credit ratings from credit agencies, which provide the accesses to the capital market at a very competitive price. Further, the group’s Net Debt to Adjusted EBIDTA stood 0.6x, which shows that despite an industry above debt contribution in the company’s balance sheet, there is no balance sheet risk given the strong earnings and free cash flow of the company.

Source: Company Presentation

• Gold Outlook: Gold’s slump this week is forcing investors to ask whether the safe-haven asset is taking a breather or facing a sharper decline. We are bullish on the gold prices and believe that despite a little pull-back, gold, as an asset class would continue to remain in the limelight as the global economic growth outlook is uncertain and COVID-19 cases continue to edging higher day by day. Unprecedented global stimulus, negative real rates and a weakening dollar pushed bullion to a record high of above USD 2,075 an ounce in early August. At the same time, some global banks forecasted even higher prices for gold to achieve. Investors’ favourite way of buying gold this year has been through exchange-traded funds, which have added 870 tons of bullion. Also, we believe that jittered investor’s sentiment and weakening global economy is likely to keep gold in the investor’s limelight in the wake of uncertainties hovering over the revival of the economy.

• Risk Associated to Investment: Performance of the company is subject to volatility in the gold prices and the US Dollar. A strong US Dollar against the basket of major could weigh on the gold prices and in turn, would impact the group’s financial performance and the stock price at the TSX exchange.

2QFY20: Financial Highlights

Source: Company Presentation

• Revenue improved by 5% on a YoY basis to USD 2,365 million primarily due to higher average realized gold prices, partially offset by lower gold sales volumes.
• Average realized price for gold was USD 1,724, an increase of USD 407 per ounce over the prior-year quarter; average realized price for copper was USD 2.91, an increase of USD 0.43 per pound over the prior-year quarter; average realized price for silver was USD 14.70 per ounce, an increase of USD 0.50 per ounce over the prior-year quarter; average realized price for the lead was USD 0.75 per pound, a decrease of USD 0.01 per pound; average realized price for zinc was USD 0.70 per pound, and there were no zinc sales in the prior-year quarter.
• Consolidated operating cash flow from continuing operations increased USD 122 from the prior-year quarter to USD 668 million due to higher realized gold prices. Free Cash Flow also increased to USD 388 million primarily due to higher operating cash flow and lower capital expenditures.
• The group ended the Q2FY20 with USD 3.8 billion of consolidated cash and approximately USD 6.7 billion of liquidity.
• The group reported net debt to adjusted EBITDA of 0.6x.
• Nevada Gold Mines (NGM) attributable gold production was 326 thousand ounces with CAS of USD 797 per ounce and AISC of USD 979 per ounce for the second quarter 2020. EBITDA for NGM was USD 277 million.,
• Gold costs applicable to sales decreased 24% to USD 940 million from the prior-year quarter due to the sites in care and maintenance and Gold CAS per ounce improved 1% to USD 748 per ounce primarily due to lower stockpile and leach pad inventory adjustments, partially offset by lower ounces sold.
• AISC increased 8% to USD 1,097 per ounce from the prior-year quarter primarily due to care and maintenance costs, partially offset by lower sustaining capital spend.
• Net income (loss) from continuing operations attributable to Newmont stockholders for the quarter was USD 412 million or USD 0.51 per diluted share, an increase of USD 411 million from the prior-year quarter primarily due to higher average realized gold prices, an increase in fair value of investments, lower operating costs and lower transaction and integration costs; partially offset by lower sales volumes from certain sites in care and maintenance and the sale of Kalgoorlie.
  

Price Performance

Source: Refinitiv, Thomson Reuters 

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 38.66% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 9.51% and 5.97%, respectively. The institutional ownership in the NGT stood at 84.23%, and strategic ownership stood at 0.32%, respectively. 

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The group has built upon solid fundamentals with Industry-Leading Returns to Shareholders, Liquidity of ~USD 6.7B; cash position of USD 3.8B, Solid track record with >USD 2B in returns through dividends and share buybacks over last six quarters and maintaining competitive advantage through its leading exploration program.

Further, the company reported solid performance in the second quarter of 2020. The group produced 1.3M attributable ounces of gold and reported CAS of USD 748/oz and AISC of USD 1,097/oz. The group resumed operations at all five sites previously placed into care and maintenance and lowered net debt to adjusted EBITDA ratio to 0.6x.

Moreover, the ongoing favourable gold price environment amplifies the group’s free cash flow generation. The group continue to invest in profitable projects while maintaining a strong balance sheet.

Further, we are bullish on the gold prices and believe that despite a little pull-back, gold, as an asset class would continue to remain in the limelight as the global economic growth outlook is uncertain and COVID-19 cases continue to edging higher day by day. Further, ETFs are showing no sign of decline in gold buying, which is likely to send yellow metal prices higher. As the gold prices are likely to remain elevated, we believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansion, higher free cash flow for the company.

We have valued the stock using Price to Cashflow multiple and arrived at target price offering low double-digit upside potential (in % terms). Hence, based on the above rationale and valuation, we have given a “Buy” recommendation on the stock at the closing price of CAD 80.43 on September 23, 2020.

*Recommendation is valid at September 24, 2020 price as well.

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