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 world-class portfolio of assets is 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 of the order of 100.2 million ounces with an aggregate land position of approximately 26,400 square miles.

Investment Rationale (All figures in USD)

• Solid Third Quarter Performance: In the third quarter of 2020, the company's revenue increased 17% from the prior year quarter to $3,170 million primarily due to higher average realized gold prices, however partially offset by lower gold sales volumes. Average realized price for gold was $1,913, an increase of $437 per ounce over the prior year quarter; average realized price for copper was $2.99, an increase of $0.62 per pound over the prior year quarter; average realized price for silver was $21.69 per ounce, an increase of $4.51 per ounce over the prior year quarter; average realized price for lead was $0.73 per pound, a decrease of $0.11 per pound; average realized price for zinc was $1.01 per pound, an increase of $0.20 per pound over the prior year quarter. Moreover, the group ended the quarter with $4.8 billion of consolidated cash and approximately $7.8 billion of liquidity. The group's net debt to adjusted EBITDA stood at 0.4x.
• Superior Free Cash Flow Generation Across Cycles: The company has consistently generated free cash regardless of the economic cycles. This reflects the resilience of the business model and world class asset in top-tier junctions. Also, every US$ 100/oz increase in the gold prices has bolstered the group free cash flow by US$ 400 million, shows a superior competitive advantage of the company against the industry peers. Further, in the third quarter of 2020, the company generated a free cash flow of $1,301 million, as compared to $365 million in the same quarter of the previous financial year, which implies a jump of 256% on a YoY basis. The company's consolidated operating cash flow from continuing operations increased 101% from the prior year quarter to $1,597 million due to higher realized gold prices.

Source: Company Presentation

• Maintaining Financial Flexibility: At the end of the third quarter, the company has reported liquidity position of $7.8bn with a cash position of $4.8bn, which implies adequate liquidity to cover its obligations. Moreover, the company maintain a robust balance sheet with an investment-grade credit rating, which provide the accesses to the capital market at a very competitive price. Further, the group’s Net Debt to Adjusted EBIDTA stood 0.4x, which shows that despite higher debt contribution in the company’s balance sheet compared to industry, there is no balance sheet risk given the strong earnings and free cash flow with the company.
• Realized Gold Prices to Remain Higher: During Q3 2020, the average realized price for gold stood at $1,913, an increase of $437 per ounce over the prior year quarter. Going forward, realization prices are expected to remain higher, given the uncertainty hovering over the world economic recovery. We believe that gold would continue to remain in the investor’s limelight. Despite a recent price correction in the gold prices on vaccine news, we believe that gold is likely to continue to oscillate between $1,850-$1,900/oz for coming few quarters; which, in turn, would bolster the margin.
• Industry-leading Dividend Framework: Newmont’s Annualized dividend of $1.60 per share is the highest in the gold sector. Further, the company has announced dividend framework that maintains $1.00 per share sustainable base dividend. The company’s strong financial position and world-class portfolio support the higher dividend as the group continue to progress the most profitable projects. Moreover, the company is featuring an industry-leading dividend yield of 2.7%, which exceeds the median yield of the S&P 500 Index.

Source: Company Presentation

Risk Associated to Investment: Performance of the company is subject to volatility in the gold prices and U.S Dollar. A strong U.S 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.

3QFY20: Financial Highlights

Source: Company Filing

• During the third quarter of 2020, the company’s Attributable gold production decreased 6% to 1,541 thousand ounces from the prior-year quarter primarily due to ongoing COVID related impacts at Yanacocha, Cerro Negro and Éléonore as the operations continued to ramp up in the third quarter from care and maintenance in addition to the sale of Red Lake and Kalgoorlie, which was partially offset by higher production at Peñasquito and Musselwhite.
• Attributable gold equivalent ounce (GEO) production from other metals increased 16% to 273 thousand ounces primarily due to operations at Peñasquito receiving sustained community support compared to the prior year blockade and higher recoveries at Boddington.
• Revenue during the quarter under consideration increased 17% from the prior year quarter to $3,170 million primarily due to higher average realized gold prices; however, revenue was partially offset by lower gold sales volumes.
• Average realized price for gold was $1,913, an increase of $437 per ounce over the prior year quarter; average realized price for copper was $2.99, an increase of $0.62 per pound over the prior year quarter; average realized price for silver was $21.69 per ounce, an increase of $4.51 per ounce over the prior year quarter; average realized price for the lead was $0.73 per pound, a decrease of $0.11 per pound; average realized price for zinc was $1.01 per pound, an increase of $0.20 per pound over the prior year quarter.
• Consolidated operating cash flow from continuing operations increased 101% from the prior year quarter to $1,597 million due to higher realized gold prices, partially offset by lower sales volumes.
• Free Cash Flow also increased to $1,301 million against $388 million reported a year before period, primarily due to higher operating cash flow and lower capital expenditures.

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 9.5% 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)

Peers Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Newmont has built upon fundamentals with Industry-Leading Returns to Shareholders, the liquidity position of $7.8bn, including a cash position of $4.8bn. The company has maintained a solid margin profile over several quarters. Moreover, the margin profile improved consistently, which is commendable.  

Source: Refinitiv, Thomson Reuters

Further, the company reported a solid 3QFY20 result and significantly outperformed the industry in terms of margin profile and RoE.

Source: Refinitiv (Thomson Reuters)

Further, the company has reported positive 2020 outlook, with 2020 attributable gold production is unchanged at approximately 6.0 million ounces, and the company expects to produce approximately 1.0 million gold equivalent ounces from co-products. Gold CAS is expected to be $760 per ounce, and gold AISC is expected to be $1,015 per ounce. Newmont's capital expenditure for 2020 is expected to be approximately $1.4 billion as the company continues to progress the majority of its development and sustaining capital projects, including Tanami Expansion 2, developing the sub-level shrinkage mining method at Subika Underground and advancing laybacks at Boddington and Ahafo.

Further, 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. 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 and higher free cash flow for the company.

Therefore, based on the above rationale and valuation, we have given a "Buy" recommendation at the closing price of CAD 77.89 on December 09, 2020.

1-Year Price Chart (as on December 09, 2020). Source: Refinitiv (Thomson Reuters)

 

*Recommendation is valid at December 10, 2020 price as well.

*All data in USD, except share price.

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