Newmont Corporation — Q3 forecasts refined

Newmont’s Q322 results are scheduled for release on 1 November. This report updates our forecasts for metals prices, costs and production in the wake of quarter’s end. As in FY21, Newmont expects both (higher) production and (lower) costs to be weighted towards the second half of the year in FY22, approximately in the ratio 47:53. For the purposes of this report, we have updated our production and cost forecasts to reflect guidance at the time of Q222 results as well as a greater than expected weather impact on operations in the tropics and southern hemisphere in Q3. We have also updated our production estimates for NGM and Pueblo Viejo, which were announced by Barrick yesterday. Given this, a summary of our updated production and cost assumptions for Q3 and for the remainder of the year is as follows:

In addition to production and cost forecasts, we have updated our metals price forecasts for both Q3 and Q4. As is our custom, we are using the spot price of gold at the time of writing as the basis of our short-term forecasts. In the case of gold, however, our forecast achieved price for Q3 is lower than the average spot price of the quarter of US$1,727/oz on account of an adjustment downwards for approximately 200koz of gold provisionally priced at the end of Q2 at a time when prices were declining. A summary of our updated metals price forecasts for both Q3 and Q422 is as follows:

In addition, Newmont made a one-off payment to Caterpillar of US$34m in Q3 in respect of the battery electric haul truck collaboration between the two parties (out of a total of US$100m), which we expect to be included in ‘advanced, projects, research and development’. Note that this item is in addition to Newmont’s official guidance for ‘advanced, projects, research and development’ spend for the full year. In the light of these changes, our updated financial forecasts for Newmont for FY22, by quarter, are as follows:

Our basic adjusted EPS forecast of US$1.832/share for FY22 (cf US$2.230/share previously) compares to the market consensus, by quarter, as follows:

While Edison does not make explicit cash flow forecasts on a quarterly basis, we note one specific item in Q3 that will affect cash flows during the quarter. On 5 July, Newmont announced that it had reached a profit-sharing agreement at Peñasquito, whereby it was to pay its represented workforce an uncapped profit-sharing bonus up to 10%, with an immediate cost equivalent to US$70m related to FY21. This expense was accrued during Q2, but we understand that the actual payment was made in July, which will result in an adjustment to working capital in Q3.

Newmont’s Q1 and Q222 dividends were maintained at US$0.55/share. At the time of its Q320 results in October 2020, Newmont unveiled a new dividend framework whereby it formally rebased its dividend to a ‘base’ payout of US$1.00/share (or US$0.25/share per quarter) at a gold price of US$1,200/oz, but also stated explicitly that it would return 40–60% of incremental attributable free cash flow that it generated above a gold price of US$1,200/oz to shareholders. Under this framework, Newmont then augments its ‘base’ payout in increments of US$0.60–0.90/share per year (or US$0.15–0.225/share per quarter), evaluated in gold price increments of US$300/oz for gold prices above US$1,200/oz, with the goal of targeting 40–60% of incremental free cash flow above a gold price of US$1,200/oz returned to shareholders. Thus, a (sustainable) gold price at US$1,800/oz should (on this basis) result in a quarterly dividend of US$0.55/share, whereas a gold price below that level could result in one of US$0.40/share. However, it is worth noting that Newmont affords itself a degree of latitude in the level of the ultimate payout in that, should it decide to pay out nearer 60% of incremental attributable free cash flow to shareholders that it generates above a US$1,200/oz gold price, rather than 40%, then there is scope for the quarterly dividend to remain at the higher level (ie US$0.55/share) even if the gold price dips below the US$1,800/oz level. As such, we have left our dividend forecasts unchanged for the remainder of FY22 notwithstanding the fact that the gold price is, at the time of writing, below US$1,800/oz. However, we recognise a risk to this payout at these levels in the event that the gold price continues to weaken under pressure from aggressive Federal Reserve monetary policy tightening.

On 15 September, Newmont announced that, in the light of unprecedented and evolving market conditions, the war in Ukraine, record inflation, the rising prices of commodities and raw materials, prolonged supply chain disruptions and competitive labour markets, it will delay its full funds investment decision regarding the Yanacocha Sulphides project in Peru to H224 (approximately two years later than had previously been intended). To complement this development, Newmont also announced that it had appointed Dean Gehring as chief development officer (Peru) to lead its Yanacocha operations, generally, and its Sulphides project, in particular.

Ahead of the full funds investment decision on the Sulphides project, Newmont has said that it will continue advanced engineering and long-lead procurement activities to de-risk the project, including the construction of two water treatment plants, with an anticipated initial spend of around US$350m over the next two years (albeit this expenditure will take the form of accretion, rather than capex). Following the investment decision anticipated in H224, the project is expected to be developed over a three-year period, adding average annual production of approximately 525koz gold equivalent ounces per year for the first five full years of operation (now forecast by Edison to start in FY28 cf FY27 previously). Aside from the delay in achieving full production that the delay in making a full funds decision will engender, we also forecast that it will materially alter the timing and phasing of capital expenditure. Whereas Newmont had provided guidance at the end of FY21 that capex would trend downwards from FY22 and FY23 onwards, we now expect a material portion of capex (especially related to the Yanacocha Sulphides project) to be shunted from FY23 and FY24 into FY25–27, approximately as shown in the graph below:

On 23 September, Newmont announced that it had sold its 18.75% shareholding in the MARA project in Argentina to Glencore for a consideration of US$124.9m upon closing plus a US$30m deferred payment upon commercial production being achieved (subject to an annual interest charge of 6%, but capped at US$50m).

The MARA project was formed as a joint venture between Yamana Gold, Glencore and Newmont in December 2020 following the integration of the Minera Alumbrera plant and mining infrastructure into the Agua Rica project. A core asset for Yamana and Glencore, MARA has proven and probable mineral reserves of 5.4Mt of copper and 7.4Moz of gold contained in 1,105Mt of ore (Yamana and Glencore reporting standards based on pre-feasibility study) with an initial mine life of 28 years. Under the new structure, Yamana will remain the operator with 56.25% of MARA, with Glencore owning the remaining 43.75% interest.

Although Newmont’s announcement regarding this transaction was made on 23 September, we anticipate that it will not close and that Newmont will not receive its initial tranche of cash consideration until Q422.

We expect Newmont to provide further updates regarding the progress of its Tanami Expansion 2 and Ahafo North projects, specifically, towards the end of the year or the beginning for FY23.

Notwithstanding an evolving macroeconomic environment, as well as evolving development pipeline, our approach to the valuation of Newmont has remained unchanged since our initiation note (see The sustainable leader, published on 9 February 2021). In our last note, we valued the company at US$81.10/share assuming 2.0% growth in real, long-term cash flows per share per annum (ie the same as the long-term, real increase in the gold price per annum). This valuation was inherently conservative in that it excluded any explicit value to Newmont from its other development assets, such as Coffee, Galore Creek, Conga, Norte Abierto and Nueva Union, which together represent combined reserves and resources of 53.94Moz attributable to the company.

While preserving the same basic profile, the consequences of shifting capex for Yanacocha Sulphides, in particular, from FY23 and FY24 into FY25–27 has had a material effect on our forecasts for pre-financing cash flows per share in those years (on which our valuation is based), as shown in the graphs below:

In empirical terms, our estimate of Newmont’s ‘terminal’ pre-financing cash flow in FY27 has moderated from US$4.35/share to US$3.54/share. On this basis, applying a (real) discount rate of 6.71% (calculated from a nominal expected equity return of 9% and decreased long-term inflation expectations of 2.1456% (cf 2.2376% previously, as defined by the US 30-year break-even inflation rate – source: Bloomberg, 11 October), our terminal valuation of Newmont as at end-FY27 is US$52.73/share or US$48.12/share as at the start of FY22. However, note that this valuation is again based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY27. It increases to a terminal value of US$76.62/share if growth in real cash flows after FY27 amounts of 2.0% per annum (ie the minimum that might be expected from the average historical annual increase in the real price of gold of 2.0% pa) and to US$64.30/share as at the start of FY22 (cf US$81.10/share previously).

Newmont’s valuation on a series of commonly used measures, relative to its peer group of the nine largest publicly quoted senior gold producers, is provided below.

From the table above, it can be seen that while Newmont continues to command a premium rating relative to its peer group on most valuation measures, it remains cheap with respect to its dividend yield in at least 20 out of 24 instances (ie 83%) over the next three years. Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 60.8% for its dividend yield to match those of its peers. Based on our forecasts, we estimate its share price would have to rise 54.9%.

As previously, one further observation concerning the comparability of the above measures is merited. Given its policy of proportionately consolidating its interest in NGM and that it owns 100% interests in the majority of its remaining mining operations (with the exception of Merian), estimates of cash flow in particular are also close to estimates of cash flow attributable to shareholders (Newmont estimates that 99.8% of free cash flow was attributable to the company in FY21). This is in contrast to a number of its peers, where earnings and cash flow from assets not 100%-owned tend to be fully consolidated and therefore may not so easily approximate cash flow attributable to shareholders, making direct comparison using these measures either difficult or, potentially, misleading.

Based on Newmont’s average historical P/E ratio of 23.9x current year earnings over the past nine years, from FY13 to FY21, and its average historical yield of 1.7% over the same timeframe (excluding special dividends), a summary of our updated valuation of the company over 12 measures of value over the next three years is as follows: