Newmont Corporation — A high-dividend safe haven

Newmont’s Q222 results are expected to be released in the week commencing 25 July. After the end of the quarter however, for the purposes of this report, we have updated our assumptions for metals prices, costs and production from NGM and Pueblo Viejo, which were announced by their operator, Barrick, on 14 July.

A summary of the changes in our metals prices assumed for both Q222 and the remainder of the year is as follows:

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 left our production forecasts unchanged for the quarter, with the exception of production from NGM and Pueblo Viejo, which were announced by Barrick last week. We have also adjusted our cost assumptions to reflect continuing inflationary pressure into Q2, which we also expect to persist for the remainder of the year. While this cost pressure relates to the obvious categories, such as commodities and diesel, in this case we also believe that it has manifested itself in a tight market for specialised labour, especially in Canada and Australia. Given this environment, a summary of our updated production and cost assumptions for Q2 and for the remainder of the year is as follows:

In addition, we have adjusted our financial forecasts to reflect Newmont’s announcement, on 5 July, that it had reached a profit-sharing agreement at Peñasquito, whereby it will pay its represented workforce an uncapped profit-sharing bonus up to 10%, with an immediate cost equivalent to US$70m related to FY21, which we understand will be recognised in Q222 and not adjusted out. 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$2.230/share (vs US$2.818/share previously) for FY22 compares to the market consensus, by quarter, as follows:

Although our forecasts are now below the bottom of the analysts’ range, we believe that this adequately reflects the recent declines in the gold price, which we suspect may not yet be factored in to all other analysts’ estimates.

While Edison also does not make explicit cash flow forecasts on a quarterly basis, readers should note that Newmont typically experiences higher than average cash tax payments in the second quarter of any financial year (as in the first quarter) as a result of the ‘truing up’ process. In Q222, it also closed its acquisition of a 5% stake in Yanacocha from Sumitomo for US$48m, which will result in a further short-term outflow of cash (albeit in the form of a long-term investment).

Newmont’s dividend for Q122 was 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.

Our approach to the valuation of Newmont has remained unchanged since our initiation note (see The sustainable leader, published on 9 February 2021) and readers are directed to this note for a fuller explanation of the methodologies involved. The following is an update of our valuation in light of our updated forecasts for FY22.

Newmont is a multi-asset company that has shown a willingness and desire to trade assets in the past to maintain production, reduce costs and maximise shareholder returns. As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY22, in the case of Newmont, we have opted to discount forecast dividends back over six years from the start of FY22 and to then apply an ex-growth terminal multiple to forecast cash flows in that year (FY27) based on the appropriate discount rate. In the normal course of events, we would exclude exploration expenditure from such a calculation on the basis that it is a discretionary investment. In the case of Newmont, however, we have included it in our estimate of future cash flows on the grounds that it will be a critical component of ongoing business performance in its ability to continually expand and extend the lives of the company’s assets via exploration.

In this case, our estimate of Newmont’s ‘terminal’ pre-financing cash flow in FY27 has moderated, very slightly, from US$4.39/share to US$4.35/share. On this basis, applying a (real) discount rate of 6.47% (calculated from a nominal expected equity return of 9% and decreased long-term inflation expectations of 2.2376% cf 2.4867% previously, as defined by the US 30-year break-even inflation rate – source: Bloomberg, 19 July), our terminal valuation of the company at end-FY27 is US$74.84/share cum-dividend (cf US$77.76/share previously). However, note that this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY27. The valuation increases to US$106.85/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$81.10/share as at the start of FY22. It should also be noted that our valuation is inherently conservative in that it assumes that the long-term price of gold will decline from current levels to US$1,524/oz in real terms by FY27 (before levelling out). If the gold price instead remains at current levels in real terms (US$1,710/oz at the time of writing), our valuation increases to US$77.24/share cum-dividend in FY27 and to US$60.77/share currently in FY22 (with the added assumption that mining at NGM does not then revert to the reserve grade in that year on account of the relatively high sustained level of the gold price).

Note that this (absolute) analysis inherently excludes any 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 Newmont.

Newmont’s valuation on a series of commonly used measures, relative to its peer group of the 10 largest publicly quoted senior gold producers, is as follows.

From the table above, it can also 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 a majority of instances. Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 32.4% for its dividend yield to match those of its peers. Based on our forecasts, we estimate its share price would have to rise 25.9%.

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: