Newmont Corporation — Re-evaluating prospects with respect to guidance

Newmont’s Q4/FY22 results, released on 23 February, exhibited stronger production than we had anticipated, albeit accompanied by costs that generally stuck at higher levels then we had forecast, especially at its African operations. As a result, production and costs for the full year met the company’s guidance of 6.0Moz at a cost applicable to sales of US$900/oz to within its usual tolerance range of ±5%. Six of Newmont’s mines (Musselwhite, Yanacocha, Merian, Tanami, Ahafo and Akyem) outperformed our production expectations for the three-month period, while seven performed in line. As a consequence, the ratio of production in H2 compared to H1 was 52:48, which was exactly in line with the company’s prior guidance.

A summary of Newmont’s production and cost results for the full year, by geographical area and by quarter, relative to our prior expectations is presented in the table below:

In addition to outperforming our production expectations, Newmont also achieved a gold price that was 1.6% higher than that prevailing over the quarter, at US$1,758/oz (cf US$1,731/oz). It also sold approximately 1.0% more gold than it produced, which, combined with the production outcome, led to a 2.4% (or US$282m) positive variance in sales relative to our forecasts, albeit this was almost exactly counterbalanced by a US$274m (or 4.4%) negative variance in costs. Financial results beyond this in Newmont’s official accounts were distorted by two material exceptional charges relating to impairments and also reclamation and remediation. However, Exhibit 2 (below) strips these (and all other adjusting items) out of their individual line items to present Newmont’s results for both the quarter and the full year on an underlying basis (marked with an asterisk and highlighted in bold). In this context, it may be seen that, in as much as Newmont’s results were below our expectations (which were anyway at the top of the analysts’ range), this could be almost entirely attributed to a negative variance of US$57m in ‘other income, net’ and a US$27m negative variance in the interest expense for the quarter. In almost all other respects, Newmont either met, or exceeded, our expectations.

Notwithstanding its performance relative to Edison’s expectations, Newmont’s performance for the quarter was very much in line with the market consensus, as shown below:

Concurrent with its Q422/FY22 results, Newmont presented its medium- to long-term production outlook to investors. A comparison of Newmont’s guidance with both its prior (December 2021) equivalent guidance and Edison’s (updated) production and cost assumptions for the period FY23–27 is provided in the table below:

In general, it may be seen that Newmont has reduced its production guidance by approximately 300koz per annum (albeit declining to only 100koz by FY26), while it has increased its cost guidance by c US$150/oz (or c 20%) in the near term, albeit by just c US$50/oz (or 6.7%) in the longer term. Edison has now brought its production and cost forecasts into line with the company’s guidance, involving the changes shown. As a result, Edison’s forecasts are now, in general, in the middle of the range of guidance provided by Newmont, with the exception of FY23 costs (for which Edison is at the high end of the range) and FY25 production, when Ahafo North and the Tanami Expansion 2 project are anticipated to be coming on stream (and for which Edison is also at the top end of the range).

In addition to cost and production guidance for FY23–27, Newmont has also provided capex guidance as follows:

However, while Newmont’s production guidance over the next decade includes production from the Yanacocha Sulphides project (effectively from H227), its development capital outlook only includes spend related to Yanacocha Sulphides for FY23 and FY24 ahead of an investment decision planned for late 2024, but not thereafter. In order to match production with capex therefore, Edison has added our estimate of development capital expenditure related to the Yanacocha Sulphides project for years beyond FY24 to Newmont’s guidance for development capital expenditure in those years, such that our estimates for total capital expenditure over the next five years (inclusive) is as follows:

Readers’ attention is drawn to the uplift in Edison capex estimates compared with the mid-range of guidance of US$375m in FY25, US$1,016m in FY26 and US$201m in FY27 (total US$1,572m), which we believe is consistent with Newmont’s Yanacocha Sulphides project capex estimate of c US$2bn.

Whereas in FY22, Newmont anticipated production to be weighted towards the second half of the year in the approximate ratio 47:53 H1:H2, in FY23, it expects production to be weighted towards the second half of the year in the ratio c 45:55.

In the light of Newmont’s Q422 results as well as its updated guidance, we have calculated the following operational forecasts for the company’s geographical regions for FY23:

Assuming a gold price of US$1,868/oz for the remainder of the year (cf US$1,749/oz for the full year, previously) and an effective tax rate for the year of 34% (in the middle of guidance of 32–36%), this operational performance translates into financial forecasts for Newmont for FY23 as follows:

This basic adjusted EPS forecast of US$2.141/share (vs US$1.761/share previously) for FY23 compares to the market consensus, by quarter, as follows:

Readers’ attention is drawn to the relatively wide range of consensus forecasts for FY23, which we would attribute to varying gold price assumptions.

Newmont’s dividend framework remains the same as that set out in Q320, whereby it formally rebased its dividend to a ‘base’ payout of US$1.00/share (or US$0.25/share per quarter), albeit this has now been recalibrated to a gold price of US$1,400/oz – being the price at which it calculates its reserves (cf US$1,200/oz previously). Its intention is that this will represent a stable base dividend at reserve pricing of US$1.00/share. It will then review the incremental portion of the dividend on an annual basis, considering the cash flows that it expects to generate at higher gold prices and provide an incremental dividend range that it would expect to pay in addition to its base dividend. This will typically be evaluated in gold price increments of US$300/oz from the ‘base’ level of US$1,400/oz with the expectation that every US$300/oz by which the gold price exceeds this level in FY23 will result in the base dividend being augmented by approximately US$0.10–0.20/share per quarter (or US$0.40–0.80/share per annum), all other things being equal. For the full year therefore, Newmont has a targeted payout range of US$1.40–1.80/share. As such, its dividend of US$0.40/share for Q422 was exactly at the mid-point of this range on an annualised basis. This gives rise to a number of possibilities for future quarterly dividends in FY23:

In its philosophy, Newmont has made a virtue of a stable dividend. At the same time, we believe that its payout of US$0.40/share in Q422 signals that future quarterly payments at the same level (ie US$0.25/share per quarter ‘base’ dividend plus US$0.15/share per quarter ‘incremental’ dividend) are acceptable. As a consequence, at gold’s current level above US$1,700/oz, we anticipate that Newmont’s FY23e quarterly dividend level will remain at least US$0.40/share per quarter. Should the gold price move away from this level however, we think that the following dividend payout rates are possible (subject to cash flow, cash requirements, inflation etc):

For the moment, we have also made these assumptions the basis of our FY24 dividend forecast of US$1.40/share (in combination with our gold price forecasts presented in Exhibit 13), although we note that the board assesses the variable component of the dividend annually in alignment with its business planning cycle and considering the prevailing macroeconomic environment and the required level of reinvestment in the business. As such, it is worth reminding investors that the dividend framework is non-binding and that the declaration and payment of future quarterly dividends remains at the discretion of Newmont’s board of directors and will depend, among other things, on the company’s financial results, cash flow, cash requirements and future prospects, etc.

In addition to its financial results, on 23 February, Newmont also announced the results of its annual resource and reserve estimation. Full details of the updated reserves and resources statement and of the changes in the categorisations of reserves and resources, by asset, are available on Newmont’s website. However, a brief summary is provided below:

The following table summarises the year-on-year changes in Newmont’s attributable resources and reserves, by asset. Readers should note that, ordinarily, Newmont reports its resources exclusive of reserves. In this case, however, we have aggregated reserves with resources to provide an indication of the full mineral inventory attributable to the company.

Newmont’s ongoing target is to replace approximately two-thirds of its mining depletion through additions ‘via the drill bit’, with 100% replaced over a five year period, including acquisitions.

In FY23, Newmont’s attributable exploration expenditure for managed operations is expected to be c US$200m (cf US$250m in FY22) plus a further US$25m for its share of its non-managed joint ventures’ exploration (cf US$45m). Approximately 80% of the total will be dedicated to near-mine expansion programmes with a focus on extending mine life, developing districts and discovering new opportunities in the most favourable jurisdictions. The remaining 20% will be allocated to the advancement of greenfields projects (unchanged cf FY22).

Geographically, the company expects to make approximately 32% of its investment in North America (cf 38% in FY22), 30% in South America (cf 23%), 20% in Australia (cf 17%) and 18% in Africa and other locations (cf 22%). The table below briefly summarises the percentage of Newmont’s exploration budget accounted for by each region compared to the percentage of its reserves currently accounted for by each region.

As Newmont sees it, the challenge in discovering the next generation of mines is to be able to identify deeper, so-called ‘blind’ deposits that are under cover, rather than those originally discovered from outcrops (readers are directed towards Newmont’s 2021 Exploration update presentation for detailed information on this strategy). Its philosophy towards exploration is therefore to understand completely the geological systems in which it has a presence on both a regional and district scale – a goal that it believes cannot be achieved by operating a decentralised model. Immediate examples of domains with such multi-million ounce endowments include (but are not limited to) the Tintina Province in the Yukon, the Golden Triangle in British Columbia, the Carlin Trend, the Guiana Shield, the Superior Province in Canada, the Yilgarn, the West African Craton, the Nubian Shield and the Deseado Massif in Chile/Argentina, where, in addition to reserve expansion potential, Newmont’s existing presence also makes them attractive from the perspective of offering synergies with existing operations. In this context, it is worth noting that c 80% of Newmont’s reserves are located within easy trucking distance of an existing operating site and are therefore able to contribute relatively easily to low-cost, value-focused production for minimal investment.

As outlined earlier in this note, Edison’s forecasts for production and costs applicable to sales have now been brought into line with Newmont’s guidance over the next five years, while our forecast for capex (including the Yanacocha Sulphides project) is as shown in Exhibit 6. Otherwise, our approach to the valuation of Newmont has remained unchanged since our initiation note in February 2021 (see The sustainable leader, published on 9 February 2021). Our longer-term gold price forecasts (in real terms) remain unchanged – and relatively conservative – as follows:

In our methodology, we have opted to discount forecast dividends back over six years from the start of FY23 and then to apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY28 – when forecast capex is forecast to fall back from ‘elevated’ to ‘ambient’ levels) based on the appropriate discount rate. We would normally 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 the wake of our adjustments, our forecast of Newmont’s operational and pre-financing cash flows over the next six years is as follows:

Readers should note the decline in forecast operational and investing cash flows in FY26, which corresponds with our estimate of peak capex, including Yanacocha Sulphides, in particular (see Exhibits 5 and 6).

On the basis of these cash flow estimates, our estimate of ‘terminal’ pre-financing cash flow is now US$3.89/share in FY28 (cf US$3.62/share in FY27 previously). Applying a (real) discount rate of 6.52% (calculated from a nominal expected equity return of 9% and decreased long-term inflation expectations of 2.3303%, cf 2.2305% previously, as defined by the US 30-year break-even inflation rate – source: Bloomberg, 7 March) to this estimate, our terminal valuation of the company at end-FY28 is US$59.74/share (cf US$54.74/share at end-FY27 previously) or US$47.30/share in FY23 (cf US$50.14/share previously). However, this valuation is based on the inherently conservative assumption of zero growth in (real) cash flows beyond FY28. The terminal valuation would increase to US$87.91/share (cf US$79.99/share previously) if growth in real cash flows after FY28 amounts to just 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 the valuation at the start of FY23 to US$66.59/share (cf US$68.47/share previously). It also compares with results of US$60.02/share (assuming 0% long-term growth in cash flows beyond FY28) and US$84.80/share (assuming 2% growth in long-term cash-flows beyond FY28) if the gold price remains at current levels in real terms (US$1,868/oz), effectively indefinitely (with the added refinement that mining at Nevada Gold Mines 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 62.58Moz attributable to Newmont.

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