Newmont Corporation — The sustainable leader

Newmont is the world’s largest gold mining company. It has a global operating model and is building upon a firmly embedded a culture to lead the gold sector in creating value for shareholders by 1) delivering superior operational execution, 2) sustaining a global portfolio of long-life assets and 3) leading the sector in profitability and responsibility. At the same time, it has a broadly diversified portfolio of assets in geo-stable areas and represents a liquid, conservative and attractive defensive investment in a sector that has not always generated acceptable returns for its shareholders. Total attributable reserves and resources amount to 199.3Moz and, over the course of the coming decade, its target is to produce a sustainable 6.0–7.0Moz gold pa plus an additional 1.4–1.6Moz of co-product gold equivalent ounces (AuE) at an all-in sustaining cost (AISC) declining to US$800–900/oz by FY24. In addition to its existing production base, Newmont has three major new projects either in, or near, development (the Tanami Expansion 2, Ahafo North and Yanacocha Sulphides) and is entirely unhedged with respect to the gold price.

Unsurprisingly, the single biggest single external factor influencing the market for gold equities and Newmont’s share price is the gold price itself. Over the course of the past twelve months, the gold price has increased by 17.0%, from US$1,570/oz to US$1,838/oz (NB Newmont calculates that it generates an additional US$400m per annum for every US$100/oz by which the gold price appreciates), while the NYSE Arca Gold BUGS index (of which Newmont is a constituent) has increased by 24.8% – demonstrating that, in the current environment, gold equities have reprised their geared relationship to the gold price. While we can make a case for speculation driving the gold price to either US$3,000/oz (eg more government stimulus and monetary base expansion) or US$1,400/oz (Federal Reserve total US monetary base tapering), in our valuation of Newmont in this report, we have taken a balanced view and assumed that it will fall back in real terms, before flattening off at US$1,524/oz in 2027. Note that this treatment is conservative in that, in the long-term, the gold price has traditionally increased at an average rate of 2.0% pa in real terms. Moreover, while we accept that a short period of Federal Reserve tapering is a possibility, we do not believe that the fundamental reversal of the gold bull market will occur until real interest rates in the US (defined as the Fed Funds rate less the CPI inflation rate) exceed 4% on a sustainable basis – on which basis we believe that gold assets should form a core part of any balanced portfolio (see A golden future, published on 11 June 2020).

Newmont has a highly disciplined and relatively conservative management philosophy. No further M&A is required and the portfolio of world class mines in top tier jurisdictions should support steady to rising production for the next 20+ years. The company tests all capital investments based on a bottom of cycle forecast of US$1,200/oz gold and seeks to maintain its base dividend and net debt/ EBITDA below 1x at this gold price. Management teams work rigorously within this framework, ensuring good capital discipline at the corporate level and a declining cost profile. This enables the company to return excess cash from higher gold prices and does this through a combination of incremental variable dividends and share buy-backs. Under the president and CEO, Tom Palmer (only the 10th CEO in the company’s 100-year history), Newmont has continued to advance its industry-leading ESG framework, with ambitious targets and initiatives across the business. In recognition of this, the company has been ranked the number one gold mining company in the Dow Jones Sustainability Index for six years in succession, from 2015 to 2020.

Based on nine measures across three methodologies, our blended average valuation of Newmont’s shares is US$76.34/share. Unsurprisingly, our valuation of the company is extremely sensitive to the cost of equity assumed. Within this context, it is notable that our blended average valuation of US$76.34/share is within 5.0% of our valuation of Newmont assuming an 8.4% nominal (6.3% real) cost of equity (derived from long-term equity returns of 9% and 30-year break-evens implying future inflation of 2.5%). Alternatively, we calculate that Newmont’s current share price of US$59.30/share discounts a real cost of equity of 7.7%, which is approximately double that implied by conditions prevailing in financial markets (see Exhibit 19 and Exhibit 20). Were these conditions to become accepted as the ‘new normal’, we estimate that Newmont’s share price could rise to in excess of US$100/ share. This puts it on a premium relative to its peers, but may be justified by the company’s size, track record and the fact that almost all of its operations are in top tier jurisdictions (see Exhibit 2). However, Newmont remains cheap relative to its own historical valuation measures which, on average, also imply a share price over US$100/share.

Edison’s valuation of Newmont in absolute terms, in particular, is acutely sensitive to assumptions surrounding the future rate of real gold price appreciation. The absolute valuations quoted in the Valuation paragraph above, in particular, assume an ex-growth terminal multiple. However, in general, they increase by c 17% for every one percentage point of real, long-term cash flow growth assumed. For example, long-term revenues growing at a real 2.0% pa (ie the average long-term real rate of appreciation of the gold price) combined with flat real terms costs would imply an average 6.3% increase in cash flows over a five-year period (assuming a 29% initial margin condition) and this assumed growth would, in turn, justify a price for Newmont shares in excess of US$100/share. In the shorter term, we estimate that a 10% increase in the gold price above our assumptions will result in EBITDA on average 16.5% higher than our expectations in the period FY21–23, with EPS 39.6% higher and cash flow per share 18.0% higher (and vice-versa for a lower gold price).

Newmont had net debt on its balance sheet of US$1.8bn at the end of Q320, which equated to a gearing (net debt/equity) ratio of 8.2% and a leverage (net debt/[net debt+equity]) ratio of 7.5%. We expect net debt to have remained broadly flat in Q420 under the influence of an accelerating capex programme. Even at this level of net debt, however, we estimate that end-FY20 gearing will amount to just 9.0% and leverage just 8.3%. Hereafter, we forecast that Newmont will generate cash at a rate approaching US$5bn pa, of which around c US$2.2bn will be expended in capex and a further c US$1.5bn in dividends to shareholders. On this basis, we would expect Newmont to be net debt free in late in FY22, although this is subject to future investment decisions and may also be delayed depending on the extent to which the company buys back shares under its share buyback programme (sanctioned, so far, at a rate of US$1bn over the next 18 months). In the meantime, it boasts a dividend that puts it among the top five yielding large-cap global gold mining stocks globally and well in excess of the S&P 500 index’s dividend yield (see Exhibit 23), as well as having a share buyback programme of a similar order of magnitude.

Based in Denver, Colorado, Newmont is the world's largest gold mining company with approximately 31,600 employees and a world-class portfolio of assets in Nevada, Colorado, Ontario, Quebec, Mexico, the Dominican Republic, Australia, Ghana, Argentina, Peru and Suriname. It is the only gold producer in the S&P 500 Index and is widely recognised for its ESG practices and as a leader in value creation, safety and mine execution.

Newmont was founded by William Boyce Thompson in 1916 as a holding company for his mineral and mining interests. According to company folklore, the name Newmont is a conflation of Montana (where Colonel Thompson was born and raised) and New York (where he made his fortune).

After joining his father in a number of mining and lumber ventures in the 1890s, Colonel Thompson moved east to New York to become a mine promoter and stockbroker at Hayden, Stone & Co, where he amassed a fortune developing low-grade, large-scale porphyry copper deposits. His successes included the Shannon Copper Company (now part of the Morenci open pit in Arizona, the largest in the US), Nevada Consolidated (which eventually became a part of Kennecott), Mason Valley (where a smelter town was named after him), the Magma mine at Superior, Arizona, which became a major copper producer, and the promotion of the high-grade Inspiration Copper Company also in Arizona. In addition to copper, he also financed lead, zinc and coal mines, steelworks and promoted the Nipissing Silver deposit in Ontario and his interests were distributed from as far north as Canada to as far south as Peru. His portfolio of non-mining interests included refinancing the American Woollen Company, launching the Cuba Cane Sugar Company, gaining control of Pierce-Arrow Motors, organising the Wright-Martin Aero Company and serving on the boards of the Metropolitan Insurance Company, Sinclair Oil and Gulf Sulphur, among others. He retired from the New York stock exchange in 1915 and created Newmont Mining Corporation in 1916 to house his mining interests.

Thompson made a number of trips to Russia around the time of the revolution ostensibly to encourage the formation of a democratic government. For his work there, he was a awarded the honorary title of colonel by the American Red Cross.

In the US, he was prominent behind the scenes in the Republican party, a presidential elector and party chair. He served on the board of the Federal Reserve Bank of New York from 1914 to 1919 and was twice a delegate to the Republican National Convention in 1916 and 1920. In 1921, he declined nomination for a cabinet post under President Warren Harding.

He became ill in 1925, while scouting for mining properties in South Africa, and died of pneumonia in 1930. He is buried at Sleepy Hollow cemetery on the outskirts of New York City.

By the time of his death, Newmont Mining had developed into one of the world’s largest financiers of copper mining projects.

One of Newmont’s earliest investments included grassroots funding of Sir Ernest Oppenheimer’s Anglo American Corporation of South Africa in 1917 (the forerunner of today’s Anglo American (AAL) and, then, more of a diamond company than a gold one), giving Newmont a 25% interest in the newly created company. Note that, had Newmont followed its interest in AAL, then 25% of AAL’s current market capitalisation would today have a value of c US$11.0bn.

In 1925, Newmont diversified via the acquisition of oil interests in Texas. Eventually, Newmont's oil interests would encompass more than 70 blocks in the Gulf of Mexico as well as production assets in the North Sea.

In 1929 (shortly before the death of Colonel Thompson), Newmont became an operating company in its own right with the acquisition of California's Empire Star Mine. By 1939, it was operating a further 11 gold mines, all in North America. However, it also maintained its interest in southern Africa and, in the decades around the middle of the 20th century, it had controlling interests in both the Tsumeb copper mine in Namibia and the O’Okiep Copper Company in South Africa.

The company’s transition into the modern era began with its discovery of the world’s first invisible gold at Carlin in Nevada in the early 1960s. The Carlin Trend (or Unconformity) as it is now called is a belt of gold deposits, approximately 5 miles (8km) wide and 40 miles (60km) long, located in the north-east of Nevada extending in a north-north-westerly direction. It was created approximately 350 million years ago by a collision between the North American Plate and a terrane that induced higher crustal temperatures and pressures and numerous hot springs along the suture zone. Several episodes of subsequent subsurface magmatism are known to have occurred and, during each of these, hot springs brought dissolved minerals (including gold and silver) toward the surface where they precipitated out, primarily in Paleozoic limy sediments. Gold was discovered in the area as early as the 1870s. Owing to its fine and disseminated nature however, the potential of the region was largely overlooked and, prior to 1964, only c 22,000oz of gold had been produced (ie an average rate of only 240oz per year). However, Newmont opened the world’s first open-pit gold mine there in the early 1960s and, in 1971, began to use heap leach technology on lower-grade ores (NB perhaps not coincidentally, South African gold production peaked in 1972) and, in the 57 years since its discovery, more than 70Moz gold have been produced (ie at an average rate in excess of 1Moz per annum), making Carlin the largest gold discovery in north America in the 20th century and one of the world’s richest mining districts.

In the 1980s, Newmont thwarted five takeover bids: from Cecil Rhodes’s Consolidated Gold Fields (Cons Gold, the forerunner of Gold Fields of South Africa), the legendary business magnate, oil tycoon and corporate raider, T. Boone Pickens, Minorco (then the off-shore arm of Anglo American), Hanson (the ultimate buyer of Cons Gold after the latter’s successful defence against Minorco) and Sir James Goldsmith. NB None of these takeover bids was independent of any of the others and readers with an interest in the history of mining, gold, mining finance, the Oppenheimer family, Consolidated Gold Fields, Anglo American/Minorco/De Beers, imperial, post-imperial and apartheid relationships and one of the most acrimonious attempted takeovers in corporate history are strongly advised to read Consolidated Gold Fields in Australia: The Rise and Decline of a British Mining House, 1926–1998, published by ANU Press.

After 1987, Newmont underwent a major restructuring. This included a divestment programme involving all of its copper, oil, gas and coal interests and the payment of a US$33/share dividend to shareholders (to put this into context, in the first half of 1987, Newmont’s share price averaged just US$34.76/share). A year later, it moved its headquarters from New York to Denver.

In 1997, Newmont merged with the Santa Fe Pacific Corporation to form North America’s largest gold producer. Starting in 2000, there then followed one and a half decades of rapid, but targeted, corporate development, including:

In addition to buying assets, Newmont has shown itself willing to divest itself of them as and when it deems such sales appropriate. Since its acquisition of Goldcorp, this has included the sale of its stake in Continental Gold for a cash consideration of US$260m, the sale of Red Lake for cash proceeds of US$375m (plus potentially a further US$100m, contingent upon future exploration success) and its 50% stake in Kalgoorlie to Northern Star for US$800m, also in cash, thereby meeting its target of US$1.0–1.5bn in divestments within the space of a year.

Just as it was concluding its acquisition of Goldcorp, Newmont simultaneously concluded a deal with Barrick whereby the two agreed to combine their Nevada Carlin assets into a joint venture owned 38.5% by Newmont and 61.5% by Barrick, called Nevada Gold Mines. Assets contributed to the joint venture by Newmont included Carlin, Twin Creeks, Phoenix, Long Canyon and Lone Tree, while assets contributed by Barrick included Goldstrike, Cortez, Turquoise Ridge, Gold Rush and South Arturo plus an assortment of associated processing and other infrastructure.

At the moment of its creation, the new joint venture comprised 10 underground and 12 open-pit mines, two autoclave facilities, two roasting facilities, four oxide mills, a flotation plant and five heap leach facilities. Within this portfolio were three of the world’s top 10 tier one gold assets, namely Goldstrike/Carlin, Cortez and Turquoise Ridge/Twin Creeks), with potentially another one (Goldrush) to add to its ranks. In 2018, total production from these assets amounted to 4.1Moz gold (cf total production from South Africa that year of 130t, or 4.2Moz), making the Nevada complex by far the largest single gold mining entity in the world and more than twice as big as its next nearest rival.

At the time of the transaction, Barrick estimated that it could extract synergies from the combined entity of US$500m per year in the first five years of operation, worth an estimated US$4.7bn in total before tax, including:

These, in turn, would create a virtuous cycle, leading to:

Newmont has interests in 17 gold mining assets, comprising 14 operating mines and three near-term projects. Of the 14 operating mines, it deems nine to be ‘world class’ (NB with three complexes being contributed by Nevada Gold Mines) with one further ‘emerging world class’ asset in the form of Merian in South America (see Exhibit 1) plus six further mines. All of the three near-term projects are related to Newmont’s portfolio of world-class assets.

A map of the geographical locations of Newmont’s 17 assets is as follows:

Newmont is the owner and operator of each of the assets indicated, with the exceptions of Nevada Gold Mines, in which it has a 38.5% interest (see above) and which is proportionately consolidated for accounting purposes (see below), and Pueblo Viejo, in which it has a 40% interest and which is also operated by Barrick and is accounted for as an associate.

Otherwise, the veracity of Newmont’s statement that it limits its investments to ‘top tier’ jurisdictions may be judged by the following graph, which shows the Fraser Institute’s index of ‘Investment Attractiveness’ for all 75 jurisdictions covered in its latest survey. Jurisdictions in which Newmont has an interest in a mining operation are highlighted. Of note is the fact that only two jurisdictions – the Dominican Republic (where Newmont is the minority partner in the Pueblo Viejo mine) and Santa Cruz in Argentina (where Cerro Negro is located) – are in the lower half of survey’s range of results.

In addition to its producing and near-producing assets, Newmont has interests in an extensive portfolio of exploration assets including, but not limited to, Coffee and Galore Creek (in Canada) and Nueva Union and Norte Abierto (in Chile). A map showing the locations of these assets, among others, is available on Newmont’s website.

Newmont groups its assets according to the continents on which they are located. It is beyond the scope of this report to provide detailed descriptions of each of Newmont’s assets in the space available. Such descriptions, including technical documents, are all readily available on Newmont’s website and also on Sedar.com. However, the briefest possible description of each of its 17 producing and near-producing assets, by continent, is as follows:

Within the context of the above tables, investors should note that the average contribution to production and profitability for each of the 13 assets that are currently consolidated (either wholly or proportionately) into Newmont’s accounts is 7.7% (being 100/13). Otherwise, the sum of all of the contributions may not add up to 100% owing to 1) rounding and 2) a very small (<1.0%) contribution to both from Red Lake in FY20 before it was sold.

In addition, it should be noted that Nevada Gold Mines’ contribution to pre-tax profitability is adversely affected by its effectively carrying all of Newmont’s central general and administrative charges. In the absence of this cost, we estimate that it would contribute a more proportionate 21.4% of aggregate pre-tax profitability.

Material organic growth in production and profitability is already evident within Newmont’s portfolio of assets, at both Boddington and Ahafo, which are on the cusp of concluding multi-year stripping campaigns, after which production and profitability are expected to increase materially. In addition, Musselwhite will benefit both from a recovery from being placed on coronavirus-enforced care and maintenance and from the operation of its new conveyor system, which will reduce haul distances, as ore crushed at depth is hoisted from underground and brought to the surface for processing. Beyond this organic growth however, Newmont also has three major new projects on the verge of board approval, which are summarised below.

Historically speaking, Newmont has been notable within the sector for declining to rush the development of a number of mega-projects in its portfolio, preferring instead to advance a series of medium-sized projects on a faster timeline. However, the development of the Yanacocha Sulphides project in Peru marks a decisive departure from that strategy. This shift will a) provide the first big test of Newmont’s management in developing a large-scale project for a number of years and b) allow it to re-build capability in the area. In this respect, Yanacocha represents an excellent first initiative, in that it is a brownfields development within the existing footprint of mining operations, thereby facilitating permitting, infrastructure and the company’s social licence to operate.

Funding for Tanami Expansion 2 (TE 2) has been approved and the project is in execution stage; investment decisions regarding Ahafo North and Yanacocha Sulfides are expected later this year.

TE 2 is expected to increase average annual gold production at Tanami by c 150–200koz pa for the first five years of operation, to reduce operating costs by c 10% and to secure the mine as a long-life, low-cost producer. In addition, it has the potential to extend the mine’s life beyond 2040 via the addition of a 1,460m hoisting shaft and supporting infrastructure to achieve production of 3.5Mtpa and provide a platform for future growth.

In Newmont’s estimation, Ahafo North is ‘the best unmined gold deposit in West Africa’, with c 3.5Moz of reserves plus a further c 1Moz of additional resources (see Exhibit 7, below) and ‘significant upside potential to extend Ahafo North’s current 13-year mine life’. Once in production, it will add to Newmont’s existing footprint in Ghana, including the four open-pit mines and stand-alone mill that it operates at Ahafo South, c 30km distant. In the first five full years of production (2024–28), Ahafo North is expected to add 300koz pa to Newmont’s production profile at an AISC of US$600–700/oz and an estimated capital cost of US$700–800m. Over its full 13-year life, it is forecast to contribute c 250koz of gold to Newmont’s attributable production profile per annum

As its name implies, the Yanacocha Sulfides project will develop the first phase of Yanacocha’s sulphide deposits, including an integrated processing circuit, including an autoclave. After a three-year development period, the project is expected to add c 500koz gold equivalent per annum (in the ratio 50% Cu by value, 40% Au and 10% Ag) for five years (2026–2020) at an AISC of US$700–800/oz and an investment of c US$2.1bn (of which 51.35% is attributable to Newmont).

The first phase of the project will focus on developing the Yanacocha Verde and Chaquicocha deposits to extend Yanacocha’s operations beyond 2040 with the second and third phases having the potential to extend the mine’s life for multiple decades thereafter.

After these three projects, Newmont has a material pipeline of other potential projects for development, including (but not limited to) Coffee, Akyem underground, Oberon (Tanami), Long Canyon Phase 2, Sabajo extension (Merian), Galore Creek, Norte Abierto, Nueva Union, Apensu underground (Ahafo), Cripple Creek & Victor (CC&V) underground and Cerro Negro district expansions.

A summary of Newmont’s reserves and resources, by asset, is provided in the following table. Ordinarily, Newmont reports its resources exclusive of reserves. In this case however, we have aggregated reserves with resources in order to provide an indication of the full mineral inventory attributable to the company.

Relative to 2018, reserves in 2019 declined by 7.4Moz (or 6.9%) on an underlying basis, almost exclusively owing to mining depletion. However, this was more than made up for by a 10.8Moz (16.4%) underlying increase in measured and indicated resource ounces (excluding reserves) and a 2.0Moz (or 6.8%) increase in inferred resources. Newmont’s updated reserve and resource statement is scheduled to be released on Wednesday 10 February 2021. Although it probably does not need to in any conventional sense, given the size and scale of its existing reserves and resources, in FY21, Newmont has US$250m budgeted for exploration, with a target of replacing two-thirds of mining depletion 'via the drill bit’.

Of particular note in Exhibit 7 is the material (48–55%) uplift in Newmont’s reserves and resources (by value) once co- and by-products are taken into account. Whereas Newmont’s current market capitalisation of US$47.6bn and (end-FY20 forecast) enterprise value (EV) of US$49.6bn equate to multiples of US$248.83 per resource ounce and US$518.04 per reserve ounce, respectively, if by- and co-products are taken into account, these reduce to only US$160.92 per gold equivalent resource ounce and US$350.79 per gold equivalent reserve ounce.

Unlike some mining companies, Newmont sets great store by its involvement in and performance among the less quantifiable aspects of mining, such as ESG standards and climate and sustainability initiatives, effectively believing these to form an essential prerequisite in establishing and securing the company’s social licence to operate. Historically, initiatives that it has either undertaken or subscribed to include:

Once again, the length of this note is insufficient to recognise all of the company’s achievements in this area of operations. However, the following is a very brief summary of its goals and commitments in these spheres.

Newmont is registered under the Science-based Target Initiative (SBTi), which is aligned with the Paris Agreement and, every year, it is assessed according to S&P Global’s SAM Corporate Sustainability Assessment (CSA), which is an annual evaluation of companies' sustainability practices and enables its performance to be benchmarked on a wide range of industry-specific economic, environmental and social criteria that are relevant to the growing number of sustainability-focused investors. Perhaps an indication of the importance that it ascribes to ESG may be seen from the fact that Newmont’s longstanding general counsel now reports directly to the board on ESG matters. Within this context, the company has set itself the following targets and objectives in 2021 (among others):

Specific initiatives that are currently under consideration at the company in order to meet these goals (among others) include:

In support of its targets, Newmont is publishing its inaugural Climate Strategy report in 2021, which is aligned with the Task Force for Climate Related Financial Disclosures (TCFD) and is budgeting US$500m in expenditure on climate initiatives over five years. As such, its intention is as much to compete effectively with non-mining companies on matters of climate, sustainability and ESG as with mining companies. Nevertheless, in recognition of its efforts in these areas to date, it has been ranked as the number one gold mining company in the Dow Jones Sustainability Index for six years in succession, from 2015 to 2020.

In March 2020, Newmont’s Corporate Governance & Nominating Committee in conjunction with the board of directors determined that the size of the board could be reduced from 15 to 11 members while still achieving the appropriate balance between promoting robust dialogue and accountability while ensuring diverse expertise, perspectives and skills. As a consequence, five directors retired from the board upon completion of their terms in April 2020 and after the integration of Goldcorp and one new nomination was made.

In the aftermath of the reduction, Newmont’s board continues to consist of a broad range of backgrounds, experiences, talents and nationalities as well as continuing to reflect its commitment to diversity. Of the 11 members of the board:

As well as gold, the board has collective experience of a wide range of other extractive industries, including coal, iron ore, copper and aluminium, other industries (such as banking, fertiliser, industrial gases and defence) and other companies (eg Rio Tinto, De Beers/Anglo American, Jacuzzi and Elizabeth Arden).

Newmont’s officers comprise an executive leadership team of eight individuals (four of whom are profiled on the final page of this report) and 25 further key officers who operate under the direction of the board of directors.

Newmont has adopted a collegiate approach to management and a number of aspects of the culture that it is seeking to embed differentiate it from others in the sector and are worthy of consideration. The first concerns cyclicality. Newmont’s CEO, Tom Palmer, has being quoted as saying that he is ‘trying to drive the cyclicality out of the company’. While this cannot be completely true, given that Newmont is unhedged, one among many cultural initiatives deployed is that virtually everyone at the company is required to plan around a gold price of US$1,200/oz with respect to margin, cost and investment decisions – thereby embedding a culture of capital discipline throughout the company rather than merely at the upper echelons. Another important initiative is the so-called ‘separation of Church and state’. According to this initiative, all of the technical aspects pertaining to a mine’s (or project’s) operation are first reported to the CEO. After due consideration and, if necessary, alteration, these are then provided to the mine’s manager as a template against which to perform, rather than vice-versa.

A number of Newmont’s operations have been affected to date by the coronavirus pandemic. Mines put onto ‘care and maintenance’ at various points during the course of the year include Musselwhite, Éléonore, Penasquito, Yanacocha and Cerro Negro, in relation to which, Newmont has incurred costs of US$171m up to the end of Q3, plus a further US$67m in direct costs in responding to the pandemic, including:

In addition, progress on the development of the Tanami Expansion 2 has also been impeded.

While such negative effects of the crisis have been widely reported, however, less so have been the unintended positive consequences. Largely as a result of being forced to do so by the pandemic, Newmont reports that it has learnt important and material lessons regarding the distribution of its personnel, for example, including the possibilities of remote working, which will aid it in streamlining its labour force and lowering costs in the future.

Even so, as of Q420, all previously affected mines have, to all intents and purposes, returned to normal operating levels.

Edison’s gold price assumptions have now been updated to reflect the passage of time since 2020. In our last note on the subject (see A golden future, published on 11 June 2020), Edison argued that the recent, sharp increases in the total US monetary base might be expected to support a (nominal) gold price of US$1,892/oz and potentially as high as US$3,000/oz. While there is a historically strong and statistically significant correlation of 0.909 between the gold price and the total US monetary base from 1967 to 2018, there is very little visibility as to how, or to what extent, the total US monetary base may be expected to evolve. Currently, we know that it is expanding at a rate of approximately US$98bn per month, which equates to an expected increase in the gold price (derived via the historical correlation) of approximately US$391/oz pa. Anecdotally, the total US monetary base may probably be expected to continue to increase for a time until the COVID-19 crisis has been managed and then to flatten off for a discrete period until a period of tapering is attempted by the Federal Reserve (in a similar fashion to the aftermath of the global financial crisis). However, neither the extent of any increases nor the extent of any subsequent tapering nor the timing of either is easy to judge. In consequence, Edison’s strategy is to maintain a flat, nominal gold price of US$1,892/oz into the future.

In the absence of more general deflation, a flat, nominal gold price of US$1,892/oz is, self-evidently, a declining gold price in real terms, which is an unlikely long-term scenario, given that the gold price has historically increased by 2.0% per annum in real terms from 1914 to 2018 (see Portents of economic weakness, Gold: Doves in the ascendant). During the period 2013–18, the gold price was relatively flat, averaging US$1,270/oz. Its average price in 2018 was also US$1,271/oz – both of these levels were arguably supported by the marginal cost of production. If this level is then increased at 2% per annum from 2018, it may be compared with the flat nominal (declining real) price scenario previously described, as shown in the exhibit below:

As may be seen from the chart above, the two lines cross between 2026 and 2027 at a level fractionally above US$1,500/oz. All Edison’s gold company valuations are conducted in real terms. Consequently, and in the absence of much immediate visibility as to the evolution of the total US monetary base, Edison’s gold price scenario for valuation purposes continues to assume that the gold price will remain at US$1,892/oz in flat nominal terms (ie declining in real terms) until the price (in real terms) crosses with the increased US$1,271/oz 2018 price. At that point we (conservatively) assume that the price will flatten out (in real terms) at US$1,524/oz. This compares with our analysis in 2020 only inasmuch as the base year from which deflation is deemed to occur has been moved from 2020 to 2021. A table comparing the difference between our real terms gold price forecasts last year and this is as follows:

In simple terms, the consequence of the gold price remaining higher for longer into 2021 is that we are now assuming that the (real) gold price will similarly stay higher for longer and will flatten out at a higher level, later. For 2021, we are assuming that the current spot price (US$1,838/oz at the time of writing) will prevail for the remainder of the year.

Note that this method of gold price forecasting may be contrasted with our prior methodologies, which were set out in our report Portents of economic weakness, Gold: Doves in the ascendant.

For other metals, our assumed prices are the current spot price (in the short term). In the long term, they are:

For silver, our assumed prices are governed by silver’s long-term correlation with the gold price, since the latter was demonetised in 1971, as follows:

Newmont groups its assets by continent with the exception of its Carlin assets, which are grouped separately as Nevada Gold Mines. Production and cost and capex guidance is provided by mine site on a 13–14-month basis (ie now for FY21) and, beyond that, on a continental basis. The following is a comparison of Edison forecasts compared with publicly available guidance provided by the company for the period 2021–23 for each of Newmont’s four continental mine groupings and its one complex grouping.

Newmont’s Australian region comprises Boddington and Tanami. In 2021, production at Boddington will benefit from improvements to achieve its full potential under Newmont’s eponymous production philosophy, simultaneously sustaining mill throughput at greater than 40Mtpa and also taking advantage of higher grades in the South Pit. In 2022 and 2023, Boddington will continue to benefit from mining higher-grade ore coupled with improved efficiency provided by Autonomous Haulage before transitioning to stripping the next layback in 2023 at the same time as the TE 2 is beginning to ramp up.

Newmont’s African region comprises Ahafo and Akyem. In 2021, Ahafo will benefit from higher tonnages delivered from Subika, while Akyem benefits from a higher grade. In 2022 and 2023, Ahafo will continue to benefit from higher grades, although this will be partially offset by mine sequencing at Akyem. The ramping up of production is also scheduled to begin at Ahafo North in 2023.

Newmont’s North American region comprises CC&V, Musselwhite, Porcupine, Éléonore and Penasquito. Penasquito is scheduled to mine slightly higher grades in 2021, while sustaining Full Potential programme improvements at its mill. It will also benefit from a full year of operations following coronavirus-related disruptions in 2020, as will Eleonore and Musselwhite. At the same time, Porcupine will benefit from higher underground and open-pit tonnes mined, partially offset by lower leach pad production at CC&V.

In 2022 and 2023, Penasquito will mine lower-grade, harder ore from the Chile Colorado pit while stripping the next phases of the Penasco pit from 2022 until 2024. At the same time, grades will improve at Porcupine from the Borden underground and Hollinger open-pit mines in 2022, before Hollinger begins to ramp down in 2023.

Newmont’s South American region comprises Yanacocha (51.35% owned, fully consolidated), Merian (75% owned, fully consolidated), Cerro Negro and Pueblo Viejo (40% owned, equity accounted). For the purposes of its guidance, Newmont’s share of production from Pueblo Viejo is included in attributable production; given that it is equity accounted however, neither its revenue nor costs are included in Newmont’s revenue or costs etc, although it accounts for the overwhelming majority of ‘equity income of affiliates’ (reported post-tax).

Cerro Negro, which was placed on coronavirus related ‘care and maintenance’ in 2020, is expected to return to full production in 2021, partially offsetting Merian’s transition to mining harder rock and Yanacocha transitioning to a primarily leach operation, while simultaneously developing the first phase of its sulphide resources. Output is then expected to increase with increased production and flexibility in 2022 and 2023 as Cerro Negro mines ore from five to six ore sources under the auspices of Full Potential productivity improvements. At the same time, output from Merian and Yanacocha will be slightly lower owing to mine sequencing.

Newmont proportionately consolidates its production and costs, etc, from its 38.5% interest in Nevada Gold Mines. Otherwise, detailed guidance is provided by the operator, Barrick, and merely rendered into its proportionate share by Newmont, albeit with the explanation that ‘2021 and 2022 are years of investment in the future of NGM.'

In the meantime, Newmont’s capital expenditure guidance over a slightly longer period, from 2021 to 2025, is as follows:

Of note within the context of Newmont’s overall guidance is the sharp decline in capital expenditure between 2023 and 2024 as the capital phases at its three major new development projects (TE 2, Ahafo North and Yanacocha Sulphides) in particular are completed and the mines begin to contribute meaningfully to the company’s production, profitability and cash flows. It is also consistent with its analysis that ‘2021 and 2022 are years of investment in the future of NGM.’

Note that full details of Newmont’s guidance may be found in its announcement, entitled Newmont Provides 2021 and Longer-term Outlook, released on 8 December 2020.

Newmont has an acute focus on shareholder returns, ostensibly in three forms: dividend yield, capital appreciation and a share buy-back programme.

Newmont’s policy is to pay a quarterly dividend that is both stable and predictable as well as being variable with respect to the gold price.

In FY19, it paid a dividend of US$0.14/share per quarter, with the exception of Q219 when it also paid a special dividend of US$0.88/share to recognise the value inherent in the Goldcorp acquisition. At the start of FY20 the quarterly dividend was increased to US$0.25/share and it was increased, once again, to US$0.40/share at the time of the company’s Q320 results, which were announced in October. At the time of the last increase, the company also unveiled a new framework whereby it formally re-based its dividend to a ‘base’ pay-out of US$1.00/share (or US$0.25/share per quarter), but also stated explicitly that it would return 40–60% of incremental attributable free cash flow to shareholders that it generated above a gold price of US$1,200/oz.

Under the new framework, Newmont then seeks to adjust the ‘base’ pay-out according to the gold price in increments of US$300/oz, equating to incremental increases in the dividend of US$0.60/share per year (or US$0.15/share per quarter). Hence a sustainable gold price above US$1,500/oz should result in a dividend of US$0.40/share per quarter (being 0.25+0.15=0.40) – ie the quarterly dividend paid in Q320 – and a sustainable gold price above US$1,800/oz should result in a dividend of US$0.55/share per quarter (being 0.25+0.15+0.15=0.55) etc. Nevertheless, within this context, it is worth noting that, should Newmont 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 still scope for the quarterly dividend to increase even further.

However, all dividends need to be approved by the board of directors on a quarterly basis and due regard will be given to the perceived volatility of the gold price in this respect. As such, a gold price either momentarily above US$2,100/oz or momentarily below US$1,500/oz will not – for example – automatically result in a change in the dividend (either upwards or downwards) unless the board deems that level newly sustainable.

For practical purposes, in the short term, Edison has assumed that a gold price averaging in excess of US$1,800/oz for two successive quarters will result in a dividend of US$0.55/share per quarter. Otherwise, we assume that the dividend will either be (or revert to) US$0.40/share.

One key aspect of Newmont’s variable gold price dividend is that it allows flexibility in balancing returns between distributions to shareholders and its share buyback programme, rather than fixed or inflexible dividends necessarily cannibalising share buybacks. On 14 January 2021, Newmont announced that its board of directors had sanctioned a share repurchase programme for up to US$1.0bn of common equity over the next 18 months. The programme will be executed at the company’s discretion and builds upon a similar US$1.0bn programme in 2020, which retired 22m shares at an average price of US$45 per share for an implied total consideration of US$990m and contributed towards the US$2.7bn returned to shareholders by Newmont via its combined dividend and share buyback policies since January 2019. Note that, at a gold price of US$1,200/oz, Newmont’s shareholder returns programme is structured so that c 50% of Newmont’s free cash flow is retained within the company and 50% is returned to shareholders via its dividend and buyback programmes. Notwithstanding its importance however, owing to the inherent uncertainty surrounding how many shares will be repurchased under the programme and at what price, for the purposes of its valuation of Newmont (below), Edison assumes that all returns to shareholders are in the form of income and capital appreciation.

Edison has derived full financial forecasts for Newmont over the life of its operations based on its guidance. While there are many numbers, estimates, forecasts, measures and metrics to consider in relation to Newmont, perhaps the best summary of its immediate prospects is provided by the following graph demonstrating the effect of the aforementioned guidance combined with Edison’s assumptions on the company’s operational and pre-financing cash flows over the course of the next five years.

While we expect a dip in pre-financing cash flows in FY21 relative to FY20 therefore, this may be largely attributed to the absence of an estimated US$1.4bn in net sales proceeds that were recorded in FY20 in addition to a 29.7% increase in capital expenditure. Cash flows from operations are nevertheless anticipated to continue to increase. From their nadir of US$2.6bn in FY22 therefore, we expect Newmont’s pre-financing cash flows to increase by 47.4% to US$3.9bn in FY25 and to continue to increase thereafter.

Newmont is a multi-asset company that has shown a willingness and desire to trade assets in the past in order 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 FY21, we have opted to discount forecast dividends back over five years from the start of FY21 and then to apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY25). In the normal course of events, we would exclude exploration expenditure from such a calculation on the basis that it is an investment. In the case of Newmont, however, we have included it in our estimate of future cash flows on the grounds that it may 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.

Our estimate of Newmont’s pre-financing cash flow in FY25 is US$4.83 per share (cf US$1.22 per share in FY18). On this basis, our terminal valuation of the company at end-FY25 would be US$48.33/share if based on an assumption of zero growth in cash flows beyond FY25 and a standardised 10% discount rate. In conjunction with forecast intervening dividends, this terminal value would then discount back further to a net present value of US$44.75/share at the start of FY21 (again, based on the assumption of zero growth in cash flows beyond FY25 and a standardised 10% discount rate).

This 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 54.77Moz attributable to Newmont. It is also conservative in its use of a standardised 10% discount rate and in its assumption of zero growth in cash flows after FY25. These factors are considered in turn, below.

The question of discount rates has long been a vexed one. The long-term nominal equity return has been 9% and 30-year break-evens are currently expecting 2.5% inflation, which would imply a real equity return of 6.3% (1.09/1.025). Long-term real bond returns have been 2.5%.

Typically, in valuing mining companies, Edison employs a standardised real discount rate of 10%. While adequate for junior miners however, where the greatest risk is typically operational, this metric requires more attention for senior gold producers.

In the opinion of Edison’s senior economist, with real US 10-year yields at -1%, the bond market is not, at present, a very good guide to discount rates and is only consistent as a basis for deriving equity weighted average costs of capital on the assumption of a very weak outlook for long-term GDP and profit growth.

However, if inflation is 2% (the Federal Reserve’s target), real GDP growth – and by implication long-term real yields – is 2% (roughly in line with population and productivity growth) and the risk premium is 2–4%, then, adding those together, the cost of equity should be in the range 6–8% (or 4–6% in real terms with inflation at 2%). According to Bloomberg, Newmont’s beta relative to the S&P 500 Index is 0.74. Combining these would imply a nominal cost of equity for Newmont of 5.5–7.0% (eg 2+2+[0.74*2]) or a real cost of equity of 3.4–4.9% with inflation at 2%.

As an alternative, Professor Pablo Fernandez of the IESE Business School conducts an annual survey of analyst risk premiums. The most recent is entitled Annual Survey: Market Risk Premium and Risk Free Rate used for 81 countries in 2020. Out of a total of 2,156 responses, the average market risk premium for the United States was found to be 5.6% (within a range 2.6–13.4%) and the average risk-free rate 1.8% (approximately 0.8 percentage points lower than the equivalent rate in 2019). Again, applying Bloomberg’s beta of 0.74 would imply a nominal cost of equity for Newmont of 5.9% (being 1.8+[0.74*5.6]) or a real cost of equity of 3.8% with inflation at 2%. In the meantime, the US 10-year Treasury bond is currently yielding 1.1%. Applying this instead would imply that Newmont’s cost of equity is 5.2%, or 3.1% in real terms.

Alternatively, US junk bonds are currently yielding 4.5%. If these are considered as only a little less risky than equity, then it would imply a market cost of equity closer to 6%, in which case, Newmont’s cost of equity may be estimated (depending on the risk free rate applied) at 4.7–4.9%, or 2.7% to 2.9% in real terms (assuming long-term inflation at 2%).

Finally, Ashwath Damodaran from Stern School of Business at New York University estimates a total equity risk premium for the US market (last updated 8 January 2021) of 4.72%, on which basis, we estimate that Newmont’s cost of equity would be 4.6–5.3%, or 2.5–3.2% in real terms (assuming a 2% inflation rate).

A summary of all of these estimates of Newmont’s cost of equity is as follows:

All of Edison’s valuations of mining companies are conducted in real terms. According to our forecasts, Newmont could be net debt free by the end of FY22 (see Financials section on page 28). Thereafter, it should not be necessary to consider its cost of debt as a component part of its cost of capital. Obviously, in theory, this would result in a higher cost of capital to the company than if higher levels of debt and leverage were employed. However, this benefit is offset by the higher levels of risk associated with more highly leveraged companies. In the light of these considerations, a summary of Edison’s valuation of Newmont at a range of costs of equity is as follows:

As such, it may be stated that Newmont’s share price is currently discounting a cost of equity (highlighted in Exhibit 20, above) approximately twice that implied by current conditions prevailing in the debt and equity markets at the present time (above).

Note that the average discount rate implied by all of the above sources and methodologies is 3.275%, on which basis the terminal valuation of Newmont (assuming an ex-growth terminal multiple) would be US$147.59/share and its current value US$143.54/share).

The above valuation methodology also provides a valuation of US$59.30/share (ie the current share price) in the event that a long-term real cash flow growth rate of 3.1% is used (in conjunction with a 10% discount rate). Within this context, investors should note that in August 2019, Edison calculated that, between 1913 and 2018, the gold price recorded an average (geometric) real return of 2.0% per annum with a standard deviation of ±16.7% (both calculated assuming that the distribution of returns is normal – see Portents of economic weakness, Gold: Doves in the ascendant). The following table demonstrates Edison’s Newmont valuation sensitivity to a range of real gold price growth rates (being a proxy for real revenue growth assuming a roughly flat long-term production profile) and a range of real cost price inflation rates.

As such, it could be stated that Newmont’s share price is discounting a flat long-term production profile, a 2.0% real gold price growth rate and a 1.6% real cost inflation rate. Obviously, this is a possibility, although a more logical future scenario is that costs should increase at no more than the rate of inflation – ie zero growth in real terms – with the result that in real terms cash flows should increase at 6.3% per annum (geometric average over five years) and Newmont’s valuation should be as depicted in the left-hand column of Exhibit 21, above (highlighted in bold).

Alternatively, at the same time as we calculated a long-term real gold price growth rate of 2.0% per annum, Edison also calculated that, in the period 1967–2018, it recorded a (geometric) average nominal growth rate of 9.6% with a (sample) standard deviation of ±24.2% and a population standard deviation of ±18.5% (NB these calculations are again based on the assumption that returns are normally distributed). An analysis of our valuation of Newmont using the above methodology at a variety of different nominal revenue and cost inflation rates (translated into real terms) over five years is then as follows:

As with the earlier analysis in Exhibit 21, we could similarly state that Newmont’s share price is discounting a flat long-term production profile, a 9.6% nominal gold price growth rate (as a proxy for revenue growth) and an 8.6% nominal cost inflation rate, the last of which appears excessive within the context of current inflation rates both in the US and globally in US dollar terms.

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 be seen that, while Newmont commands a premium rating relative to its peer group on the first three valuation measures, it is materially cheap relative to its peer group with respect to its dividend yield. Based on consensus forecasts, we estimate that Newmont’s share price would have to rise by an average of 34.8% for its dividend yield to match those of its peer group. Based on Edison forecasts, we estimate that its share price would have to rise 54.3%.

However, one further observation about the comparability of the above measures is merited. Given its policy of proportionately consolidating its interest in Nevada Gold Mines and the fact that it owns 100% interests in the majority of its remaining mining operations (with the exception of Yanacocha and Merian), estimates of cash flow in particular are also close to estimates of cash flow attributable to shareholders (Newmont estimates within 3%). This is not always the case in the mining industry, where fully consolidated earnings and cash flow from assets not owned 100% may not so easily approximate cash flow attributable to shareholders, making direct comparison using these measures potentially either difficult or misleading. With that caveat, Newmont’s share price, as implied by the average rating of its peers applied to both Edison and consensus forecasts over the course of the three years from FY20 to FY22, is as follows:

Since FY13 (in what might be regarded as a low gold price environment), Newmont shares have traded on an average current year P/E multiple of 24.7x (calculated using the average share price for the year) within a relatively narrow range of 21.4–28.3x. Over the same period, it has traded on an average dividend yield of 1.7%, within a range of 0.4–4.0%, or 1.3% within a range 0.4–3.7% if its US$0.88/share special dividend payment in FY19 is excluded:

On the basis that it maintains these average ratings, the share prices implied by both Edison’s and consensus forecasts for adjusted EPS and dividends over the course of the next four years are as follows:

A summary of all of the above valuations of Newmont shares over the course of the next five years is as follows:

In general, it may be concluded that Newmont’s share price commands a premium rating relative to its peers. However, it is also indisputably cheap relative to its own historical valuations and, arguably most importantly, in absolute terms (even assuming zero long-term cash flow growth). Otherwise, investors’ attention is drawn to the similarity between the average valuation calculated by Edison for FY20 and Newmont’s year-end share price of US$59.89/share.

Unsurprisingly, Edison’s forecasts and valuation of Newmont are most sensitive to our assumptions regarding the gold price. Within this context, there is plenty of scope for prices to diverge from those predicted as a result of speculative activity. Should speculative activity match levels last seen in 1980, for example (perhaps as a result of virus mutations, vaccine failures and another round of government economic stimulus), then we believe that the gold price could reach over US$3,000/oz. In a worst-case scenario (eg conditions – and positive real interest rates, in particular – equating to those last seen in 2001), then we estimate that the gold price could fall as low as US$1,099/oz in real (2021) terms – albeit we recognise that there would inevitably have to be a long period of ‘normalisation’ before such conditions could be achieved. Within this context, it is worth noting that the gold bull market of the 1970s did not peak until real interest rates in the US exceeded 4% on a sustainable basis in late 1980. Alternatively, assuming that 2020 equates to 2012 (the peak year for gold in the post financial crisis era), then we estimate that a worst-case scenario would be for the gold price to fall to US$1,392/oz over the next two years – 24.3% below current levels but nevertheless still comfortably in excess of the US$1,200/oz price around which Newmont conducts its planning. Inevitably, which scenario transpires will depend much on the future course of COVID-19 and the anti-coronavirus vaccines currently being rolled out around the world.

While Edison has considered specific gold price and cost scenarios in Exhibit 21 and Exhibit 22, the following table provides an indication of the sensitivity of a number of profitability and cash flow measures to specific changes not only in the gold price, but also the prices of Newmont’s other co- and by-product metals over the course of the next three years:

Newmont had net debt on its balance sheet of US$1.8bn at the end of Q320, which equated to a gearing (net debt/equity) ratio of 8.2% and a leverage (net debt/[net debt+equity]) ratio of 7.5%. We expect net debt to remain broadly unchanged as at end-FY20 under the influence of an accelerating capex programme, such that gearing will be just 9.0% and leverage just 8.3%.

Hereafter, we forecast that Newmont will generate cash at a rate approaching US$5bn per annum, of which around c US$2.2bn will be expended in capex and a further c US$1.5bn in dividends to shareholders. On this basis, we would expect Newmont to be net debt free late in FY22, although this may be delayed, depending on a) the extent to which the company buys back shares under its share buyback programme (sanctioned, so far, at a rate of US$1bn over the next 18 months) and b) the extent to which it embarks on new investment initiatives.