Is Newmont a golden opportunity?
Opdateret: aug. 22
At the moment a rather large part of my portfolio consists of precious metals and miners. If you follow my posts, you would also know that I see 2021 as being a good year for precious metals. One way to get exposure to precious metals is through miners such as Newmont, which is a company I have in my portfolio. In this analysis, I will explain why that is so.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followes. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
This analysis will be a bit different than my usual analyses. It is because I believe that you cannot analyze a mining company as you can with other companies due to commodity prices being what drives the price of miners. Hence, mining companies come with more risks than other companies. I will go through some of them later in this analysis. I should also mention that I'm in no way an expert in commodities, meaning it is important that you do your own research before investing in a company such as Newmont. I will try to keep the format in this analysis the same as in my other analyses, even though the historical numbers are not as important as when analyzing companies in other sectors. I should also mention that the reason I have precious metals in my portfolio is due to the macro economic environment we are in for the time being. I do not necessarily want to keep it long term.
Newmont corporation is the world largest largest gold mining company with operations in North- and South America, Africa and Oceania. As of 2020 Newmont had approximately 6% of estimated total worldwide mined gold production. While they mainly mine gold, they also mine copper, silver, zinc and lead. However, mining gold is by far their largest asset as 90% of their sales in 2020 were attributable to gold (it is actually a bit down in 2020, as it was 93% in 2019 and 96 % in 2018). In 2020 other metals attribute to sales were copper 1%, silver 5%, lead 1% and zinc 3%. What differentiate Newmont from other companies I usually invest in is that they, in my opinion, has no moat. It means that you obviously need to be aware of the risks that I will come back to later. However, I do feel comfortable for the time being to invest in Newmont, as they are the largest gold miner in the world, and later we will also get into why I invested in the company.
Their CEO is Tom Palmer. He became the CEO in 2019, and had several positions in Newmont and other mining companies previously to him becoming the CEO. He has a Bachelor of Engineering degree and a Master of Science degree from Monash University in Melbourne, Australia. He is a fourth-generation miner with a vast knowledge about the industry. Once he became the CEO, he made a speech about his vision for the future being that he would like "Newmont remaining to be focused on keeping their people safe, while growing our profit margins through operating, technical and financial discipline". He also stated "We will also generate value for our shareholders by leveraging Newmont's leading land position and exploration program in favorable jurisdictions to grow our reserves and resources". Especially the last sentence is sweet music in a shareholder's ear. Another thing about Tom Palmer is that during the pandemic he declared the office era over, which I believe is quite interesting. He stated " we'll have spaces where teams can come together to work or collaborate, and we'll have people spending time in an office environment and spending time at home or travelling around the operating sites as necessary, and I will have a place where I can park my computer" but in general he would like people to work from home. He also said about the pandemic "this has demonstrated that we don't need to have that sort of real estate". He has also made a commitment to cut Newmont's greenhouse gas emissions by 30 % by 2030 and set a goal of net zero by 2050. All in all, I like his attention to the shareholders, employers and that his modern point of view at the possibility to work from home and making the business greener.
I really do like the management of Newmont, and even though they have no moat and the historical numbers are not that important, I would still like to shortly run through the big five numbers. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. Normally, we want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. Obviously, the numbers are quite underwhelming. Especially in the oldest benchmarks. They look better in the latest benchmarks though. It isn't something I worry about, as Newmont depends on commodity prices. Later in this post, I would come with some points of why I have decided to invest in Newmont.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. While the oldest benchmarks are underwhelming, we are actually seeing the sales growth rate for Newmont increasing, and the later benchmarks look great.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. It is sort of a mixed bag, as you have some fantastic numbers in three benchmarks, while the oldest and newest benchmark are underwhelming.
The Equity Growth Rate is the most important of the four growth rates. Besides the oldest benchmark, we see that Newmont does live up to our wish of at least 10 % in all of the benchmarks. As I wrote previously, I don't believe the numbers are that important when looking into miners but it is encouraging to see numbers like these.
Finally we look into the Cash Growth Rates. The numbers are fantastic if you ignore the oldest benchmark. They are way above the requirements and it is encouraging to see a cash growth rate like this for Newmont. When I go through the reasons I have invested in Newmont, you will get an idea of why we have seen such a growth, especially in the latest benchmarks.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. When you are making these calculations on Newmont, you see that they have a debt that can be paid off in 1,94 years. Which is acceptable, and nice to see as miners previously were known to be companies with a large debt,
All right. So we have gone through a short description of the company, the management and the numbers. Now I would like to mention some of the reasons that I have invested in Newmont. First and foremost I use my investments in precious metals and miners as a hedge to inflation. I know there are different opinions about inflation in the United States and if we will see it or not. I believe we will see inflation, especially because we saw 22 % of all the U.S. dollars ever printed being printed in 2020, and I cannot see how this can not lead to a devaluation of the dollar. Another reason for me to invest in Newmont is that they work on a gold price of $1.200 an ounce and run their business based on that price, and as I write this the price of an ounce of gold is $1.770. You might want to ask yourself what they are going to do with that extra cash? The answer is that the board has approved to share 40-60 % of the incremental attributable free cash flow to shareholders that is generated about a $1.200 per ounce gold price. It can be through dividends or buybacks, where the board of directors have approved a stock repurchase program of $1 billion over the next 18 months from January 2021. Finally, let us look at the prices of the other metals as well. According to their annual report the average copper price per pound in 2020 was $2,80 and it is now $4,17, average silver price per ounce in 2020 were $20,55 now it's $26,02, average lead price per pound in 2020 was $0,83 now it's $0,89 and the average price of zinc per pound in 2020 was $1,03 and now it's $1,26. Hence, all of them are higher now than the average price last year (it is not a typo, the silver price is per ounce, while the others are per pound).
Obviously, it isn't all good for Newmont. There are plenty of risks to consider when investing in a mining company. Actually, Newmont lists 32 different risk factors in their annual report! I will not go through all 32 risk factors but it is something you should read through if you are going to invest in Newmont. Instead, I will shortly mention what I believe are the two largest risk factors when investing in any mining company. Especially because the mining companies cannot really do anything about it, so it is something you will need to monitor yourself. The first and most obvious one is the price of commodities. If prices of the commodities a company mine drops, it will effect the revenue of the company. As I wrote previously, Newmont is operating with a price of gold per ounce of $1.200 so they still have plenty of room but it is certainly something you will need to monitor. The other major risk is that the estimates that mining companies make for each mine are uncertain. The mine could have less (or more) of the commodity than expected, which could hurt (or improve) the revenues. This is where experience and good management comes in.
All right, we have gone through the numbers, potential and risks regarding Newmont, and now it is time for us to calculate a price for Newmont. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use a EPS as it is now at $3,52. I chose a Estimated future EPS growth rate of 5,50 (I believe that this is a very conservative growth rate), Estimated future PE of 11 (which the double of the growth rate, as the historically PE for Newmont has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $16,35 and we want to have a margin of safety on 50 %, so we will divide it by 2, meaning that we want to buy Newmont at price of $8,17 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 4.882 The Capital Expenditures was 1.302. However, I looked through their annual report to see, how much of the capital expenditures were used on maintenance. Luckily, Newmont is actually stating how much of their capital expenditures are used on maintenance, which is 933, meaning we will use that number in our calculations. The Tax Provision was 704. We have 801,11 outstanding shares. Hence, the calculation will be like this: (4.882 - 933 + 704) / 801,11 x 10 = $58,08 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at $5,21 and a growth rate of 5,5 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $53,44.
I believe that Newmont is a good mining company with a great management. Due to my believe that inflation will increase the price of gold, I believe it is important to have a company such as Newmont in the portfolio. It is not necessarily a long-term position for me, as it depends on the macro economic environment. In case you invest in Newmont or in any other mining company, I would advice you to keep a close look to the price of gold or whatever commodities the company mine. With all that being said, I would be comfortable to open a position in Newmont around $58, which is what I did some time ago. It means that I got it around at the Ten Cap price.
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