In the event of a recession, diversifying a portfolio with gold may be a prudent strategy. Historical data suggests that gold has performed well during certain recessionary periods. For instance, during the eight-month recession in 2001, gold rose by 5,0%, while the S&P 500 dropped by 1.8%. Similarly, in the 18-month recession starting in 2007, gold returned 16,3% compared to a decline of 37,4% for the S&P 500. However, it is important to note that there have also been periods of recession where gold has underperformed the stock market. For those hesitant to buy gold directly, investing in a gold mining company that is correlated to the price of gold and offers dividends can be an attractive alternative. One such option is Newmont Corporation, the largest gold miner in the world.
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 followers. 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.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Newmont. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Newmont either. Thus, I have no personal stake in Newmont. If you want to purchase shares (or fractional shares) of Newmont, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
Newmont Corporation, founded in Colorado, United States in 1916, is the world's largest gold mining company, with operations spanning the United States, Canada, Mexico, Dominican Republic, Peru, Suriname, Argentina, Chile, Australia, Papua New Guinea, Ecuador, Fiji, and Ghana. Newmont is responsible for approximately five percent of the estimated total worldwide gold production. Most of Newmont's revenue comes from the sale of refined gold. The end product at Newmont's gold operations is typically doré bars, an alloy consisting primarily of gold but also containing silver and other metals. These doré bars are sent to refiners to produce bullion that meets the required market standard of 99,95% gold. In addition to gold, Newmont also mines copper, silver, zinc, and lead. However, gold remains the company's largest asset, accounting for 89% of sales in 2023, compared to 87% in 2022 and 86% in 2021. In 2022, the sales distribution for other metals was copper (5%), silver (3%), lead (1%), and zinc (2%). The mining industry is capital intensive and requires ongoing investment for the replacement, modernization, or expansion of equipment and facilities. This significant capital requirement creates a barrier to entry, which can be considered a "toll moat" for Newmont, as it requires substantial investment to establish and maintain a mining business.
Tom Palmer is the CEO of Newmont Corporation, having assumed the role in 2019. Prior to becoming CEO, he held several positions within Newmont and other mining companies, bringing extensive industry experience to his leadership role. He holds a Bachelor of Engineering degree and a Master of Science degree from Monash University in Melbourne, Australia, and is a fourth-generation miner with deep knowledge of the mining sector. Upon becoming CEO, Palmer delivered a speech outlining his vision for Newmont's future. He emphasized prioritizing the safety of employees while achieving growth in profit margins through operational, technical, and financial discipline. He stated, "We will generate value for our shareholders by leveraging Newmont's prominent land position and exploration program in favorable jurisdictions to expand our reserves and resources." This focus on expanding reserves and resources is particularly appealing to shareholders. During the pandemic, Palmer declared the end of the traditional office era, stating, "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 at home or traveling to operating sites as necessary. I will also have a place where I can park my computer." He expressed a preference for remote work, noting that the pandemic had demonstrated the reduced need for traditional office space. Additionally, Palmer has committed to reducing Newmont's greenhouse gas emissions by 30% by 2030, with a goal of achieving net zero emissions by 2050. This commitment to environmental sustainability, along with his focus on shareholder value and employee welfare, underscores his modern and forward-thinking leadership approach.
I believe that Newmont has a moat. I also like the management. Let's now analyze the financials to evaluate if Newmont meets our criteria for a strong competitive advantage. For further clarification on the financial metrics, please refer to "MY STRATEGY" on the website.
The first metric to examine is the return on invested capital (ROIC). Ideally, we would like to review 10 years of historical data, with ROIC exceeding 10% each year. However, the numbers for Newmont Corporation are underwhelming. Only once have they met the 10% threshold, and there have been two consecutive years with a negative ROIC. It is worth noting that during this period, the economy only experienced two months of recession in 2020. Newmont is often considered a means to diversify a portfolio, and its performance can be influenced by fluctuations in gold prices. If gold prices surge during inflation, it should positively impact Newmont's ROIC.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. The numbers are somewhat mixed, with some years showing increases and others showing decreases, highlighting the cyclical nature of Newmont Corporation's business. Notably, equity has increased significantly in both 2019 and 2023, primarily due to major acquisitions: Goldcorp in 2019 and Newcrest in 2023.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. One noteworthy point is that Newmont has consistently generated positive free cash flow since 2014, which is always encouraging to observe. It is not surprising to see that Newmont delivered its highest free cash flow in 2020, indicating a strong correlation between Newmont's operations and the price of gold. Typically, if gold prices spike, Newmont will deliver higher free cash flow. However, free cash flow reached a ten-year low in 2023, primarily due to an exceptionally challenging year for Newmont. In 2023, Newmont experienced a four-month-long labor dispute at the Peñasquito mine, as well as large-scale flooding and bushfires impacting their Tanami and Éléonore mines. These events significantly affected production and, consequently, free cash flow. The disruptions also impacted the levered free cash flow margin, contributing to the lower free cash flow yield. Therefore, the 2023 numbers should be viewed in the context of these extraordinary events. It is also important to note that Newmont experienced declines in all three metrics in 2022, which were due to macroeconomic factors. Despite these challenges, management remains optimistic about generating long-term sustainable free cash flow and hopes to see positive signs of this recovery in 2024.
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. Newmont has had negative earnings in the past two years, making it impossible to calculate this ratio based on earnings. If we instead divide the long-term debt by free cash flow, Newmont has 71,66 years of free cash flow in debt. However, this does not provide an accurate picture due to the unusually low free cash flow in 2023, as discussed previously. Nonetheless, it is notable that long-term debt is currently at a ten-year high, approaching $7 billion, partly due to the acquisition of Newcrest. This elevated level of debt is significant and warrants close monitoring. However, management has indicated that they prioritize debt repayment, which is a positive sign.
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Based on my preliminary findings, Newmont could be a compelling addition to a portfolio. However, all investments come with risks, and Newmont is no exception. The most obvious risk is a decline in commodity prices. Newmont's business is heavily dependent on the prices of gold, copper, silver, lead, and zinc, which fluctuate daily and are influenced by numerous factors beyond Newmont's control. Factors influencing commodity prices include gold sales, purchases, or leasing by governments and central banks; speculative short positions taken by significant investors or traders in metals; the relative strength of the U.S. dollar; the monetary policies employed by the world’s major central banks; the fiscal policies employed by the world’s major industrialized economies; expectations of future inflation rates; interest rates; recession or reduced economic activity in large economies; decreased industrial, jewelry, base metal, or investment demand; increased import and export taxes; increased supply from production, disinvestment, and scrap; forward sales by producers in hedging or similar transactions; availability of cheaper substitute materials; and changing investor or consumer sentiment, including the transition to a low-carbon economy, investor interest in cryptocurrencies and other investment alternatives, and other factors. In addition, sustained lower prices for gold, silver, copper, zinc, or lead can reduce revenues through production declines due to the cessation of mining deposits, or portions of deposits, that become uneconomic at sustained lower metal prices. They can also reduce or eliminate the profit expected from ore stockpiles, halt or delay the development of new projects, and reduce funds available for exploration and advanced projects. Uncertainty in Estimates. Another risk is the uncertainty surrounding the estimates. Miners use pre-feasibility or feasibility studies for undeveloped ore bodies to derive estimates of capital and operating costs based on anticipated tonnage and grades of ore to be mined and processed, the predicted configuration of the ore body, expected recovery rates of metals from the ore, the costs of comparable facilities, the costs of operating and processing equipment, and other factors. Actual operating and capital costs and economic returns on projects may differ significantly from original estimates. Furthermore, it may take many years from the initial phases of exploration until the commencement of production, during which time the economic feasibility of production may change. Thus, a mine could have a lower (or higher) quantity of the commodity than expected, which could negatively (or positively) impact revenues. Dividend Cuts. Newmont decided to cut its dividend after the acquisition of Newcrest. The reason is that Newmont had to issue approximately 400 million shares to fund the acquisition. Last year, Newmont paid $1,60 in annual dividends per share, which cost the company around $1,4 billion. With the issuance of 400 million new shares and the subsequent reduction of the dividend to $1 annually per share, the total dividend payout now costs around $1,2 billion, necessitating the dividend cut. Management has stated that their capital allocation priorities will be: first, maintaining a minimum cash balance; second, reducing debt to $8 billion; and third, share repurchases. Management has emphasized that they will prioritize share buybacks over dividend increases until they have repurchased the 400 million shares issued. While this strategy may benefit long-term investors, it means that Newmont will pay less in dividends than its peers for the foreseeable future.
There are numerous reasons to consider investing in Newmont. Best Portfolio in the Industry. Newmont is committed to building the best portfolio in the industry. Management has indicated plans to divest six non-core assets this year, aiming for a portfolio comprised entirely of Tier 1 and emerging Tier 1 operations and districts. A Tier 1 asset is defined as having, on average over the asset’s mine life, production of over 500.000 gold equivalent ounces per year on a consolidated basis, average all-in sustaining costs per ounce in the lower half of the industry cost curve, an expected mine life of over 10 years, and operations in countries classified in the A and B rating ranges by Moody’s, S&P, and Fitch. Additionally, Newmont anticipates delivering $500 million in annual synergies and realizing over $2 billion in cash from portfolio optimization. Management asserts that Newmont's Tier 1 portfolio sets a new standard for gold and copper mining, providing shareholders with exposure to the highest concentration of Tier 1 assets in the sector. These assets are located in the most favorable mining jurisdictions and have an improving cost profile, maximizing margins and generating strong free cash flow. Lower Gold Production Costs. Management projects that Newmont will produce approximately 5,6 million ounces of gold at an all-in sustaining cost of $1.300 per ounce in 2024, which is significantly lower than the current price of gold. Additionally, Newmont's unit costs are expected to improve due to steady production volumes and the delivery of synergies and full potential improvements, with the lowest unit costs coming from Newmont's managed Tier 1 portfolio. Management expects to deliver all-in sustaining costs, bringing Newmont's go-forward portfolio down to $1.150 per ounce by 2027. This reduction in costs should make Newmont significantly more profitable in the future. The Newcrest Acquisition. Newmont acquired Newcrest in 2023, expanding its gold portfolio in the most favorable jurisdictions. This acquisition also doubled Newmont's copper production, which is significant as Newmont's CEO, Tom Palmer, has highlighted the growing global demand for copper. He has noted that over the next 10 years, the amount of copper needed is expected to increase significantly, with a projected shortfall of around 10 million tonnes by 2035 based on current production trends. Bridging this gap will require more copper mines, recycling, and enhanced hedging processes. This creates an exciting opportunity for Newmont to help meet this demand with the organic copper exposure now present in its portfolio.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,39, which is from the year 2021 (the last time Newmont had a positive EPS). I have selected a projected future EPS growth rate of 9%. Finbox expects EPS to grow by 8,9% in the next five years. Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on Newmont's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $14,64. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Newmont at a price of $7,32 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.058, and capital expenditures were 2.990. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.093 in our calculations. The tax provision was 573. We have 1.153 outstanding shares. Hence, the calculation will be as follows: (3.058 – 2.093 + 573) / 1.153 x 10 = $13,34 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Newmont's free cash flow per share at $1,37 (2022 numbers) and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is $16,47.
I believe that Newmont is a reputable mining company with strong management. Newmont experienced a particularly challenging year in 2023 due to the labor dispute at the Peñasquito mine, along with large-scale flooding and bushfires impacting its Tanami and Éléonore mines. These events significantly affected the company's performance, as reflected in both the ROIC and free cash flow. Hopefully, such adverse events will not recur soon, and the numbers should improve in 2024. However, there are inherent risks when investing in a cyclical company like Newmont. The company's performance is highly dependent on commodity prices, which are influenced by numerous external factors beyond its control. Despite Newmont's over 100 years of experience in mining, output estimates for each mine come with a degree of uncertainty, which is another factor investors must consider. Dividend investors faced an unpleasant surprise as Newmont cut its dividend following the acquisition of Newcrest. While I understand that management prioritizes debt repayment and share buybacks to offset the recent dilution, dividend investors might find more attractive opportunities elsewhere in the industry. On a positive note, I appreciate that Newmont has improved its portfolio by focusing on Tier 1 assets, which should enhance future results. I also find it promising that Newmont is confident in its ability to reduce gold production costs, potentially making the company significantly more profitable in the future. Moreover, the Newcrest acquisition is advantageous as it doubles Newmont's copper production, a metal expected to be in high demand in the future. While I may have been conservative in calculating Newmont's price, it is challenging given the recent difficulties the company has faced. However, the stock price is not a primary concern for me, as I do not plan to buy Newmont shares. Personally, I believe there are more attractive investment opportunities available outside the mining industry.
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