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Newmont: A Golden Opportunity?

Opdateret: for 1 dag siden

It may be a good idea to diversify one's portfolio in order to prepare for a recession. During the 8-month recession in 2001, gold rose by 5,0%, while the S&P 500 dropped 1,8%. 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, there have also been periods of recessions where gold has underperformed the stock market. If you do not want to buy gold, you have the option to invest in a goldminer that is correlated to the price of gold. One such option is Newmont, which currently pays a more than 4% dividend.

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 slightly different from my usual analyses. It is my belief that analyzing a mining company is different from analyzing other companies, primarily because the price of miners is driven by commodity prices. Hence, mining companies come with more risks than other types of companies. I will go through some of them later in this analysis. I should also mention that I am not an expert in commodities. Therefore, it is important for you to conduct your own research before investing in a company such as Newmont. I will strive to maintain the same format in this analysis as in my other analyses, even though the historical numbers are not as critical when evaluating companies in differentsectors. I do not currently own shares in Newmont or any of its competitors. If you would like to view my portfolio or if you want to copy it, you can find instructions on how to do so here. If you want to buy shares or fractional shares in Newmont at eToro.

Newmont Corporation is the world's largest gold mining company with operations in North and South America, Africa, and Oceania. Newmont mainly mines gold, but they also mine copper, silver, zinc, and lead. However, mining gold is by far their largest asset, as 87% of their sales in 2022 were attributable to gold (compared to 86% in 2021 and 90% in 2020).In 2022, other metals attributed to sales were copper (3%), silver (5%), lead (1%), and zinc (4%). You could argue that Newmont has a toll moat, as it requires significant capital investment to establish a mining business. However, I would consider their competitive advantage to be rather weak compared to other companies I analyze. It means that you obviously need to be aware of the risks that I will discuss later. However, I do feel comfortable for the time being investing in Newmont, as they are the largest gold miner in the world, which means they have a lot of experience in gold mining.

Their CEO is Tom Palmer. He became the CEO in 2019 and had held several positions in Newmont and other mining companies prior to assumingthe role of CEO. He holds a Bachelor of Engineering degree and a Master of Science degree from Monash University in Melbourne, Australia. He is a fourth-generation miner with extensive knowledge of the industry. Once he became the CEO, he delivered a speech outlining his vision for the future. He expressed his desire for Newmont to prioritize the safety of their employees while also achieving growth in profit margins through operational, technical, and financial discipline. He also 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." Especially the last sentence is music to a shareholder's ears. Another interesting thing about Tom Palmer is that he declared the end of the office era during the pandemic. 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 at home or traveling to operating sites as necessary. I will also have a place where I can park my computer." However, in general, he would prefer people to work from home. He also commented on the pandemic, saying, "This has demonstrated that we don't need to have that kind 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 achieving net zero emissions by 2050. All in all, I appreciate his attention to the shareholders and employees, as well as his modern perspective on the potential for remotework and creating a more environmentally friendly business.

I really like the management of Newmont. Although they have a weak moat and the historical numbers may not be that important, I would still like to briefly review the numbers. In case you want an explanation about what the 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 expect the numbers to exceed 10% in all years. Overall, the numbers are underwhelming. Not once have they met the requirement of 10% or more, and they have had three consecutive years with a negative ROIC.However, it is worth noting that during this time frame, we only experienced two months of recession in 2020. Newmont is considered a means to diversify your portfolio. Additionally, if gold prices surge during inflation, it will also be reflected in Newmont's return on invested capital (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 actualnumbers and the percentage growth year over year. The equity growth is also a bit of a mixed bag and underwhelming in most years. Once again, the macroeconomic factor in this period means that Newmont has not been operating in an environment that would grow their book value. The significant increase in book value in 2019 is due to Newmont's acquisition of Goldcorp Inc.

Finally, we will investigate 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. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield is the amount of free cash flow per share that a company is expected to earn 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, which indicates a strong correlation between Newmont's operations and the price of gold. If gold prices spike, Newmont will deliver higher free cash flow. The high free cash flow is also evident in the levered free cash flow, which has been historically high in 2020 and 2021. Free cash flow yield indicates that the stock isn't cheap, but we will discuss this furtherin the analysis.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings.When making calculations on Newmont, it is observed that they have a debt that can be paid off in 4.77 years. It is a bit too high, and I would like to see the management prioritize debt repayment in the future.

Based on my preliminary findings, Newmont could be a compelling addition to the portfolio. However, there are some risks of which you need to be aware. Actually, Newmont lists 32 different risk factors in its annual report! I will not go through all 32 risk factors, but it is something you should read if you are going to invest in Newmont. Instead, I will briefly mention what I believe are some of the major risk factors when investing in any mining company. Especially because these are risks that mining companies cannot really control. Hence, it should be something you monitor yourself.The first and most obvious factor is the price of commodities. If the prices of the commodities that a company mines drop,it will affect the company's revenue. Newmont is currently operating with a gold price per ounce of they still have ampleroom for the price of gold to decrease. However, it is definitely something that you will need to keep an eye on. The other major risk is the uncertainty surrounding the estimates made by mining companies for each mine. The mine could have a lower (or higher) quantity of the commodity than expected, which could negatively (or positively) impactthe revenues. This is where experience and good management come in. Finally, we have the short-term risk of macroeconomic factors. Management has mentioned that labor costs, material and consumables costs, and fuel and energy costs are still at elevated levels, which have affected their results. If prices continue to remain high, it will have a negative impact on the company's profitability for an extended period.

There are also numerous reasons to invest in Newmont. One is as a hedge against recession. I already mentioned that during the last two longer recession, the price of gold outperformed the stock market. Investors tend to flock to safer investments when the stock market plummets. I already provided some examples in the introduction of this analysis. Another example is the significant increase in the price of gold, which more than doubled from 2007 to 2011 during the last stock market crash. Another reason for me to invest in Newmont is that they operate with a gold price assumption of $1.200 ounce and conduct their business accordingly. Currently, the price of an ounce of gold is $1.981. 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 generated at a $1.400 per ounce gold price with shareholders. It can be through dividends or buybacks. Newmont currently has a sustainable base dividend of $1 per share. If the price of gold is above $1.700 the dividend will be between $1,40 - $1,80 per year, if the price of gold is above $2.000, the dividend will be between $2,00 - $3,00. Other metals. Newmont also has exposure to other metals, which could lead to additional growth. The demand of copper is expected to grow as we see global trends towards decarbonization and renewableenergy. The demand for silver is also expected to rise, as it is used in electric vehicles. Lead isused for many different purposes, and Mordor Intelligence expects the price of lead to rise by a 5 % CAGR until 2026. There are some uncertainties regarding zinc, which has been experiencing a steady decline lately. Nonetheless, it gives from diversification from gold.

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. 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 decided to use an EPS of $2,00, which is higher than in 2022 and 2021 but lower than in 2020 and 2019. I chose an estimated future EPS growth rate of 5,50% (I believe that this is a very conservative growth rate as Finbox expects agrowth rate of 13%.) The estimated future PE is 11, which is double the growth rate, as the historical PE for Newmont has been higher. Additionally, we already have the minimum acceptable return rate at 15%. Doing the calculations, we calculate the sticker price (also known as fair value or intrinsic value) to be $9,29. To ensure a margin of safety of 50%,we divide this value by 2. Therefore, we aim to purchase Newmont at a price of $4,64 or lower, using 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". 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 3.220. The capital expenditures were 2.131. However, I looked through their annual report to see how much of the capital expenditures were used for maintenance. Luckily, Newmont is stating that 1.059 of their capital expenditures are used on maintenance. We will use this number in our calculations. The tax provision was 455. We have 793 outstanding shares. Hence, the calculation will be as follows: (3.220 - 1.059 + 455) / 793 x 10 = $32,99 in Ten Cap price.

The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With Newmont's Free Cash Flow Per Share at $1,37 and a growth rate of 5,5 %, if you want to recoup your investment in 8 years, the Payback Time price is $14,05.

I believe that Newmont is a reputable mining company with excellent management. There is a lot of uncertainty in the current economic environment, and it may be a good idea to have some exposure to precious metals. However, there are some risks associated with Newmont. Costs are expected to increase, and the stock price is highly correlated with the price of gold. Hence, there are things that need to be monitored if you invest in the company. You could choose to buy gold instead, but I believe that Newmont is a great alternative because it is highly correlated to the price of gold. Additionally, they pay a 3,5% dividend while waiting for the price of gold to rise (although the dividend yield may be lower next year, as explained previously). Personally, I don't want too large a portion of my portfolio to be invested in precious metals, but I do feel comfortable buying Newmont below the Ten Cap price of $32,99.

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