Newmont: A golden opportunity?
Opdateret: 23. apr.
It may be a good idea to diversify one's portfolio to prepare for recession. During the 8 months recession in 2001 gold rose by 5,0 % while the S&P 500 dropped 1,8 %, while gold returned 16,3 % the 18 months recession starting in 2007 compared to -37,4 & of the S&P 500. However, there has also been periods of recessions where gold has underperformed the stock market. If you don't want to buy gold, you can buy a goldminer that is correlated to the price of gold and currently pays a 3 % dividend, enter Newmont.
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. I do not currently own shares in Newmont, but I do own shares in one of their competitors, Barrick Gold Corporation. If you want to see my portfolio or if you want to copy it, you can see how to do so here.
Newmont corporation is the world largest gold mining company with operations in North- and South America, Africa, and Oceania. Newmont mainly mine gold, they are also mining 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 (it was 86 % in 2021 and 90 % in 2020). In 2022 other metals attribute to sales were copper 3 %, silver 5 %, lead 1 % and zinc 4 %. You could argue that Newmont has a toll moat, as it is capital intensive to open a mining business. However, I would determine their moat 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 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, which means they have a lot of experience in gold mining.
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 weak moat, and the historical numbers are not that important, I would still like to shortly run through 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 we want the numbers to be above 10 % in all the benchmarks. Overall, the numbers are underwhelming. Not once do they reach the requirement of 10 % of more, and they have had three years with a negative ROIC. However, it is worth noting that during this time frame, we have only had two months of recession in 2020. Newmont is thought of as a way to diversify your portfolio and if gold prices spike during inflation, it will also reflect in the ROIC of Newmont.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The equity growth is also a bit if a mixed bag and underwhelming in most years. Once again, the macroeconomic factor in this period means that Newmont hasn't been operating in an environment that would grow their book value. The large spike in book value in 2019 is because Newmont acquired Goldcorp Inc.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share One thing that is worth noticing is that Newmont has delivered a positive free cash flow since 2014, which is always nice to see. It is not a surprise to see that Newmont delivered their highest free cash flow in 2020, which shows that Newmont's operations are strongly correlated with the price of gold. If gold prices are going to spike, Newmont will deliver higher free cash flow. The high free cash flow also shows 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 get back to that later in the analysis.
Another important thing to investigate 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 earnings. When you are making these calculations on Newmont, you see 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 pay off some debt moving forward.
Based on my findings so far, Newmont could be an interesting company to add to the portfolio. However, there are some risks that you would need to be aware of. 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 some of the largest risk factors when investing in any mining company. Especially because they are risks that mining companies cannot really do anything about. Hence, it should be something you monitor yourself. The first and most obvious one is the price of commodities. If prices of the commodities a company mine drops, it will affect the revenue of the company. Newmont is operating with a price of gold per ounce of $1.200, so they still have plenty of room for the price of gold to drop, 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. Finally, we have the short-term risk of macroeconomics. Management has mentioned that labor costs, material and consumables costs, and fuel and energy costs are still at elevated levels, which has affected their results. If prices continue to be elevated, it will hurt the profitability of the company for a longer period.
There are also plenty of reasons to invest in Newmont. One is as a hedge to recession. I already mentioned that during the last two longer recession, the price of gold outperformed the stock market. Investors tend to flee into safer investments once the stock market tumbles. I already gave some examples in the intro of this analysis; another example is that the price of gold more than doubled from 2007 to 2011 during the last crash. 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 $1.6750. 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 $1.400 per ounce gold price. It can be through dividends or buybacks. It means the following: Newmont currently has a sustainable base dividend of $1 dollar per share. If the price of gold is above $1.700 the dividend will be between $1,40 - $1,80 a year, if the price of gold is above $2.000, the dividend will be between $2,00 - $3,00. Other metals. Newmont has exposure to other metals as well, which could result in further growth. The demand of copper is expected to grow as we see global trends towards decarbonization and renewable energy. The demand of silver is also expected to rise, as it is used in electric vehicles. Lead is used 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 on 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 at $2,00, which is higher than 2022 and 2021 but lower than 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 a growth rate of 13). The Estimated future PE is 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 $9,29 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 $4,64 (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". 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 was 2.131. However, I looked through their annual report to see, how much of the capital expenditures were used on maintenance. Luckily, Newmont is stating how much of their capital expenditures are used on maintenance, which is 1.059, meaning we will use that number in our calculations. The Tax Provision was 455. We have 793 outstanding shares. Hence, the calculation will be like this: (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 the Free Cash Flow Per Share at $1,37 and a growth rate of 5,5 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $14,05.
I believe that Newmont is a good mining company with a great management. There are 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 when it comes to Newmont as costs are expected to increase and because the stock price is highly correlated to the price of gold. Hence, there are things that needs 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 so correlated to the price of gold and they pay a 3 % dividend while waiting (the dividend yield may be lower next year, as explained previously) for the price to rise. Personally, I don't want too large of my portfolio to be in precious metals, but I do feel comfortable in buying Newmont below the TEN CAP price of $32,99.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.
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