Newmont Corporation: Strategic and Financial Deep Dive

Introduction

Since the beginning of time, gold has exercised a unique attraction and appeal on investors all over the world. This precious metal has a rich history of both cultural significance and practical use, but, most importantly, gold has always been considered a safe haven for the preservation of wealth. In the landscape of the financial market, gold has played a critical role, offering investors an option to diversify portfolios and to protect against economic uncertainty. Most of all, gold is suitable for risk-averse investors, since it can be used as a hedge against inflation risks or as protection against share price losses. In other words, usually gold has inverse correlation with the other asset classes. This proved to be true during the financial crisis of 2007/2008: between October 2007 and March 2009, stocks worldwide recorded losses of more than 50%; the value of gold, on the other hand, rose by more than 15%. And even in the spring of 2020, a rise in the price of gold can be observed, after the collapse due to the coronavirus.

The gold market, which has a history of stability and embedded value, is influenced by a number of factors, including global demand, monetary policy, geopolitical instability and financial market trends.

However, to understand completely the practical and industrial aspect of gold, it is essential to examine the companies that hold its reserves and mine it. In this article, we will focus on one of the leaders in gold mining: Newmont Corporation. Founded over a century ago, Newmont has shaped the gold mining industry with its history of success, its quest for innovation and by playing a leading role in meeting the growing demand for this unique precious metal.

In this article, we will consider Newmont's history, management, operations, IPO and eventual M&A, in order to provide a comprehensive view of this important company in the gold sector.

Furthermore, we will critically analyze Newmont's prospects using financial tools such as SWOT Analysis, Multiples Analysis, Dividend Discount Model (DDM) and Discounted Cash Flow (DCF), to fully understand its value and future potential.

Following these analyses, we will conclude by providing a recommendation based on a hypothetical target price valuation for Newmont's shares, stressing the opportunities and challenges that the company and the gold sector face in the current economic environment.

Company Overview

Newmont Corporation (NYSE: NEM) is an American gold mining company. It is the largest gold mining company in the world and is also the only company in the sector to be included in the SP500 index.

Gold mines are very numerous and are scattered all over the world, some examples are Nevada, Colorado, Ontario, Quebec, Mexico, Dominican Republic, Australia, Ghana, Argentina, Peru and Suriname.

The most important M&A deals involving Newmont are certainly the acquisition of Goldcorp in 2019 for 10 billion dollars and the most recent acquisition of Newcrest in May 2023 for 16.8 billion.

Newmont was founded in New York in 1916 and was named after the union of 'New York' and 'Montana', which indicate the names of the places where founder Thompson made his fortune and where he was born.

In the 1980s, Newmont managed to thwart five takeover attempts by companies that wanted to dissolve the company and sell its assets in order to increase shareholder value.

Since then, Newmont has tried to complete many M&A transactions in order to increase its market share. For instance, in April 2011 Newmont acquired Canada's Fronteer Gold INC, becoming the second largest gold producer.

The business model of gold miners is quite simple: they try to produce at the lowest possible cost and hope that the price of gold will rise to increase revenues and thus profits.

It should be noted that the share price of gold miners is much more volatile than the price of gold itself. A brief example may facilitate understanding: if Newmont spent $1,200 to produce one ounce of gold and the price of gold was $2,000 Newmont would earn $800. If the price of gold increased by 10%, going to $2,200, Newmont would earn $1,000 (equal to a 25% increase). The same method, however, also applies to decreases in the gold price. This suggests that gold miners’ stocks are quite risky.

Newmont has had several legal disputes, mainly because it is accused of polluting too much and imposing excessively harsh working conditions on miners (especially in Ghana).

The current CEO is Tom Palmer, who has been in office since 1 October 2019. He worked for 20 years at Rio Tinto. He holds a master’s degree in engineering from Monash University (Melbourne, Australia).

There was an increase in outstanding shares from about 535 million in 2018 to about 841 million in 2023. It is true that making acquisitions increases the production of gold, but it also increases the number of shares, so that the production per share remains almost unchanged.

The synergies that Newmont refers to when talking about its acquisitions are quite limited, considering that the various mines are scattered all over the world and far away from each other. It is unclear how the company intends to lower its production costs in the coming years, considering ever-increasing maintenance and production costs.

SWOT analysis

Strengths

Analyzing Newmont's balance sheet, it has a healthy balance sheet and is not overly indebted compared to the sector in which it operates (Financial Leverage of 1.91).

Newmont can count on a large portfolio of high-quality mines around the world, which guarantee a first-rate degree of diversification and profitability.

Newmont has more than 100 years of experience in the field (108 years) and an experienced management. Management's experience and commitment is critical in this historical period when we are exposed to rapid changes in economic conditions and consumer preferences.

The $1 billion share buyback program seems serious, as does the attempt to use free cash flow to reduce the debt level.

Weaknesses

Regarding liquidity and financial sustainability, however, it should be noted that in 2023 Current Ratio was 1.25 while Quick Ratio was only 0.71. Both ratios should be above 1 to signal a solid liquidity position, which unfortunately is not the case for Newmont.

Newmont is overly dependent on gold’s performance, as more than 90% of its revenues are related to gold. Being overly dependent on one commodity can be dangerous in case of fluctuations in gold prices, as well as problems in the supply-chain.

The industry is heavily regulated from the point of view of environmental pollution and workers' rights, so a lot of money has been spent and is likely to be spent in the future by Newmont on lawsuits brought by various shareholders.

The cut in the dividend to $1.00 per share (from $1.60 per share in 2023) could cause many investors interested in the dividend to flee, negatively affecting the share price and market sentiment in general with respect to Newmont and the industry in general.

In 2023, the level of free cash flow was quite low ($88m vs. $1,067m).

Opportunities

Several new site explorations are underway, which if successful could greatly increase Newmont's revenues.

Newmont has a large amount of cash, $6.1 billion, which it could use for further acquisitions in the future if the right opportunities arise in the market.

Newmont could use the technology to try to keep the cost of production per ounce constant or lower in the coming years. Newmont could use autonomous mining machines, drones and artificial intelligence.

Synergies are possible, which Newmont estimates to be a reduction of $100M in G&A expenses and $200M in supply-chain related expenses by 2025. In addition, Newmont estimates that it may be able to gain an additional $200M related to achieving full potential in mining, i.e. increasing mine productivity, creating better processes and mine structure.

Threats

It may not be easy for Newmont to manage new mines acquired through M&A processes. Expansions do not always guarantee economies of scale. It will be the management that will have to prove itself capable of managing the mines around the world, giving the right incentives to the workers and being respectful of environmental and workers' rights regulations.

Declining gold prices could significantly affect Newmont's profits, which could go negative. This is because the cost per ounce has risen more and more in recent years, reaching more than $1,300 per ounce in 2023. If the gold price were to retrace, Newmont's profits would be in serious trouble.

DDM analysis

Newmont Corp was analyzed using the DDM (Dividend Discount Model) because it has been paying dividends for some time now and it is assumed that it will be able to do so in the future under normal circumstances.

In this case, the Dividend Discount Model was created on the basis of two assumptions: dividend growth rate of 3.5% equal to the expected growth of the gold mining sector in the coming years and perpetual growth rate of the terminal value equal to 3%.

The analysis can be carried out by starting from Newmont's projected 2024 dividend figure of $1.00 ($0.25 per quarter), or by applying a 3.5% increase over the known 2023 dividend of $1.60 ($0.40 per quarter), thus assuming that the decrease in the 2024 dividend is only temporary.

The two hypotheses are both plausible and lead to quite different results.

The first hypothesis, i.e. the one assuming a dividend of $1.00 for 2024 and then a growth of 3.5% per annum, assigns a fair value of $29.25 per share.

The second hypothesis, i.e. the one that starts with a dividend of $1.66 for 2024 (up 3.5% from that of 2023) and then a growth of 3.5% per annum, assigns a fair value of $48.44 per share.

The first hypothesis might seem overly conservative, although it is true that the gold mining sector could face periods of loss due to any downward fluctuations in gold. Consequently, remaining conservative might be advisable.

The second hypothesis is based on the expectation of a steady increase in the gold price, which would continue the upward trend of recent years.

Giving equal weight to both scenarios, the fair value can be identified by the average of the values offered by the two scenarios, i.e. $38.84 per share.

Multiples analysis

Newmont Corporation was analyzed against nine industry multiples relevant to the mining and metals sector. Specifically, its ratios were compared to industry benchmarks, with metrics such as EV/FCF, P/CF and P/E indicating an undervaluation, supporting a buy strategy. Indeed, a lower multiple suggests that the implied enterprise value of the company should be higher and, consequently, the implied (i.e. target) share price is higher than the actual price at which the shares are currently traded on the market.

For instance, Newmont's EV/FCF ratio stands at 23.6x, while the industry's is 33.26x. Similarly, its P/CF ratio is 21.64x, compared to the industry's 22.42x, and its P/E ratio is 21.33x, while the industry's is 21.54x. Moreover, Newmont's EV/Revenues ratio is 2.73x, compared to the industry's 3.19x, and its P/Sales ratio is 2.42x, while the industry's is 2.87x. Additionally, Newmont's P/BV ratio is 1.34x, compared to the industry's 1.20x.

On the other hand, the EV/EBITDA multiple seems to signal overvaluation, given Newmont's EV/EBITDA of 12.10x, compared to the industry's 7.41x. To be absolutely accurate, we specify that, although of negligible difference, the P/BV multiple also suggests slight overvaluation.

Data Q4 2023       

Overall, Newmont's average multiples of 10.80x reflect an undervalued position compared to the industry's 11.64x. Therefore, based on the full assessment of the multiples, a buy strategy is recommended for Newmont Corporation due to its favorable positioning relative to competitors in the mining and metals sector.

DCF analysis

Following a 5-year DCF analysis, we conclude that Newmont is a company to invest in. We assumed a tax rate equal to the US marginal tax rate of 25% and considered the weighted average cost of capital of 7.72% as per Damodaran's recommendation for the metals & mining sector. Moreover, the cash flows for the first 3 years ahead (2024 to 2026) were estimated based on the market consensus via FactSet and Financial Times. Furthermore, for the remaining two years considered in the valuation (2027 and 2028), both the market consensus and the company's historical data from recent years were considered. A final measure was to take into consideration into the valuation the date of this report (29 March 2024), adjusting the discounting factors accordingly. For the calculation of the terminal value, we assumed a perpetual growth rate of 3%.

Following the assumptions shown above, we reached an equity value of $53,550.7 million, which, based on the current outstanding shares, corresponds to a target price of $46.5, representing a premium of 36.6% over the market price of $34. 

Below we report the table on the sensitivity of this result, which shows how the target price varies with the changes in the values of perpetual growth and the weighted average cost of capital (assuming shocks up to 0.2%). The sensitivity analysis shows that the confidence interval for the target price varies from a minimum of $42.9 to a maximum of $50.7 (and the premium from 26.2% to 49.0%). It is therefore clear that, with respect to the DCF analysis, our recommendation for the Newmont company is a buy strategy.

Conclusion

Investing in gold is therefore an excellent way to diversify a portfolio to offset fluctuations from other asset-classes.

Gold miners offer a way to invest indirectly in gold by choosing a more volatile medium as positive and negative shocks in the gold price are amplified in the price of gold miners.

The technical analyses (Multiples, DDM and DCF) all provide a BUY signal, showing an investment opportunity. In particular, the DDM analysis provides a fair value of around $39 while the DCF analysis identifies a value of $46.5, so that both values are higher than the price of around $34 at which Newmont is currently trading.

The signal is therefore BUY within a well-diversified portfolio.

References

Financial data: Factset, Financial Times, TradingView and Bloomberg.

Gold industry outlook: Livsey, A. (no date) Gold is flying but miners are left in the dirt, Financial Times. Available at: https://www.ft.com/content/c18e53b3-2a42-41a9-b8b1-09087ee8ddea (Accessed: 29 March 2024). 

Gold, pros&cons:

-        Viebig, J. I Vantaggi dell’oro in un portafoglio di Investimento, MF Milano Finanza. Available at: https://www.milanofinanza.it/news/i-vantaggi-dell-oro-in-un-portafoglio-di-investimento-202312141155177915 (Accessed: 28 March 2024). 

-        Bromberg, M. 8 good reasons to own gold, Investopedia. Available at: https://www.investopedia.com/articles/basics/08/reasons-to-own-gold.asp (Accessed: 28 March 2024). 

-        Perché investire in oro. Available at: https://www.raiffeisen.ch/rch/it/clientela-privata/investire/conoscenza-investimenti/perche-investire-in-oro.html (Accessed: 28 March 2024). 

Metals&mining industry, cost of capital: Damodaran, A. (Jan 2024) Cost of equity and Capital (US), Available at: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html (Accessed: 28 March 2024). 

Mutliple valuation in mining sector:

-        Mining & Specialty Chemicals: 2023 valuation multiples (2023) Finerva. Available at: https://finerva.com/report/mining-specialty-chemicals-2023-valuation-multiples/ (Accessed: 29 March 2024). 

-        Prithvi (2018) Valuation of Metals & Mining Companies Part II: Multiples, Sell Side Handbook. Available at: http://sellsidehandbook.com/2018/07/17/valuation-of-metals-mining-companies-multiples/amp/ (Accessed: 29 March 2024). 

Newmont Investor Presentation about 2023 Full Year + future outlook: Newmont Outlook and Portfolio Update - February 2024. Available at: https://s24.q4cdn.com/382246808/files/doc_presentations/2023/02/newmont-investor-presentation-february-2023_final3.pdf (Accessed: 29 March 2024). 

Swot analysis: What are the strengths, weaknesses, opportunities and threats of Newmont Corporation (NEM). SWOT analysis. Available at: https://dcf.fm/blogs/blog/nem-swot-analysis (Accessed: 29 March 2024).