Key Statistics

Company Profile

Newmont Corporation (TSX: NGT), formerly known as Newmont Goldcorp Corp, is the world’s leading gold mining company. The group also produces copper, silver, zinc and lead. The company's world-class portfolio of assets are located in North America, South America, Australia, and Africa. Newmont is the only gold producer listed in the S&P 500 Index. As of December 31st, 2019, the group's attributable proven and probable gold reserves were of the order of 100.2 million ounces with an aggregate land position of approximately 26,400 square miles.

Investment Rationale   

• Consistently delivered EBITDA margin above 30%: Newmont Corporation has a consistent track of delivering EBITDA margin above 30% over the past few years, which entails operational excellency of the management. For the financial year 2019, the company reported an EBITDA margin of 36%, which was around 320 bps higher against the industry median EBITDA margin of 32.8%. And, given the trend in the first quarter of FY20, it seems that the trend will continue in the current fiscal year as well. 

• Significantly Higher Return on Equity: For the financial year ended on December 31^st, 2019, the company reported an ROE of 18%, which was significantly higher than the industry median of 1.6% for 2019. 

• Expectation of Higher Gold Prices in the near term: Amid steep volatility in the equity and fixed income market, gold is likely to stay in the limelight given its safe-haven nature, which would have a positive impact on the group's top-line, bottom line and profitability margins.

• Lower Crude Oil prices would reduce production bills: Crude Oil has plummeted approximately 60% in 2020, and likely to hover below $50/bbl for the rest of 2020, which would allow the group to reduce its production cost and hence it will contribute positively in the group’s profitability margins.

• Newmont holds the industry’s largest gold Mineral Reserves of 95.7 million ounces. The group's performance in the Q1FY20 is exceptionally strong, with top-line grew by 43%, EBITDA surged by 63% and cash flow from operation improved by 164%.

• Stocks showing Relative Strength on TSX: Amid bearish market sentiment, which started after COVID-19 spread across the globe in mid-February, the share of NGT shown relative strength against the broader market crash. On a YTD basis, the stock has generated a return of ~43% and relatively outperformed the benchmark by ~60%. On a YoY basis, its shares were up by 91.5%, and relative outperformance against the benchmark index stood at 105%, which implies a bullish trend in the stock. 

1QFY20 Financial Highlights

• During the financial period under review, the company’s top-line grew 43% to US$ 2,581 million from US$ 1,803 million reported in the same period of the corresponding fiscal year. The solid result was primarily driven by an 11% increase in the “Attributable Gold ounces” sold and a 22% spike in the average gold realized prices in the period. The average realized gold prices during the Q1FY20 stood at US$ 1,591/oz against US$ 1,300/oz realized in the Q1FY19, and average realized price for silver, lead and zinc were US$14.13 per ounce, US$0.64 per pound and US$0.62 per pound, respectively. The unprecedented spike in the gold pieces was driven mainly by the huge swings in the equity market across the globe, led by COVID-19 pandemic. The pandemic has jolted investors sentiments and investor are continuously ditching the speculative assets and swapping to safe-heaven gold assets, which brought a demand glut for gold amid challenging equity market and a falling interest rate regime.

• Gold production during the quarter surged by 20% 1,479 koz from 1,230 koz in Q1FY19, primarily driven by a 364% surge in gold production in North America to 376koz from 81koz in a year over the period.

• The group’s all-in sustaining cost (AISC) of gold came in at US$ 1,030/oz, ~14% higher from US$ 907/oz in pcp. The increase was driven by a higher realized gold prices per ounce, higher sustaining capital spend, and care and maintenance costs associated with COVID-19.

• EBITDA during the period under review surged by 63% to US$1,118 million. Income before income and mining tax and other items leapt up by 183% to US$ 779 million against US$ 275 million reported in the same quarter of the previous financial year. Net Income from operation surged to US$ 824 million from US$ 119 million reported in the corresponding previous fiscal period, whereas net income attributable to Newmont Stockholders stood at US$ 822 million. Diluted Earnings Per Share from continuing operations surged by 495% to US$ 1.04 in the Q1FY20 from US$ 0.21c per share reported in the previous financial year.

• In the Q1FY20, the group’s capex surged by 46% to $328 million, on account of sustaining capital investment from the acquired Goldcorp assets, partially offset by reduced development capital spend. Development capital expenditures in 2020 primarily include advancing Tanami Expansion 2, Musselwhite Materials Handling and conveyor installation, Quecher Main, Yanacocha Sulfides, Ahafo North, and Nevada’s Goldrush and Turquoise Ridge shaft projects. Net cash generated from operating activities surged by 164% to US$ 936 million from US$ 571 million in Q1FY19. Further, the company generated about US$ 1,121 million from the sale of assets in Q1FY20 as compared to US$ 2 million generated in the corresponding previous financial year, and cash inflow from investing activities soared to US$ 1,123 million against a cash outflow of US$ 275 million in Q1FY19.

• In Q1FY20, the board declared a quarterly dividend of US$ 0.25/share, which was ~ 79% higher on a YoY basis. 

 Financial Highlights, Source: Company Filings.

Guidance: On 20 May 2020, the group provide a revised outlook. The group mentioned that all of its operations are deemed essential and reaffirmed long term guidance stable production of more than 6 million ounces and improving costs from 2021 through 2024. For 2020, the group expects to produce 6,000 koz gold with an AISC of US$ 1,015/oz. The production guidance is on the lower end of the previously provided guidance, while the cost is at the higher end of the previous guidance. The revised outlook includes the production and cost impacts from the group’s five operations which are being temporarily placed under care and maintenance work for an average of 45-days.

Key Risks: The gold prices have improved to multi-year highs, and long-term supply and demand outlook remains favourable for the Company. The company’s top-line is directly related to the gold prices, and any external event which affect the gold prices adversely may impact the group’s financial and operational performance.

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 41.76% of the total shareholding. The Vanguard Group Inc. and BlackRock Institutional Trust Company, N.A., holds the maximum interests in the company at 11.74% and 7.43%, respectively.

Source: Refinitiv (Thomson Reuters) 

Stock Performance and Technical Analysis

At the time of writing (as on May 28^th, 2020, after the market close), shares of NGT traded 0.14% higher at CAD 80.93. In a year-over period, its shares registered a 52W high of CAD 96.45 and a 52W Low of CAD 43.75, and at the last closing price, its shares traded approximately 85% above its 52W low closing price and nearly 16% below its 52W low price. Which reflects that at the last closing price, NGT shares were more tilted towards its 52W high price level, a positive price trend.

1-Year Price Return (as on May 29^th, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

On a YoY basis, its shares have surged by approximately 91.5%, and on a YTD basis, its shares are up by 37%. Also, its shares have significantly outperformed the benchmark indices at the same time, which reflects a relative strength of the stock against the broader market.

Further, the stock was trading well above its short-term and long-term crucial support level of 60-day and 200-day SMAs, which is a positive price trend. And, Price/200-day SMA ratio stood at 1.32x, which implies that the stock has traded approximately 32% above its 200-day SMA, which indicates that the stock is in a long-term uptrend.

However, the Moving Average Convergence Divergence is falling, with the difference between 12-day and 26-day EMAs is negative, which is a short-term negative trend, we believe that the recent recovery in the global equity market is the reason behind this, as stocks from different sector performed well and gold stocks slightly underperformed.

Valuation Methodology (Illustrative): Price to Cash Flow

*Note: All forecasted numbers have been taken from Refinitiv (Thomson Reuters).

Stock Recommendation

Given the increase in average gold realization prices and increasing gold production is set the benefit NGT in the FY20. As gold is likely to remain in the limelight within the investor's community, the recent data released from World Gold Council reveals that Gold-backed Exchange Traded Funds (ETFs) saw a massive inflow of 298 tones and pushed global gold holding in these products to an all-time high of 3,185 tonnes. In Q1’20 Gold ETFs witnessed a seven-fold YoY demand as investors have rushed to ditch speculative asset classes and swapped to safe-haven gold assets because of the recent bloodbath in the financial market similar to the 2008 financial crisis. Further, the trend continued in April'20 as well, with globally gold-backed ETFs adding inflow of another 170t which helped to push ETFs’ holding to a new all-time high of 3,355t. The global gold-backed ETFs AUM (Asset Under Management) surged to a new all-time high of US$ 184bn.

So given the positive price trend in the NGT key offerings and a positive trend in its shares backed with strong fundamentals and valuation done using P/CF method, we have given a "Buy" recommendation on the stock at the closing price of CAD 80.93 (as on May 28^th, 2020, after the market close), with lower double-digit upside potential, based on the NTM P/CF multiple of 14x on FY20E EBITDA.  We have considered Barrick Gold Corp (TSX: ABX), Franco-Nevada Corp (TSX: FNV), and Agnico Eagle Mines Ltd (TSX: AEM) etc. as a peer group.

* Recommendation is valid on 29 May 2020 price as well