Newmont Corporation (TSX: NGT), formerly known as Newmont Goldcorp Corp, is the world's leading gold mining company with the largest gold reserves in the industry. The group also produces copper, silver, zinc and lead. The company's world-class portfolio of assets is located in North America, South America, Australia, and Africa. Newmont is the only gold producer listed in the S&P 500 Index.

Investment Rationale

• Solid Second Quarter Performance: In the second quarter of 2021, the company's revenue increased by 30% from the prior-year quarter to US$3,065 million, primarily due to higher average realized metal prices and higher sales volumes. The average realized price for gold was US$1,823, an increase of US$99 per ounce over the prior-year quarter. Net income from continuing operations attributable to Newmont stockholders was US$640 million or US$0.80 per diluted share, an increase of US$228 million from the prior-year quarter primarily due to higher sales volumes and higher average realized prices in the current year.

• Superior Free Cash Flow Generation Across Cycles: The company has consistently generated free cash regardless of the economic cycles. This reflects the resilience of its business model and its world-class asset in top-tier junctions. Also, every US$ 100/oz increase in the gold prices has bolstered the group free cash flow by US$ 400 million, shows the superior competitive advantage of the company against the industry peers. Further, in the second quarter of 2021, the company generated a free cash flow of US$578 million, as compared to US$388 million in the same quarter of the previous financial year, which implies a jump of 49% on a YoY basis, driven by significantly higher consolidated operating cash flow from continuing operations due to higher gold realized prices.

Source: Company Presentation

• Solid Liquidity: The group exited the quarter with a solid liquidity position, with US$4.6 billion of consolidated cash and approximately US$7.6 billion of liquidity; implies adequate liquidity to cover its obligations. Moreover, the company maintain a robust balance sheet with an investment-grade credit rating, which provide access to the capital market at a very competitive price. Further, the group has strong debt protection metrics with reported net debt to adjusted EBITDA of 0.2x.

• Gold Realization Prices is Likely to Remain High: Average realized price for gold was US$1,823, an increase of US$99 per ounce over the prior year quarter. Average realized gold price includes US$1,819 per ounce of the gross price received, the favourable impact of US$9 per ounce mark-to-market on provisionally priced sales and reductions of US$5 per ounce for treatment and refining charges. Despite a recent correction in the gold prices, we believe that gold will continue to oscillate between US$1,750-US$1,850/oz for the coming few quarters. Hence, it would continue to bolster realization prices and margin expansion.

• An Income Play: Newmont’s Annualized dividend of US$2.77 per share is the highest in the gold sector. Further, the company has announced a dividend framework that maintains a leading US$1.00 per share sustainable base dividend and provides additional returns from Newmont’s significant free cash flow generation at higher gold prices. Moreover, the company is featuring an industry-leading dividend yield of 3.86%, which is quite decent given the lower interest rate environment.

Source: Company Presentation

• Consistency in Margin Profile: The group has maintained consistency in the margin profile, which reflects management efficiency and quality of cash flow. Also, the company has one of the best margin profiles within the industry that implies a strong competitive advantage.

• Strong Margin of Safety with Free Cash Flow Yield of 10%: Given the ability of the company to generate strong free cash flow, the company’s current year Free Cash Flow Yield stood at 10%, which provide a higher margin of safety to the existing as well as potential shareholders.

• Strong Balance Sheet: The company has negligible balance sheet risk given the strong debt protection metrics. The Debt/Equity ratio at the end of Q2FY21 stood at 0.26x, with an interest coverage ratio of 35.70x. This reflects that the company can comfortably use debt capital to amplify profitability.

• Risk Associated to Investment: The performance of the company is subject to volatility in the gold prices and U.S Dollar. A strong U.S Dollar against the basket of major could have weighed on the gold prices, and in turn, it would impact the group’s financial performance and the stock price at the TSX exchange.

Financial Highlights: Q2FY21

Source: Company Filing

• Revenue increased 30% from the prior year quarter to US$3,065 million primarily due to higher average realized metal prices and higher sales volumes.
• Average realized price for gold was US$1,823, an increase of US$99 per ounce over the prior year quarter. Average realized gold price includes US$1,819 per ounce of gross price received, the favourable impact of US$9 per ounce mark-to-market on provisionally priced sales and reductions of US$5 per ounce for treatment and refining charges.
• Attributable gold production increased 15% to 1,449 thousand ounces from the prior year quarter primarily due to higher production from sites that were placed into care and maintenance or experienced reduced operations in response to Covid during 2020, and higher ore grade milled and higher mill throughput at Boddington.
• Gold AISC improved 6% to US$1,035 per ounce from the prior year quarter primarily due to care and maintenance costs in the prior year, partially offset by higher sustaining capital spend.
• Attributable gold equivalent ounce (GEO) production from other metals increased 120 percent to 303 thousand ounces primarily due to higher production at Peñasquito as the site was placed into care and maintenance in the prior year and higher ore grade milled, mill throughput and recoveries at Boddington.
• Net income from continuing operations attributable to Newmont stockholders was US$640 million or US$0.80 per diluted share, an increase of US$228 million from the prior year quarter primarily due to higher sales volumes and higher average realized prices in the current year. These increases were partially offset by higher income tax expense in the current year.
• Adjusted EBITDA improved 62% to US$1,591 million for the quarter, compared to US$984 million for the prior year quarter.
• The company ended the quarter with US$4.6 billion of consolidated cash and approximately US$7.6 billion of liquidity; and reported net debt to adjusted EBITDA of 0.2x.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 37.14% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 8.28% and 5.9%, respectively. The institutional ownership in the NGT stood at 84.23% and strategic ownership stood at 0.32%. 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Newmont is built upon fundamentals with a significantly strong balance sheet, superior earnings quality, consistently generating free cash flow, ample liquidity, manageable debt and robust financial risk protection metrics.

More importantly, the company continues to perform strongly in the second quarter of 2021. In the second quarter of 2021, the company’s reported revenue increased by 30% from the prior-year quarter to US$3,065 million. Free Cash Flow also increased to US$578 million primarily due to higher operating cash flow, partially offset by higher capital expenditures as described above.

Further, the group exited the quarter with a strong liquidity position, with US$4.6 billion of consolidated cash and approximately US$7.6 billion of liquidity. Moreover, the company maintain a robust balance sheet with an investment-grade credit rating, which provide access to the capital market at a very competitive price. Further, the group has strong debt protection metrics with reported net debt to adjusted EBITDA of 0.2x.

Also, at the current trading level, the stock is offering a very lucrative dividend yield of 3.86%, which is substantially higher compared to the US 10-Year Treasury Bond Yield of 1.33%.

Hence, considering the aforementioned facts and valuation, we recommend a “Buy” recommendation on the stock at the closing price of CAD 71.69 on August 25, 2021.

 *Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on August 25,2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV

* Recommendation is valid at August 26, 2021 price as well.

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