Newmont Corporation

Newmont Corporation (TSX: NGT) is one of the leading gold miners with the largest gold reserves in the industry. The company also produces copper, silver, zinc and lead.

Key Update:

• Ample Liquidity: The company reported stable liquidity levels of USD 7.756 billion, which includes the cash and cash equivalents of USD 4.828 billion along with a borrowing capacity of USD 2.928 billion available under our unsecured revolving credit facility. With the current liquidity level, the group would be able to meet its working capital and capital investments.

• Improved financial metrics: The company reported an increase in gold production (1.54 million ounces versus 1.26 million ounces in pcp) during Q3FY20, followed by lower all-in sustaining costs (USD 1,020/ounce versus USD 1,097/ounce in Q2FY20). These has supported the overall financial flexibility of the company, which is a key positive. Adjusted EBITDA was recorded at USD 1,663 million, higher than USD 984 million in Q2FY20. Free Cash Flow increased to USD 1,301 million from USD 388 million in Q2FY20, primarily due to higher operating cash flow. 

Operational Highlights (Source: Company Reports)

• Event Update: The group would disclose its Q4FY20 result on February 18, 2021.

Q3FY20 Financial Highlights:

• NGT declared the quarterly result, wherein the group reported sales of USD 3,170 million, significantly higher than USD 2,713 million in the previous corresponding period (pcp). The increase was driven by higher average realized gold prices, partially offset by lower gold sales volumes.
• During the quarter, NGT reported a decrease in cost and expenses (USD 2,172 million, versus USD 2,255 million in pcp), supported by a lower cost of applicable sales (USD 1,269 million versus USD 1,392 million in pcp) and lower exploration costs (USD 48 million versus USD 88 million in pcp), partially offset by higher depreciation and amortization costs (USD 592 million versus USD 548 million in pcp).
• Net income from continuing operations stood at USD 628 million, as compared to USD 2,252 million in the previous corresponding period. The decline was mainly due to a gain on formation of Nevada Gold Mines amounting USD 2,366 million in Q3FY19.
• Cash and cash equivalents stood at USD 4,828 million, while total assets were reported at USD 40,551 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The income of the company is directly correlated with international gold prices. Thus, volatility in the commodity price would dampen the company’s income and would hinder the overall performance as well.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group reported a solid growth in the cash flows, which stood at USD 3,196 million for 9MFY20, significantly higher than USD 1,661 million, a year ago. For FY21, the group expects its attributable production of ~6,500 koz, while total Capital Expenditures is estimated at USD 1,000 million and consolidated Gold All-in Sustaining Costs is expected at USD 970/oz. The company has a balanced portfolio across the major mining geographies of Australia, North America, South America, Africa etc, which indicates stable operational performance amidst the economic cycles. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Barrick Gold Corp, Agnico Eagle Mines Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 74.12 on February 11, 2021.

NGT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Barrick Gold Corp

Barrick Gold Corp (TSX: ABX) is a mining company principally engaged in the production and sale of gold. The Company holds a geographically diversified asset portfolio and operates 15 gold mines across North America, South America, Australia, and Africa.

Key Highlights

• Preliminary numbers:The management shared its preliminary full year and fourth quarter 2020 results, indicating that it has met its 2020 guidance targets. Preliminary gold production for the entire year of 4.8 million ounces is at the midpoint of the 4.6-5.0 million ounce guidance range. The copper production of 457 million pounds is also within the guidance range of 440-500 million pounds. The average market price for gold in Q4 was USD 1,874 per ounce, while the average market price for copper was USD 3.25 per pound.

Source: Company

• Riding on the wave of higher gold prices:Through agile management and operational efficiency, the company increased its operating cash flow by 80% in Q3 2020 to USD 1.9 billion and free cash flow by 151% to USD 1.3 billion, and this is a record set by the company on a quarterly basis for free cash flow.

Source: Company

• Healthy balance sheet: The on-going robust performance of the company’s operations and continuous improvement has strengthened its balance sheet. The company holds total liquidity of USD 7.7 billion, including a cash balance of USD 4.7 billion, and a debt net of the cash position of USD 0.4 billion as of the end of Q3 2020. There are no material debt repayments due before 2033.

Source: Company

• Increased dividend distribution:For the third quarter of 2020, the company paid a quarterly dividend of USD 0.09 per share, a 12.5% increase compared to previous quarter’s dividend. The continuous hike in the dividend reflects the healthy operational and financial status of the company.

Source: Company

• Event update: The Company will report its fourth quarter and full year 2020 results before markets open on February 18, 2021. 

Financial Overview of Q3 2020

Source: Company

• In Q3 2020, the company reported revenues of USD 3.54, billion increased by 29% compared to USD 2.67 billion in the previous corresponding period, primarily due to an increase in the realized gold price.
• EBIT reported by the company in Q3 2020 was USD 1.6 billion, this is non-comparable to last year’s EBIT as the company had an impairment reversal and other income, cumulatively more than USD 2.7 billion.
• Net earnings attributable to equity holders of the company for Q3 2020 were USD 882 million compared to USD 1.63 billion in Q3 2019. The decrease was primarily due to the above-stated reason of impairment reversal and other income. 

Risks associated with investment

The company’s financial performance is mostly dependent on the price of gold, which directly affects the company’s profitability, margins, and cash flows. The price of gold is subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all of which are beyond the company’s control. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters. 

Stock recommendation

Due to the ongoing economic environment, the investors are moving towards defensive asset classes to arrest the current volatility in the equity markets. Gold, being one of the safest asset class, has generated a robust return in the recent time and currently trading close to all-time high levels. The company has also mentioned that it has achieved its full-year guidance on the back of healthy production of metals in Q4 2020. Higher gold realization cost is helping the company to drive the revenues as well as the cash flows. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 28.21 on February 11, 2021. We have considered Kinross Gold Corp, Agnico Eagle Mines Ltd, Kirkland Lake Gold Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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