- North American Gold Mines constitute 44% of the Trefis price estimate for Newmont Corporation's stock.
- Asia Pacific Mines constitute 20% of the Trefis price estimate for Newmont Corporation's stock.
- African Gold Mines constitute 13% of the Trefis price estimate for Newmont Corporation's stock.
WHAT HAS CHANGED?
Gold prices declined on average from 2011-2015. This trend prompted Newmont Corp to rationalize its portfolio of mines, in response to the subdued pricing environment. Gold prices have been gaining strength since 2017 due to global geopolitical uncertainty. Price increased sharply in 2020 following the outbreak of coronavirus pandemic and we expect prices to remain elevated in the near-term.
- Effect of Coronavirus
- Newmont's stock price increased 33% since the beginning of 2020 to $56 as of 20th August 2021. This is mainly due to a rise in gold prices from $1570/ounce at the beginning of 2020 to $1850/ounce in the beginning of 2021. The price of gold was already elevated in the last few months of 2019 due to increased buying from central banks. However, global gold prices shot up further after the WHO announced a global health emergency on January 31, 2020. With the lockdown taking a major toll on global economic and industrial growth, the value of gold as a hedge instrument increased, thus leading to a rise in price level. As about 98% of NEM's revenue is contributed by gold, the stock saw a healthy growth during this crisis. There has been some volatility (with a downside bias) in gold prices in the first half of 2021
- Recent rise in gold prices
- Gold as an investment is often viewed as a hedge against inflation and macroeconomic and geopolitical uncertainty. Macroeconomic uncertainty caused by the unexpected outcome of the UK's June 2016 EU referendum and the uncertainty regarding North Korea’s nuclear agenda boosted gold prices in 2016 and 2017. Though prices are on a higher range in 2018, strengthening economic conditions and low levels of unemployment in the U.S. prompted the Fed to raise interest rate, with 4 hikes in 2018. However, rising economic uncertainty has led to major central banks around the world to buy more gold in the last 1 year, which has led to higher prices. Prices were further pushed higher due to the ongoing pandemic in 2020. Gold prices have seen some volatility and largely declined since the beginning of 2021 as vaccine rollout has led to expectations of faster economic recovery. Additionally, rise in bond yields have led to projection of higher inflation, and thus higher interest rates, which in turn affected gold prices adversely.
- Q2 2021 Performance
- Newmont beat analysts' expectations for both revenues and earnings in Q2 2021. Newmont reported revenue of $3.065 billion in Q2 2021, marking a y-o-y growth of almost 30%. Higher revenue was mainly driven by increase in average realized prices and higher volume. Newmont's attributable gold production in the second quarter increased 15.1% year over year to 1.45 million ounces in the quarter, driven by higher production from sites that saw lower operations or were placed into care and maintenance last year due to the pandemic, higher ore grade milled as well as increased mill throughput at Boddington. Average realized prices of gold increased 6% year over year to $1,823 per ounce. Newmont reported EPS of $0.80 in Q2 2021 compared to $0.51 in the previous year period.
- 2020 Annual Performance
- Newmont reported revenue of $11.497 billion in 2020, marking a growth of 18% from $9.74 billion recorded in 2019. Higher revenue was mainly driven by increase in gold and silver sales, primarily due to higher average realized gold and silver prices, along with slight growth in other segments as well. Copper division was a drag due to lower volume sold. NEM reported adjusted earnings of $2.66 per share in 2020, higher than $1.32 per share in 2019.
- Divestment of non-core assets and rationalization of operating costs
- Newmont has rationalized its business in response to the subdued gold pricing environment prevailing over the course of the past few years. It has divested several high-cost gold mines since mid-2013, as well as tried to reduce its operating costs. The company has divested $1.7 billion worth of non-core assets since mid-2013. The company also announced the sale of the Batu Hijau mine in Indonesia, operations at which were adversely affected by changing government regulations pertaining to the mining sector. The impact of the sale of the company's high-cost mines is reflected in Newmont's all-in sustaining costs (AISC) metric, which is a measure of the overall costs required to sustain a company's ongoing mining operations. The AISC for Newmont's gold mining operations (excluding the Batu Hijau mine) fell from $1,098 per ounce in 2013 to $909 per ounce in 2018. The AISC for 2019 increased to $966 and further to $1,045 in 2020 due to increased exploration and advanced project spending. However, this number is expected to improve and range between $870 and $970 per ounce in the longer-term through 2022 as the company realizes the benefits of its cost-saving projects.
- Commercial Production at Subika Underground in Ghana
- Newmont announced commercial production at its Subika underground project, while adding high-grade low-cost gold production at the Ahafo mine in Ghana. Subika has an initial mine life of 10 years and will add an average annual gold production of 150k-200k ounces of gold in the first 5 years. Having been completed in a budget of $186 million in development capital, Subika is Newmont's third profitable expansion in 2018 and its tenth completed project since 2013. Africa production increased in 2019 and is expected to go further up in 2020 with a full year of production from Subika Underground, higher grades from Subika open pit, and improved mill throughput in the second half of the year with completion of the Ahafo Mill Expansion project.
- Newmont acquires Goldcorp
- In April, Newmont acquired Goldcorp in a $10 billion share-for-share merger. The new company, is renamed Newmont Goldcorp (it changed its name to Newmont Corp thereafter), and will be the world's largest gold producer with a good project pipeline and sustainable reserve position. Though 75% of the reserves are located in the Americas, the company has a certain amount of geographic diversification with 15% and 10% reserves in Australia and Ghana, respectively.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Newmont's value that present opportunities for upside or downside to the Trefis price estimate for the company's stock:
North American Mines
- Newmont's North American Gold Shipments: Newmont's North American gold shipments rose sharply through 2016 and 2017 before declining in 2018. This was followed by rise in gold shipments in 2019 and 2020. Nevertheless, shipments could exceed the base case expectations if production conditions become more favorable. If shipments increase by a higher percentage in 2021 and reaches a total output of 3.70 million ounces by the end of our forecast period instead of 3.33 million ounces expected currently, it would represent a 3% upside to the Trefis price estimate.
- Newmont's North American Gold EBITDA Margin: Newmont's margins from its North American operations increased from 16% in 2007 to 49% in 2012, as the sharp rise in gold prices offset a significantly higher cost of sales. Margins for the division fell to 26% by 2015 due to a fall in prices, before recovering to 36% in 2016 and 2017 as prices recovered. Margins declined in 2018 and remained almost flat in 2019 due to lower volume and higher oil prices, while margin shot up in 2020 due to higher revenue. We expect margins for the division to stabilize around 54%, driven by the sharp increase in production volumes with higher grades from Twin Creeks, Cripple Creek & Victor and Long Canyon and the company's cost reduction efforts. However, if margin growth is lower than anticipated and divisional margins stabilize around 40%, it would represent a downside of 3% to the Trefis price estimate.
Newmont Corporation is a gold and copper producer with gold mining operations in the United States, Australia, Peru, Ghana, Canada, New Zealand, and Mexico. The company's proven and probable gold reserves stood at 94.24 million ounces at the end of 2020.
Newmont's copper mining operations are located in the United States and Australia. The company's proven and probable copper reserves stood at 15.22 million pounds at the end of 2020.
SOURCES OF VALUE
Gold mining drives value
Gold mining is the most important division for Newmont Corp in terms of revenues and profits. In 2020, the company's consolidated gold production stood at 5.824 million ounces. Gold generally accounts for over 95% of the company's consolidated sales revenue. North American Gold Mines is the company's most valuable segment, according to our estimates.
Rising demand for gold from emerging economies
Demand for gold is expected to be quite robust from major emerging economies. Rapidly growing middle-class populations and rising incomes in these countries, particularly China and India -- the world's largest gold consumers -- are expected to result in a sustained jewelry and investment demand for gold. India & China's jewelry demand increased by 12% & 3%, respectively in 2017 and investment demand from each of the country grew by 2% & 8%, respectively.
Recovery in global demand and prices for copper
The global demand outlook for copper and the prices of the metal have risen significantly in the past one year. The Chinese government had instituted a fiscal stimulus targeting the infrastructure and manufacturing sectors to boost its economy in 2016 which has helped foster this growth and boosted the demand outlook for copper from China. Additionally, China's fight for the blue sky has increased its demand for refined copper, substituting the demand for scrap, further supporting prices.
A considerably enthusiastic outlook for increased usage of Electric Vehicles (EVs) and U.S.' plans for a $1.2 trillion revamp of U.S. infrastructure has also raised the demand outlook for copper globally and thus led created a favorable market environment for copper.