COVID-19 To Be A Boon For Newmont With $1.5 Billion Revenue Surge; Here’s How

Newmont Corporation’s (NYSE: NEM) revenue from gold mining increased from $7 billion in 2017 to $9 billion in 2019, primarily driven by higher shipments on account of additional mines in the portfolio due to the merger with mining giant Goldcorp in early 2019, along with higher gold prices. Gold revenue is expected to increase by about 16% to $10.5 billion in 2020, mainly due to higher gold price realization.

The spread of coronavirus which has led to a lock down in almost all major cities across the globe, is proving to be a boon for major gold miners like Newmont. Expectation of a sharp decline in economic and industrial activity has fueled safe-haven investment demand for gold, offsetting marked weakness in consumer-focused sectors of the market, in turn leading to a surge in gold prices. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to almost $1,700/ounce in May 2020. The price-induced 16% projected rise in gold revenue for Newmont in 2020 is likely to represent 100% of the $1.5 billion the company is expected to add in 2020.  In our interactive dashboard Newmont Revenues: How Does NEM Make Money? we discuss Newmont’s business model, followed by sections that review past performance and 2020 expectations for the company’s revenue drivers, and competitive comparisons with Barrick Gold and Freeport-McMoRan.

Overview

• Newmont Corporation is primarily a gold and copper producer with mining operations in the United States, Australia, Peru, Ghana, Canada, New Zealand, and Mexico.
• Gold mining is the largest and fastest growing operating division of the company, contributing 93% of total revenues in 2019.
• Gold revenue growth has been key to Newmont’s stock price appreciation of over 82% from $34 at the beginning of 2019 to about $62 as of 6^th May 2020. A major part of this appreciation, i.e. 38%, came about in the last 3 months since the WHO announced a global health emergency on 31^st January 2020. We discuss Newmont Valuation analysis in full, separately.

Revenue Segments

Newmont’s reported $9.7 billion in total revenue for full-year 2019. This includes 3 operating segments-

• Gold: $9 billion in FY2019 (93% of total revenues). The company’s proven and probable gold reserves stood at 100.2 million ounces at the end of 2019. The end product at gold operations is generally doré bars (alloy of gold and some quantity of silver & other metals).
• Copper: $210 million in FY2019 (2% of total revenues). The company’s proven and probable copper reserves stood at 15 billion pounds at the end of 2019. Operations are concentrated in Nevada and Australia.
• Others: $481 million in FY2019 (5% of revenues). Includes silver, lead, and zinc sales.

Our interactive dashboard highlights how changes in Newmont’s revenues compare with that of its competitors Barrick Gold and Freeport-McMoRan.

Gold To Be The Driving Force

• Sales from the gold division have increased over 30% in the last one year from $6.95 billion in 2018 to $9.05 billion in 2019. This mainly reflected inorganic growth due to the Newmont-Goldcorp deal.
• Division revenue is projected to grow by 16% to $10.5 billion in 2020.
• This is likely to be more than 100% of the company’s projected incremental total revenue in 2020.
• Higher revenue is likely to be driven by 2.5% projected growth in gold shipments, led by full year effect of the Newmont-Goldcorp merger, along with around an 8.5% rise in price realization.
• Newmont follows a zero-hedging strategy, which is set to help the company to take full advantage of the recent spike in gold prices, by selling its full output at market price.
• Gold revenue contributed 93% of Newmont’s total revenue in 2019, with its share expected to rise to 94% in 2020.
• With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current COVID-19 crisis which has led to an increase in gold’s value as a hedging instrument.

The current crisis is expected to have a completely opposite effect on Newmont’s copper revenues, making gold the principal driving force for the company in 2020. Our interactive dashboard details how Newmont’s copper division has performed, along with revenue outlook amidst coronavirus crisis.

Conclusion

Rise in gold prices due to the current crisis has led to expectations of a sharp rise in gold revenues, confirming gold as the primary driving force for Newmont in the near term. Based on Newmont Valuation, Trefis has increased its price estimate for Newmont Corp to $64 per share, slightly higher than its current market price of $62 per share.

In contrast to the upgrade in price estimate for Newmont, in the worst-case scenario its close-rival Freeport-McMoRan could go to $4 during the current crisis.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

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