Newmont Corp. (NEM, Financial) is one of the world’s largest gold producers with operations and assets in the U.S, Canada, Mexico, the Dominican Republic, Peru, Suriname, Argentina, Chile, Australia and Ghana. It also mines for other commodity metals such as copper, silver, lead and zinc.
As of year-end 2021, Newmont had attributable proven and probable gold reserves of 92.8 million ounces, measured and indicated gold resources of 68.3 million ounces and a total land ownership position of approximately 24,300 square miles
Gold outlook
With government liquidity-driven inflation on consumers’ minds today, investors are seeking protection from these rising prices. Physical gold as well as gold mining equities are often seen as a primary hedge against inflation.
Gold is still considered a rare element and a precious metal that has been used for currency, jewelry and other industrial uses for thousands of years. The gold standard was often utilized in monetary policy in the U.S. and other countries off and on since the 1870s, but in 1971, this concept was abandoned for a fiat or paper currency that stands today.
Gold prices rose to over $2,000 per ounce in August 2020 due to government stimulus that was ramped up to fight the negative effects of the Covid pandemic. The price eventually retreated to below $1,700 as the first wave of the pandemic faded away, only to be followed by rampant inflation and global military conflict. This spiked gold prices to over $2,000 again, and they have recently settled in the $1,900s range.
Cryptocurrencies such as Bitcoin were once thought to be an inflation hedge and perhaps a substitute for gold, but that concept has not come to fruition in any meaningful way.
Financial review
Newmont reported strong 2021 financial results as most commodity prices remained elevated. Revenues increased 6.3% to $12.2 billion. Gold sales represented 86% of total revenues with silver, zinc, copper and lead making up the rest in that order. Averaged realized gold prices in 2021 were $1,798 compared to $1,852 in 20202.
Net income increased 10.8% and Ebitda increased 7.7%. Free cash flow has been strong in recent years, totaling $2.6 billion in 2021 and $3.5 billion in 2020. Mining is a capital-intensive business and the company has spent an average of $1.5 billion in capital expenditures annually over the past three years.
This is also a dangerous line of business, and one of Newmont’s most important metrics involves the company’s fatality risk management program. The company continues to implement over 500,000 in-field critical control verifications with a large proportion via new mobile applications. Although some serious incidents have incurred in recent years, mitigation controls have been somewhat successful recently.
Balance sheet and flexibility
Newmont’s balance sheet is in good shape with liquidity of $8.0 billion, cash and equivalents of $5.0 billion and total debt of $5.6 billion. There are no debt maturities until 2029 and the debt-to-Ebitda ratio is 0.2. Cash returned to shareholders for 2021 totaled $2.3 billion, which was comprised of dividend payments of $1.8 billion and share buybacks of $525 million.
Valuation
The company continues to develop a mining and financial plan where profitability can be achieved even at a $1,200 spot gold price. However, due to inflation, higher royalties, labor costs and increased production taxes, the company assumes an $1,800 gold price for its 2022 outlook.
Based on these assumptions, analysts are calling for steady Ebitda in the $7 billion range over the next three years and steady free cash flow of approximately $3 billion on an annual basis.
Newmont maintains a unique dividend framework in which they pay a declared continual base dividend and then supplement it with an additional dividend payment based on free cash flows derived from the level of gold prices. The sustainable dividend is currently paying $1.00 and then the excess target is 50% of attributable cash flow above a $1,200 gold price. That resulted in a $1.20 “excess” payment for a total declared dividend last year of $2.20, which equates to a dividend yield of 2.26%. The company stated that at a $2,100 gold price, the total dividend payout could be $3.25 at mid-point, which would be a 4.0% dividend yield and significantly above market and industry averages.
Guru trades
One guru who recently added to his Newmont holding is John Hussman (Trades, Portfolio). Gurus who have reduced or sold out of the stock recently include Jim Simons (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Conclusion
Buying gold and gold mining stocks as an inflation hedge is a great theme, but Newmont currently produces high levels of free cash flow and high returns on capital, so perhaps it has become a real industrial company if we can assume gold and other commodity prices don’t round trip to below $1,200 per ounce.
Although Newmont is selling near 52-week highs, the stock likely has upside potential from here as inflation will not likely be tamed by near-term monetary policy actions. If the Federal Reserve raises interest rates above current expectations, I believe they could likely trigger a substantial market decline driven by investor sentiment. That will perhaps benefit gold related securities as a safe haven opportunity.
Lastly, the above-market dividend yield should provide some stability as it attracts more income oriented investors as compared to those investors interested in commodity plays.
