Newmont Mining Corporation (NYSE:NEM) added a new presentation to its website, Bank of America Merrill Lynch 2016 Canada Mining Fireside Chat Presentation, of which I want to highlight the following points.
If I were a shareholder of Newmont, there is one thing that would make me hopeful about the future of the company and its performance in the stock market. It is that the remuneration of the directors is related to the performance of the stock. As you can see from the picture below, about 2/3 of the directors’ compensation is based on the stock market.
Source: Bank of America Merrill Lynch 2016 Canada Mining Fireside Chat Presentation
So this is a guarantee that any decision taken at a senior level will be in the interest of the company and especially its shareholders.
Over the last few years, the management of Newmont Mining Corporation worked very hard to build a longer-life, lower cost asset portfolio.
As you can see from the picture below, Newmont continues on its trajectory of cost improvement, gold all-in sustaining cost is down 28% since 2012, from $1,177 per ounce in 2012 to $852 per ounce in 2016.
Source: Bank of America Merrill Lynch 2016 Canada Mining Fireside Chat Presentation
The building of a longer-life, lower cost asset portfolio also passes through the development of its project pipeline in which the miner is engaged. In particular, the miner has massively invested in four high project margins over the last few years.
Cripple Creek & Victor (Colorado), where the first production of gold commenced in March, produces between 350 – 400 thousand ounces of gold at AISC of $600 – $650 per ounce.
The other three projects that are going to be completed soon are:
- Merian, Suriname, where the first production of gold is expected in Half 2 2016. The miner expects to produce between 400,000 and 500,000 ounces of gold in the first five years at an AISC of $650 – $750 per ounce.
- Long Canyon (Nevada), where exploration drilling activities are already underway. The production of gold (the date of the first production is estimated for the first half of 2017) will be made using a phased approach. The miner expects to produce between 100 – 150 thousand ounces of gold at an AISC $500 – $600 per ounce.
- Tanami Expansion (Australia), where the first production is expected in mid-2017. Once the expansion of the mine is completed, the miner expects to produce between 425 – 475 thousand ounces of gold at an AISC of $700 - $750.
Source: Bank of America Merrill Lynch 2016 Canada Mining Fireside Chat Presentation
Newmont expects to maintain steady attributable gold production over the coming years. The outlook is without Batu Hijau, the mine in Indonesia that Newmont sold for a total consideration of $1.3 billion ($920 million gross cash proceeds plus, $403 million contingent payments) and that will provide the company with more cash to fund its high margin projects.
Source: Bank of America Merrill Lynch 2016 Canada Mining Fireside Chat Presentation
Once the sale of Batu Hijau is completed, 92% of reserve base of the company will be gold.
Through the divestment of its high cost and/or noncore assets and the reinvestment of the proceedings into the development of the high project margins, Newmont is consistently improving its efficiency at operations that is reflected in the improvement of the following ratio:
TTM average FCF per share compared to the competitor TTM average FCF ($1.89 vs. 91 cents):
Source: Bank of America Merrill Lynch 2016 Canada Mining Fireside Chat Presentation
If Newmont was able to generate a FCF per share (TTM) of $1.89 versus 89 cents (competitor average), when the average gold price (TTM) was $1,160.50 per troy ounce and the average AISC (TTM) was $884.50, then we can expect a further increase in the FCF per share for the remainder of 2016 and a higher FCF per share in 2017 on the basis of an expected higher average gold price per ounce, a lower AISC per ounce and a better TTM average net debt to EBITDA ratio (1.0x) compared to the competitor TTM average ratio (1.9x). The TTM average net debt to EBITDA ratio of 1.0x is also the result of a successful strategy in debt reduction (13% reduction in net debt from prior year quarter and 49% reduction since 2013).
Until the FED continues to postpone the rise in interest rates, gold prices will up trend and Newmont is well positioned to benefit from it.
Free cash flow amounted to $486 million in the second quarter of 2016, +308% year-over-year. This means that Newmont was able to add $367 million to its FCF with a 5.6% positive trend in the gold price. And as gold price trades higher, Newmont should be able to add extra FCF following a disciplined capital expenditure and therefore may increase the dividend going forward.
Disclosure:Â I have no positions in Newmont Mining Corp.
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