Barclays upgraded Newmont Mining Corporation (NEM, Financial) from Equal Weight to Overweight.
The company credits the following reasons for the upgrade.
The completion of the sale of Batu Hijau, the only mineral deposit (copper) in an Asian country, is taking longer than expected but should fall in the beginning of the fourth quarter:
"It could be into the early part of the fourth quarter. It is just complex going through all the different elements of approvals," CEO Gary Goldberg said.
The sale of the asset will provide the largest U.S. gold producer with plenty of cash (approximately $1.3 billion) to develop its pipeline of projects. The most promising expansion projects seen by Barclays are in Ghana.
In the sub region of West Africa, Newmont operates through the Ahafo and Akyem mines.
Ahafo is located 307 kilometers northwest of the Ghanaian capital, produces 332,000 ounces of gold annually through surface mining activities and employs 3,500 employees and contractors.
Akyem is located 111 miles northwest of Accra, Ghana, produces 473,000 ounces of gold annually through surface operations and employs 1,450 employees and contractors.
Besides Ghanaian mine expansions, Newmont is also engaged in the development of other projects that once completed will add 1.025 million ounces of gold at AISC ranging between $500 and $750 per ounce.
“Taken together, these projects are expected to add 1 million ounces of lower cost gold production over the next two years,” said Goldberg.
At Merian, Suriname, the first production of gold is expected to commence in the second half. The miner expects to produce between 400,000 and 500,000 ounces of gold in the first five years at an AISC of $650 to $750 per ounce.
At Long Canyon (Nevada), exploration drilling activities are already under way. 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 100,000 and 150,000 ounces of gold at an AISC of $500 to $600 per ounce.
At Tanami Expansion (Australia), the first production is expected mid-2017. Once the expansion of the mine is completed, the miner expects to produce between 425,000 and 475,000 ounces of gold at an AISC of $700 to $750.
At Cripple Creek and Victor (Colorado) the first production of gold commenced in March. The mine produces between 350,000 and 400,000 ounces of gold at $600 to $650 per ounce.
Once Newmont has started production at these high margin projects, the miner will guarantee steady attributable gold production over the coming years and will further improve the operating efficiency reflected in an increase of the TTM average FCF per share ratio that is already outperforming the competitor TTM average FCF ($1.89 vs. 91 cents).
Barclays is comfortable with its $1,350 per ounce gold price assumption over 2017. But 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, we then can expect a further increase in the FCF per share for the remainder of the year and a higher FCF per share in 2017 even on the basis of a “corrected gold price of $1,252 per ounce from a year-high of $1,375 per ounce as Fed statements and U.S. economic prints have led the market to believe there is a strong probability of a rate hike this December.”
Furthermore we can also expect a better TTM average net debt to EBITDA ratio (1.0x) compared to the competitor TTM average ratio (1.9x) as improved operating efficiency will lower AISC per ounce.
With a stronger asset portfolio – considering also the acquisition of Barrick’s (ABX) 50% stake in Kalgoorlie in Australia – and balance sheet, Newmont will take the best even from a gold price of $1,252 per ounce and therefore it will be able to increase the free cash flow and dividend going forward.
On Oct. 17, Newmont closed at $35.03, up 2.34%, and gained 94.72% year to date while the VanEck Vectors Gold Miners ETF (GDX) closed at $23.34, up 1.52%, and the SPDR Gold ETF (GLD) closed at $119.68, up 0.27%.
VanEck and SPDR have gained 70.12% and 17.96% year to date.
Disclosure: I have no positions in either Newmont Mining Corporation or the exchange-traded funds mentioned in this article.
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