Description

Newmont Mining (NEM)

Newmont Mining is the largest publicly traded gold mining company in the U.S. It is based in Colorado and has a market cap of ~$55b and last traded at $47.50. It is the only gold miner in the S&P500. Should gold continue to climb, managers benchmarked to the S&P500 may reach first to Newmont as it is large, liquid, and offers a degree of reduced mine risk due to its diversified portfolio of mines. Regardless of indexing, I believe the stock is worth about $80, or 68% upside, into 2025 based on $2400 gold (the current spot price), $3.99 in 2025 earnings, and a 20x p/e multiple. A higher gold price drives further and material upside.

The gold price in USD peaked in 2012/2013 and after a long decline finally exceeded those highs early in the pandemic coinciding with a monetary printing press gone wild.  

Gold price since 2010; last close $2410

In 2024, the price of gold has broken out again to new all-time highs. Reasons in favor of gold remaining at these highs and potentially climbing higher include US central bank money printing in general and deep US government deficit spending in particular.

Other compelling reasons exist to own gold include the confiscation of Russian dollar reserves post that country’s invasion into Ukraine. That taking, regardless of whether one agrees with it or not, serves as compelling reason for any country not on good terms with the United States to shed U.S. dollar-based reserves. But why wait until one’s on bad terms? If the U.S. doesn’t confiscate your money outright, they’ll debase it anyway. Why not shift some reserves earmarked for U.S. government debt of varying maturities and instead slide it on over into gold.

In fact, that is exactly what central banks have been doing. Per the chart below, central bank purchases took a step change up in 2022 and 2023 and are on a similar pace into 2024. (See chart below.) However, this piece is not designed to get into the nitty-gritty of the pro and con arguments regarding gold. It is about highlighting a gold miner that offers value at the current gold price and even more value should gold tack on further gains. 

Newmont Mining:

The current Newmont Mining consists of old Newmont plus the 2023 acquisition of Australia’s Newcrest Mining. The combined entity includes 128m ounces of Proved and Probable reserves. included within the P+P reserves is ten years of production from mines in operation at roughly 8m/oz per year. Mine expansions and constructions will access the remainder of the P+P reserves and exploration activities will expand them. The company holds an additional 155m ounces of Measured & Indicated and Inferred Resources.   

Newmont provides an investor with diversified geographic exposure, but with a weighting towards jurisdictions with lower political risk. The snippet below shows the geographical dispersion of Reserves. Forty-eight percent of reserves are positioned in North America and Australia, which are the most stable regions. The next highest exposure is 27% in South America which I consider reasonably stable (though hardly perfect).  Together they account for 75% of Reserves.

Newmont mine portfolio is anchored by ten “Tier 1 Assets” with Tier 1 assets defined below by Newmont:

Tier 1 Asset. Defined as having, on average over such asset’s mine life: (1) production of over 500,000 GEO’s/year on a consolidated basis, (2) average AISC/oz in the lower half of the industry cost curve, (3) an expected mine life of over 10 years, and (4) operations in countries that are classified in the A and B rating ranges for Moody’s, S&P and Fitch

In short, this means production is predominately large mines (>500k gold equivalent ounces / year), with long mine lives (> 10 yrs), with costs in the bottom half of the cost curve, and in which the mine is located in more stable jurisdictions per the rating agencies.

These Tier 1 Assets are listed and described by the company as follows:

Tier 1 Portfolio. Newmont’s go-forward portfolio is focused on Tier 1 assets, consisting of (1) six managed Tier 1 assets (Boddington, Tanami, Cadia, Lihir, Peñasquito and Ahafo), (2) assets owned through two non-managed joint ventures at Nevada Gold Mines and Pueblo Viejo, including four Tier 1 assets (Carlin, Cortez, Turquoise Ridge and Pueblo Viejo), (3) three emerging Tier 1 assets (Merian, Cerro Negro and Yanacocha), which do not currently meet the criteria for Tier 1 Asset listed above, and (4) an emerging Tier 1 district in the Golden Triangle in British Columbia (Red Chris and Brucejack), which does not currently meet the criteria for Tier 1 Asset listed above. Newmont’s Tier 1 portfolio also includes attributable production from the Company’s equity interest in Lundin Gold (Fruta del Norte). Tier 1 Portfolio cost and capital metrics include the proportional share of the Company’s interest in the Nevada Gold Mines Joint Venture.

A portfolio of large, seasoned mines across a range of jurisdictions certainly reduces both mine operation risk and political risk. However, one should not confuse “reduced risk” with “no risk”. This is still not an ETF. If one prefers not to wake up one morning and see the stock down due to a strike at a mine, a government summarily increasing mining royalty rates, a worker death closing a mine for a period, a government unwilling to provide permits for a mine expansion or extension, or some sort of problem/collapse/etc at mine, one may prefer an ETF.

Company guidance is shown below from their Q1 2024 presentation. Gold equivalent ounces should rise slowly from ~6.9m oz/yr in 2024 to 8.3m oz/yr in 2028.

Production growth is modest which is typical of a large, senior miner. However, the bottom line should benefit from modest cost savings as they further digest their acquisition of Newcrest, divest some non-core assets, and implement savings as per the left side of the slide below.  They claim capital expenditures should be stable in the coming years. I have modeled capex to be slightly than their guidance.

For 2024 earnings I am using management inputs for production, sales, and costs. For gold and silver prices I am using actual Q1 numbers and for the final three quarters of 2024 I am using $2320/oz for gold). For silver I am using $29, $30, and $30 per oz for Q2, Q3 and Q4. I am using $4.50/lb for copper, $1.00/lb for lead and $1.20/lb for zinc. (In 2024, I have revenue weighted 83% gold, 5% silver and 8% copper.)

Into 2025 I continue to use management guidance for production and sales. I am very slighlty decreasing cash production costs per ounce of gold, in line with management guidance. I am taking management’s 2024 line item costs for non-production related expenses and am increasing them by 3%.

In 2025 and beyond I am increasing the gold price to 2400, which is essentially today’s spot and increasing silver to $31. Nothing dramatic, very conservative. I am maintaining flat prices for all other metals.

For 2024, I get $2.71 earnings per share. 2024 exit run rate per share would be ~$3.37 and I believe that is the correct earnings number upon which to value the company.

For 2025 I get $3.99 earnings per share.

Historical average P/E is 24.15, per below.

However, I am using 18x to 20x P/E multiple. Everything assumes that they continue to digest the Newcrest acquisition and meet their goals. It also assumes that gold prices remain stable or rise.  The more currency debasement becomes evident and gold becomes seen as a store of value in opposition to it, the higher the multiple I suspect. We’ll see. In any case, it is not part of the thesis.

As shown in the table below I see anywhere from 28% to 85% across 2024 and 2025. Keep in mind, this assumes no increase in the gold price. A rising gold price is all upside.

To illustrate upside to rising gold prices, the below table shows 2025 earnings with gold rising to $2500, $2750 and $3000. Again using a 20x P/E multiple at these higher gold prices drives further and potentially significant upside.

The gold miners have been losers for a long time. But of late, even as the gold price churns at high levels (without making newer new highs at the moment), a range of mining stocks have begun to trade to new highs since bottoming last fall, some are a true new all-time highs.. See AEM and KGC, for instance. Over the past week the list has widened out considerably. NEM itself is beginning to move up, especially after a strong Q1. They will soon report Q2. The gold price input is well know and thus so is the likely revenue individual companies are likely to report. However, I think the Street wants to see tangible evidence that higher gold prices translates into higher cash flow. That may finally happen this quarter. We’ll know soon.

RISKS:

• Costs, after inflating significantly during pandemic, continue to rise, but seem to be within control, or at least predictable. However, rapidly rising costs without a similar rise in the gold price would hurt margins.
• Declining gold price would compress earnings just as fast as it has been expanding them lately.
• World returns to insignificant inflation, particularly if it came as the U.S. reigns in its deficit spending.
• Federal Reserve enters a new rate hike cycle. The coming and the arrival of the current rate hike cycle did stop gold’s rise during the pandemic. (However, Fed rate hikes alone are not necessarily enough to automatically set back gold. That is not at all what happened in the 1970s.)

Catalyst

If management simply executes on their upgraded portfolio of mines then the stock has upside based on current spot gold price in the range of $2300 to $2400. However, a rising gold prices will drive further upside still.