Company Overview: Newmont Corporation (NYSE: NEM) is one of the top gold companies in the world, which is involved in producing gold copper, silver, zinc, and lead. The company’s portfolio of assets, prospects and talent lies in the states namely North America, South America, Australia, and Africa. The company was named as the leading gold miner in the Dow Jones Sustainability World Index (DJSI) for the 5^th time in a row. The company also earned a “B” score from CDP for its 2019 Climate Change and Water Security performance. The company was also included in Bloomberg’s Gender-Equality Index (GEI) for the second consecutive year.
 

  

 
Higher Gold Prices & Buyout Synergies Are Key Growth Catalysts: Newmont Corporation (NYSE: NEM) is based in Colorado and is engaged in producing gold with numerous active mines in Nevada, Ghana Peru, & Australia. The company's operations are organized under five geographic regions, namely, North America, South America, Australia, Africa and Nevada. The North America segment contributed 23% of 2019 gold production and symbolized by operations in Nevada. In 2019, the South America segment and the Asia Pacific segment contributed 22% and 32% of the total gold production, respectively. The Africa segment represented 23% of the total 2019 gold production. Africa segment consists primarily of Ahafo and Akyem mines in Ghana.
 
In January 2019, the company entered into a definitive agreement to acquire all the outstanding common shares of Goldcorp in a stock-for-stock transaction. The transaction was successfully closed on Apr 18, 2019. The buyout offers NEM an investment-grade balance sheet and financial flexibility to carry out encouraging projects. As of December 31, 2019, the company’s gold reserve amounted to 100.2 million ounces. Its attributable gold production for 2019 stood at 6.3 million ounces, an increase of 23% on a year over year basis. Increased gold prices as well as NEM’s focus on key growth projects and efficient capital allocation strategy are few promising factors for further growth.
 
In 2019, NEM’s Africa operations saw 1.1 million ounces of attributable gold production at an all-in sustaining cost of less than $800 per ounce. The positive numbers were primarily on the back of the successful completion of Ahafo’s expansion projects. The company is likely to benefit from the progress of its key growth projects, which include Tanami Expansion in Australia along with Subika Underground and Ahafo mill expansion in Africa.
 
In 1QFY20, the company has completed the sale of its Ontario, for cash proceeds of $375 million. The move is expected to aid the company’s capital allocation priorities and will also strengthen Newmont’s investment-grade balance sheet and enable investment in highest-return projects as well as enhancing shareholders’ value. It is to be noted that gold has been the sunny spot in 2020 as concerns over the COVID-19 led pandemic has made it the most desirable safe-haven asset. This apart, plunge in crude oil prices, geopolitical pressures along with low-interest rate environment have also spiked the demand for gold. In March 2020, the price of gold crossed $1,700 per ounce level for the first time in seven years led by the coronavirus outbreak and a severe decline in oil prices prompted by Saudi Arabia's price war with Russia. Recently, the gold prices surged more than $1,740 an ounce level, mainly due to U.S-China tensions, the civil strife in the United States, and a lower U.S. dollar.
 
Notably, the company’s average realized price of gold went up 22% from the prior corresponding period in 1QFY20 and boosted margins. Higher gold prices are likely to boost the earnings of the company in the near-term in the midst of market volatility and economic worries. The company has witnessed an increase in its free cash flow with a higher gold price, demonstrated an upward movement on the back of a strong market position.
 

Trend in Free Cash Flow (Source: Company Reports)
 
For FY20, the company expects attributable gold production to be ~6 million ounces down from the prior outlook of 6.4 million ounces. The company now expects costs applicable to sales (CAS) to be ~$775 per ounce, as compared to the earlier projection of $750 per ounce. The company now projects AISC to be ~$1,015 per ounce, as compared to the previous projection of $975 per ounce. Healthy financials, decent free cash flow generation, excellent asset portfolio and a bright outlook for gold augur well for further growth in the business.
 
1QFY20 Key Highlights: During the quarter, the company recorded net income from continuing operations of $837 million or $1.04 per share, as compared to $113 million or 21 cents reported in the prior corresponding period. Adjusted earnings, excluding one-time items, stood at 40 cents per share, up from 33 cents reported in 1QFY20. Revenues for the quarter increased 43.2% year over year and came in at $2,581 million. The company’s attributable gold production soared 20% on pcp and cane in at 1.5 million ounces, whereas, average realized prices of gold stood at $1,591 per ounce, up 22% on pcp. The company’s costs applicable to sales (CAS) for gold increased by 21.9% on pcp and came in at $1,140 per ounce. All-in sustaining costs (AISC) for gold went up 14% year over year on the back of higher gold CAS per ounce as well as higher sustaining capital spending and care and maintenance costs.


Key Financial Highlights (Source: Company Reports)

Geographical Highlights: North America’s attributable gold production during the quarter stood at 376,000 ounces, skyrocketing 364% year over year. Attributable gold production in South America went up 27% on pcp and stood at 235,000 ounces. Australia’s attributable gold came in at 258,000 ounces, declining 24% from the prior corresponding period. Lastly, Africa’s production recorded 186,000 ounces of gold in the quarter, down 19% on pcp.
 
Balance Sheet Highlights: The company exited the quarter with consolidated cash amounting to $3.7 billion and long-term debt amounting to $6,030 million. Net cash from operating activities was $939 million during the quarter, with a free cash flow of $611 million.
 

Liquidity Position (Source: Company Report)
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 46.73% of the total shareholding. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold the maximum interests in the company at 12.37% and 11.74%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: During Mar’20, the company reported a gross margin of 48.4%, which is higher than the industry median of 38.8%. EBITDA margin for same time span stood at 40.6%, higher than the industry median of 28.6%. Net margin stood at 31.1%, higher than the industry median of 1.9%. The above margins seem well-aligned with the company’s objective to improve overall profitability by attaining a higher rate of growth in revenue than costs. ROE stood at 3.9% as compared to the industry median of (0.3%).
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Risk Analysis: On the flip side, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, NEM’s revenue, profitability and future growth rate are significantly reliant on prevailing metal prices, primarily for gold, copper, silver, lead, and zinc. Hence, any substantial decline in commodity prices might adversely impact the company’s financial position. Also, the company is exposed to risks relating to foreign operations that are required to be addressed from time to time. The company also faces stiff competition from peers which adds to the woes.
 
Outlook: The company has recently provided a revised FY20 outlook and verified its long-term guidance. In the recent update, the company stated that all its operational mines have been considered as an essential activity in every province where it conducts. The updated view assumes that the company’s operations will persist throughout the remainder of FY20 without substantial disruptions. The company also stated that out of its 12 operating mines and two joint ventures, 13 sites will be fully operational in the coming days.
 
Remarkably, the amended estimates indicate the effects of five operations that were provisionally placed into care and maintenance for an average of 45 days due to the COVID-19 led disruption. Furthermore, the company expects second-quarter to see lower production and peak cost as the sites ramp up from care and maintenance.
 

 FY20 Outlook (Source: Company Reports)
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology 1: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology 2: EV/Sales Multiple Based Relative Valuation (Illustrative)
 
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of NEM closed at $61.36 with a market capitalization of ~$49.3 billion. The stock made a 52-week low and high of $33 and $69.13, respectively. The stock of the company went up by 36.35% in the past three months. Notably, the company’s long-term view is unchanged with stable production of more than 6 million ounces with costs enhancing from 2021 through 2024. Considering the robust results for 1QFY20, resilient business, modest industry outlook and growth prospects, we have valued the stock using P/E and EV/Sales multiples based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). Hence, we recommend a “Buy” rating on the stock at the closing price of $61.36, down 0.62% on 1 July 2020.
 
 
NEM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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