CA - Newmont: Buy The Gold Mining Leader When Nobody Wants To

2023-11-28 13:00:00 ET

Summary

• Newmont Corporation's recent acquisition of Newcrest Mining strengthened its position as the world's leading diversified gold miner.
• The acquisition is expected to result in significant post-acquisition synergies and improved operating leverage for Newmont.
• Despite a weak third-quarter performance, Newmont's balance sheet and diversification efforts should provide financial flexibility and mitigate risks.
• I argue why the market hasn't re-rated NEM's valuation upward, even as gold futures have recovered to their recent highs, suggesting a not to be missed opportunity.
• NEM looks to have hit peak pessimism in November 2023, as buyers returned aggressively after an early scare. Buy while the market is still pessimistic.

Newmont Corporation ( NEM ) investor endured a momentary selloff in early November, coinciding with its recent acquisition of Newcrest Mining. While it strengthened Newmont's position as the world's leading diversified gold miner, investors were likely concerned with higher execution risks. I presented in my previous update highlighting that "I have not assessed a bullish reversal" in early October. As a result, I cautioned investors that "further selling could force a re-test of the $33 support zone before reaching selling exhaustion." That thesis panned out as buyers returned after NEM sellers threatened to break down the $33 level but failed to do so.

Management bolstered Newmont's asset portfolio with the acquisition. Accordingly, the gold miner now owns ten tier-1 operations " featuring over half of the world's Tier 1 assets." As a result, Newmont expects to deliver significant post-acquisition synergies from increased production, leading to enhanced operating leverage and lowering its AISC over time.

Based on management's estimates, Newmont anticipates achieving "annual pre-tax synergies of $500 million within the initial 24 months after closing." In addition, the company will review its overall portfolio as it "aims to achieve at least $2 billion in cash improvements through portfolio optimization during the first two years post-closure."

Therefore, I assessed it's justified for investors to assume higher execution risks from the acquisition. However, Newmont's robust balance sheet and investment-grade credit rating should provide substantial financial flexibility for the gold mining company as it optimizes its portfolio. Furthermore, the acquisition would bolster its Australian revenue to about 30% of its total revenue base, improving its diversification into more stable mining jurisdictions. As a result, it should help lower Newmont's geopolitical risk premium while improving its AISC leverage over time as it embeds and optimizes the acquired assets over the next two years.

Newmont posted a relatively weak third-quarter or FQ3 earnings release in late October 2023, as its production volume fell below Wall Street's estimates. The company previously faced challenges from the Peñasquito mine strike, which has been resolved.

As a result, I don't expect Newmont's lowered full-year attributable gold production guidance of 5.3M ounces to be impacted further as the company ramps production in Q4. Notably, Newmont stressed that it " anticipates finishing the year with its strongest production in Q4." Furthermore, underlying gold futures seem ready to continue along its medium-term upward bias, helping to mitigate unanticipated deviation from its guidance.

NEM's factor grades remain relatively favorable, underpinned by its solid "A-" profitability grade. Its "C+" valuation suggests a potential upward re-rating if the company could lift its volume while gold prices continue accelerating.

Analysts' estimates suggest Newmont's adjusted EPS could bottom out in 2023, reaching $1.66. As a result, I don't expect significant changes to its dividend payout, with a midpoint range of about $1.6. Unless gold futures can continue their upward climb above the $2000 level and sustain their momentum, the company needs to maintain investors' confidence about the sustainability of its dividend payouts at the current level.

As seen above, buying sentiments on NEM have remained robust in November 2023 after an early scare. As a result, NEM's March 2020 low ($33 level) held resiliently, as investors reacted positively to more constructive macroeconomic developments. Despite more positive gold price cyclicality as the Fed potentially reaches the end of its hiking phase, leading gold miners like NEM have not benefited from a discernible upward valuation re-rating.

Given Newmont's enhanced portfolio and scale, I believe the company will emerge from the cyclical low much stronger, which should improve buying sentiments on NEM. Given my assessment that NEM has already reached peak pessimism, I believe the current levels are appropriate for NEM investors to add exposure.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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