PAAS - Newmont Corporation: Newcrest Welcome Aboard

2023-11-27 02:11:06 ET

Summary

• Newmont Corporation announced its third-quarter 2023 earnings, which were lower than expected.
• The acquisition of Newcrest Mining Limited by Newmont is expected to be a game changer for both companies.
• Newmont's production was affected by the temporary closure of the Peñasquito mine in Mexico and weak production in other regions.

Introduction

On October 26, 2023, Denver-based Newmont Corporation ( NEM ) announced its third-quarter 2023 earnings. This article updates the one I wrote on July 27, 2023. I have been following NEM on Seeking Alpha since December 2014, and I am currently a long-term shareholder.

As everyone knows, on May 14, 2023, Newmont Corporation agreed to purchase all of the issued shares of Newcrest Mining Limited (NCM:CA). The acquisition was ultimately completed on November 6, 2023, following the receipt of all necessary approvals.

Thomas Palmer, Newmont's President and Chief Executive Officer said in the conference call :

Our pending acquisition of Newcrest is a significant event for our industry. It combines two of the sector's top senior gold producers to set the new standard for sustainable, responsible gold and copper mining. I think this Is a very exciting and transformational time for Newmont and all of our stakeholders.

This acquisition is a game changer for Newcrest, which will now own one of the most prolific portfolios with ten Tier 1 assets with significant production of gold and copper (about 150,000 Cu Tons) that are mostly (about 80%) located in stable mining jurisdictions (the Americas and Australia, with just two assets in West Africa).

The balance sheet will take roughly six months (first quarter of 2024) to reflect the merger of Newmont with Newcrest completely.

The fourth quarter of 2023 will include only seven weeks of Newcrest production, presenting an incomplete integration. However, one element that has already been updated is the number of outstanding shares, which I estimate to be 1,153 million, up roughly 45% from the one indicated in 3Q23, which ended September 30, 2023. The third-quarter earnings were based on 796 million shares outstanding.

Newcrest released its third quarter results on October 17, 2023. Production this quarter was significantly lower than the preceding quarter, as shown in the chart below.

Using the most recent production numbers, we can estimate what could be a virtual full-quarter for the new company. A quick estimate could be between 1.85 Moz and 1.95 Moz (including Peñasquito full production).

It is clear that Newmont will become a significant producer of copper, adding 33.4 MT (Newcrest average for the previous seven quarters) while generating roughly 370K silver ounces and 540K gold ounces.

Compared to when Newmont purchased Goldcorp's troublesome assets in 2019, which are currently negatively impacting the company's bottom line with the Peñasquito mine, I am more hopeful about the Newcrest acquisition this time around and believe it will help the company attain a more acceptable valuation in 2024.

The timing is also perfect, with gold entering a potential bullish pattern. In 2023, the Federal Reserve raised interest rates to fight inflation. Still, many analysts predict that over the next year, in reaction to decreasing inflation and the possibility of a declining US economy, it might proceed more cautiously, possibly even lowering rates.

In 2024, gold could begin a prolonged bullish trend with a gold ounce priced between $2,000 and $2,150 if this forecast comes true. In this instance, investors currently building long-term positions in gold may succeed with Newmont Corp.

The same argument may be made about Agnico Eagle (AEM) and Barrick Gold (GOLD). The gold sector as a whole can perform noticeably better than the market. However, Newmont has significantly underperformed on a one-year basis and could easily overperform in 2024.

1 - Newmont Corp.: Third Quarter of 2023 Highlights and Subsequent Events

The 3Q23 earnings results were disappointing and lower than analysts' expectations.

Attributable gold production was significantly down due to the company deemed an "unnecessary" strike at Peñasquito mine in Mexico where workers walked out in June 2023 over a profit-sharing contract.

The Union asked for a 20% increase in the profit-sharing bonus, which was 10% under the Collective Bargaining Agreement ((CBA)). The mine was idle for nearly four months. On October 13, 2023, a resolution was finally approved. In the press release:

On October 13, 2023, Newmont reached a resolution with the Union and has since begun the safe ramp-up of operations. Newmont expects to reach full operating capacity by the end of the fourth quarter.

Newmont Corporation is thought to have lost about $3.5 million daily while the mine was shut down. This mine was acquired from Goldcorp in January 2019 and had a history of issues .

Peñasquito has previously encountered strike action in 2019, where a blockade was established at the mine after a dispute between the company and a trucking contractor, as well as members of the local community. This was a four-week long suspension of mining operations as protestors cited that the way that the mine was being used was negatively affecting the local community.

1.1: Balance sheet

As a result, the revenues were weak, with $2,493 million down from $2,634 million in 3Q22, despite a gold price of $1,920 per ounce from $1,691 per ounce in 3Q22.

The net income was $158 million, or $0.20 per diluted share, in 3Q23, compared to $213 million, or $0.27 per diluted share, in the same quarter a year ago. Adjusted net income was $0.36 per diluted share from $0.27 last year, with EBITDA of $760 million in 3Q23.

The revenue per metal presented below illustrates the impact of the Peñasquito mine's closure, which reduced by-product metal revenues to practically nothing in 3Q23.

The Peñasquito mine produced 182K Au Oz of gold in 2Q23, along with $221 million in by-products with $124 million in silver, $32 million in lead, and $65 million in zinc. Although there was a major lapse this quarter, things will be fixed fairly quickly, even though the fourth quarter won't run fully.

Furthermore, production at Akyem and Ahafo in West Africa and Pueblo Viejo was also lower this quarter. It was partially offset by production in Nevada and Yanacocha.

Ahafo production was down due to the decision to run the mill at less than full capacity to protect "one of the grinding mill's girth gears" until it can be replaced in the fourth quarter of 2023.

On the plus side, the company showed a robust free cash flow in the third quarter.

The cash from operation was strong this quarter with $1,003 million, up significantly from $473 million last year. The company said:

primarily driven by favorable working capital changes, including the timing of accounts payable, draw-downs of lower cost inventory and lower cash tax payments

CapEx was only slightly up to $604 million from $529 million. The capital expenditures were comprised of $264 million in development capital and $340 million in sustaining expenditures, which is an average amount for NEM.

Thus, the trailing 12-month free cash flow was $765 million, and free cash flow for the third quarter was $399 million (including discontinued activities) compared with a negative $56 million in 3Q22. This FCF level is reassuring and allows the company to pay a quarterly dividend of $0.40 per share.

Finally, the debt situation has mostly stayed the same sequentially. The company had cash, cash equivalent, and marketable securities of $3,214 million with an LT debt of $5,575 million. The company is keeping a total liquidity of about $6.2 billion. The reported net debt to adjusted EBITDA was 0.7x.

However, the acquisition of Newcrest will change the debt profile significantly. The 4Q23 numbers will demonstrate the full scope of this move, although I do not believe it will have a negative effect.

On the production front, it was not as bad as I thought it could have been after the temporary closure of Peñasquito mine in Mexico and weak production in West Africa and Pueblo Viejo.

1.2: Gold Production

However, as shown below, the company delivered no by-product revenues for zinc and lead, with copper producing 10 MT this quarter. The immediate consequence is that the AISC for GEOs reached a record high of $2,422 per ounce in 3Q23, while AISC for gold production was $1,426 per gold ounce, which is dangerously high, as shown in the chart below:

In 3Q23, there were 1,291K Au ounces of attributed gold production and 1,349K GEOs of attributed gold equivalent production. 300K Au Oz were produced from the JV Nevada Gold Mines, up from 267K Au Oz the previous year. I found the AISC for Nevada JV quite high at $1,307 per ounce this quarter.

In 3Q23, NEM sold 1,309 GEOs and 1,250 Au Oz.

CEO Tom Palmer said in the conference call:

Now that we have a resolution to the strike at Peñasquito, we are updating our outlook for the remainder of the year to incorporate the following 3 impacts. The first is to reflect the suspension of operations at Peñasquito for early June to mid-October. The second is to reflect the lower than anticipated production from both Nevada Gold Mines Pueblo Viejo. And the third is to reflect lower throughput at the Ahafo mill...

1.3 New 2023 Guidance adjusted

In its updated 2023 guidance, Newmont forecasts 5.3 million ounces of attributed production on a standalone portfolio. The change was due to the Peñasquito strike, lower production from the Nevada Gold Mines and Pueblo Viejo joint ventures, and the Ahafo mine.

As a result, the CAS in 2023 is expected to be around $1,000 per ounce, with an AISC of $1,400 per ounce. Furthermore, the outlook for silver, lead, and zinc for the rest of the year has been revised due to the Peñasquito strike. Finally, the sustaining capital expenditure in 2023 is expected to be $1.4 billion. This includes increased spending at Musselwhite to improve camp conditions, adding five new autonomous haulage trucks at Boddington to advance stripping operations in the North and South Pits, and the replacement indicated earlier at the Ahafo mine.

Technical Analysis and Commentary

NEM currently trades in a declining channel, with resistance at $37.90 and support at $33.1. Descending channel patterns are usually bearish in the short term but often lead to a major breakout.

As we can see, the stock price is currently testing the resistance level again. This pattern has been going on for over six months, beginning in May 2023. The RSI at 53 would suggest a possible breakthrough if the price of gold crosses $2,000 an ounce. That will depend on the Fed's decision in December, though.

If you want to secure a significant payout until this bearish cycle ends, my mid-term trading approach is to trade LIFO with roughly 45% of your total investment and hold a core long-term amount. The dividend payout, which is nearing 4.3%, makes the task much easier for dividend investors.

Therefore, I suggest selling between $37.8 and $39.5, with a potential higher resistance level of $41.85, and holding onto the gains until an eventual retracement occurs between $35 and $32.75, with a potential lower support level of $32.25.

Warning: For the TA chart to remain current, it must be updated often. The above chart may be valid for up to one week. Keep in mind that the TA chart is merely a tool to assist you in choosing the best course of action. It is not a method of predicting the future. Nothing and no one can.

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