NEM - Newmont Corporation: Why I Turn Bullish Heading Into 2024

2024-01-04 05:09:21 ET

Summary

• Mining/gold companies faced challenges in 2023, but fortunes are set to shift positively in 2024 with rate cuts stimulating demand for commodities like copper and gold.
• Gold prices are trading close to all-time highs due to geopolitical tensions, desire for an inflation hedge, and anticipation of rate cuts.
• Newmont's recent acquisition of Newcrest Mining positions it as the world's largest gold producer, with potential for substantial value creation through portfolio divestitures.

The mining and gold sector has suffered a difficult year in 2023, grappling with multifaceted challenges: For example, gold and metals demand suffered from surging treasury yield on Fed rate hikes, a strong dollar and concerns about a US recession, sluggish European demand, and the enduring headwinds seen in the Chinese property markets. However, the fortunes for miners are set to shift positively in 2024, as rate cuts will stimulate macro demand for commodities like copper and render gold relatively more attractive vs. falling yields. Moreover, there are encouraging signs that suggest that the risk of a US recession may be fading, while China's economy may be strengthening too. One that note, I like the risk reward for Newmont ( NEM ) stock heading into 2024, with the company being the world's largest gold producer, and with shares trading at an EV/EBIT <25x.

For context, back in November 2022 I held a more bearish view on gold producing assets including Newmont, as gold prices dropped to their lowest point in two years. Moreover, with central banks having increased interest rates, the comparative appeal of the yellow metal against other 'interest-bearing' safe assets has been low. This thesis is now changing.

Gold Surging To New All Time Highs ...

As a major gold miner, Newmont's fundamentals are anchored on the price of gold. In that context, NEM investors will certainly celebrate that gold (XAU) spot prices are trading close to all time highs. While some of the gold price strength may relate to gold's status as a "safe haven" asset during times of geopolitical tensions, gold is also seeing more structural strength from the world's newfound desire for an inflation hedge. Moreover, gold prices are also supported by the anticipation of rate cuts, a scenario that is expected to unfold in 2024. In that context, investors should note that low rates are favorable for gold as they reduce the opportunity cost of holding non-yielding assets. Additionally, low rates can weaken the currency, increasing gold's appeal as a hedge against inflation and currency devaluation.

Central banks' buying of gold is another driver of strong gold prices. In a recent research note, BNP Paribas Exane noted that in the third quarter of 2023, central banks globally acquired 337 metric tons of gold, marking a notable 120% increase from the previous quarter. Moreover, BNP Paribas Exane also pointed out that on a trailing nine months perspective, central banks' gold demand in 2023 has been the second-highest since after the Great Financial Crisis, with China leading the buying spree (Source: BNP Paribas Exane, research note dated 19th December: 2024 gold outlook - expert event feedback).

... Will Benefit The World's Largest Gold Miner

Newmont's recent acquisition of Newcrest Mining has positioned the company as the biggest gold producer globally, boasting an annual output of approximately 8 million ounces, and gold reserves totaling 144 million ounces. In addition, Newmont will own and operate a portfolio featuring 10 Tier 1 assets. For context, Tier 1 assets in gold mining refer to high-quality, large-scale mines with significant production levels, long mine lives, low production costs, and strong profitability, often considered as the most desirable and valuable assets in a gold mining company's portfolio. These assets typically have substantial mineral reserves, employ advanced mining technologies, and exhibit favorable geological conditions.

Moreover, the strategic consolidation will offer management a platform for substantial value creation as Newmont looks to refine its portfolio, focusing primarily on these Tier 1 assets and aiming to unlock around $2 billion in capital through portfolio divestitures, while factoring in $500 million in annual synergies guided by Newmont.

Newmont's acquisition should be able to address some of the gold producer's legacy challenges, as investors shift their focus towards merger integration success. In the recent past, Newmont has suffered a stagnation in its gold production (2019 to 2023 TTM), and management projected a continued production stagnation without a substantial acquisition. Compounding these challenges, there was a four-month strike at Newmont's Penasquito mine in Mexico, resulting in revised guidance and lower-than-anticipated earnings in the most recent quarter for the company.

Valuation: Set TP At $44.82

To value Newmont stock, I suggest using a residual earnings model, which anchors on the idea that a valuation should equal a business' discounted future earnings after capital charge. As per the CFA Institute :

Conceptually, residual income is net income less a charge (deduction) for common shareholders' opportunity cost in generating net income. It is the residual or remaining income after considering the costs of all of a company's capital.

With regard to my Newmont stock valuation model, I make the following assumptions:

• To forecast EPS, I anchor on the consensus analyst forecast as available on the Bloomberg Terminal till 2025. In my opinion, any estimate beyond 2025 is too speculative to include in a valuation framework. But for 2-3 years, analyst consensus is usually quite precise.
• To estimate the capital charge, I anchor on NEM's cost of equity at 8.25%, which is approximately in line with the CAPM framework.
• For the terminal growth rate after 2025, I apply 2.25%, which is about in line with estimated nominal global GDP growth.

Given these assumptions, I calculate a base-case target price for NEM stock of about $44.89/share.

I acknowledge that investors may hold varying assumptions regarding these rates. Therefore, I've included a sensitivity table to test different scenarios and assumptions. See below.

Investor Takeaway

Mining/ gold companies faced challenges in 2023, but fortunes are set to shift positively in 2024 with rate cuts stimulating demand for commodities like copper and gold. Gold prices are trading close to all-time highs due to geopolitical tensions, desire for an inflation hedge, and anticipation of rate cuts. Newmont's recent acquisition of Newcrest Mining positions the company as the world's largest gold producer, with potential for substantial value creation through portfolio divestitures and synergies. All that said, I turn bullish on Newmont stock heading into 2024; and I upgrade may recommendation to Buy. Lastly, on updated valuation assumptions, I now calculate a fair implied share price for NEM equal to $44.82. "Buy".

For context, Newmont stock performance has significantly underperformed the broader equities market year-to-date. Since the beginning of the year, NEM shares are down about 17%, compared to a gain of almost 25% for the S&P 500 ( SP500 ).

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