NCMGF - Newmont Mining: A Gold Mine Of Opportunities Ahead

2023-05-05 18:35:46 ET

Summary

• Newmont Corporation reported poor Q1 earnings.
• However, Newmont expected this to be a weak quarter.
• Newmont is likely to acquire Newcrest Mining in the near future, and other organic growth opportunities should boost its production.
• Newmont Corporation is a strong senior gold miner that's a BUY, as I argue below.

Senior gold miner Newmont Corporation ( NEM ) has announced its Q1 2023 financial results , and it was not a good quarter by any means, with its cash costs soaring. But, on the bright side, things should improve throughout the year, and a new acquisition could change the company’s future for the better.

First, here are the Q1 highlights : Newmont Corporation produced 1.27 million ounces of gold, in-line with expectations, but saw its all-in sustaining costs rise to $1,376/oz. It reported net income of $363 million and adjusted net income of $.40 per share, along with $990 million in EBITDA.

So, despite these increased cash costs, the company was able to turn a nice profit on the back of its production and sales volumes; of course, higher average realized gold prices ($1,906/oz) didn’t hurt, either.

Additionally, Newmont ended the quarter in pretty good financial shape, especially when compared to other large gold miners that far more of a debt burden.

The company has $2.7 billion in cash, $797 million in short-term deposits, and $6.5 billion in total liquidity. Overall, its debt stands at $5.57 billion, but this is a highly liquid company. It has a net debt-to-adjusted EBITDA ratio of .60x, indicating it has more than enough earnings power to fund its debt obligations.

Newmont: Why the Future Looks Bright

This was not a strong quarter, but that shouldn’t be too surprising to investors who have been following Newmont’s story closely.

The company has indicated that Q1 will likely be its worst quarter in terms of total production and cash costs. In fact, it has stated that 55% of its full-year gold production guidance will come in H2 2023.

The second quarter will also likely see improvements over Q1, and contribute to 24% of its production guidance. The company expects a bounce back in production from the following mines:

• Tanami mine: Higher milling rates and continued recovery from a rainfall event that impacted its Q1 results.

• Boddington: Newmont expects to mine gold at higher grades in Q2, and stripping will begin in H2 2023, leading to higher output.

• Ahafo: Higher gold grades in Q2 2023 due to the planned mine sequence, along with work at Subika Underground.

• Akyem: Higher gold grades in Q2 2023 due to mine sequencing.

More importantly, Newmont has re-affirmed the company’s five-year production and cash cost outlook, and the future appears to be very bright for this senior gold miner.

For example, while gold AISC could end up on the high-end of its guidance this year and finish around $1,250/oz, costs are expected to fall every year from hereon out to 2026-27, eventually falling to as low as $1,000/oz.

This comes with a corresponding waterfall decline in its development capital requirements, which are expected to fall from $1.2-$1.4 billion this year to as low as $300 million by 2027.

Newmont's 5-year outlook

Development capital estimates

At the same time, we’re seeing gold prices break out, and prices currently sit just over $2,000/oz. Therefore, it's highly likely that Newmont will continue to churn out profits for the foreseeable future.

Newmont: Organic Growth Projects Update

Newmont continues to advance several of its organic growth projects, which are expected to drive its earnings and cash flow in the years to come. Its strong pipeline includes the Tanami Expansion 2, Ahafo North, and Cerro Negro District Expansion 1.

Tanami Expansion 2: This is a long-life, low-cost gold mine that will see its mine life expand to beyond 2040 as Newmont adds a 1,460-meter hoisting shaft and supporting infrastructure, which will allow it to process 3.3 million tonnes of ore per year. Overall, this expansion should increase average annual gold output by 150,000 - 200,000 ounces for the first five years of production, while also reducing average AISC 10% to $900-$1,000/oz.

Commercial production is anticipated in H2 2025, with total capital costs estimated between $1.2 and $1.3 billion.

Ahafo North: These are four open-pit gold mines located about 30km from its existing operations in Ahafo South. The expansion project will contribute 275,000 - 325,000 ounces of gold per year, with low AISC ranging between $800-$900/oz in its first 5 years of production. The gold deposit contains 3.8 million ounces of reserves along with 1.4 million ounces of resources, and could potentially expand the mine life beyond its current life of 13 years. Newmont expects initial production in H2 2025.

Cerro Negro: This expansion will prolong operations beyond 2030 while improving production by 350,000 ounces of gold starting in 2024. Newmont also thinks the expansion plan will provide it with more exploration and future growth opportunities.

Will Newmont’s Newcrest Takeover Go Through?

Newmont is nearing a takeover of the Australia-based Newcrest Mining Limited ( OTCPK:NCMGY ), according to reports . Newmont had previously offered $19.5 billion for the company, which is currently ranked as the world’s 8th largest gold producer.

This acquisition looks like a game changer for Newmont Mining and certainly presents a reasonable price for the top-tier miner, Newcrest. I do believe this takeover will go through, although the actual timing of the closure is currently unknown.

Last year was a highly profitable one for Newcrest, as it reported $1.68 billion in operating cash flow and $229 million in free cash flow, with an industry-low AISC of $732/oz.

Most recently, Newcrest reported another strong quarter of earnings , although its numbers weren’t as good as 2022 results. It produces 510,000 ounces of gold, and 31,000 tons of copper, at AISC of $837/oz. This was considered a down quarter, but like Newmont, Newcrest expects a much stronger H2 2023.

Newcrest has strong earnings power while also maintaining a very strong balance sheet (like Newmont ). Its net debt position is around $1.3 billion, and the vast majority of this debt doesn’t mature until after 2029. According to Newcrest, this debt is also at a low average rate of 4.3%.

Additionally, Newcrest’s operations are mostly located in favorable mining jurisdictions, and it should help diversify Newmont’s risk in that regard.

Overall, I view the $19.5 billion takeover as a net positive for Newmont which will immediately boosts its production while reducing overall AISC, strengthening its liquidity, adding several organic growth opportunities, and improving jurisdiction risk.

Newmont Mining: The Bottom Line

While Newmont certainly experienced a challenging first quarter, with increased cash costs, it still remained profitable, and investors need to dig deeper and keep an eye on the future.

• The company’s H2 2023 will likely be stronger than its first quarter, with the majority of its production weighted later in the year, and higher gold prices will also boost profits.

• It maintains a healthy financial position compared to other large gold miners, with ample liquidity and a manageable debt-to-EBITDA ratio.

• The company has reaffirmed its five-year production and cash cost outlook, which looks promising as gold prices continue to rise.

• Its organic growth projects are progressing and expected to boost earnings and cash flow in the coming years.

• The likely takeover of Newcrest Mining could significantly benefit Newmont by enhancing production, reducing overall AISC, strengthening liquidity, and providing additional growth opportunities.

Finally, after seeing Newmont Corporation stock fall 32% over the past year, its current valuation looks reasonably priced and may outperform the benchmark gold miners index ( GDX ) going forward. Newmont Corporation offers an attractive risk vs. reward proposition for investors considering all of the bullish factors mentioned above.

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