Summary
- Newmont Corporation released its Q4 and FY2022 results this week, reporting quarterly production of ~1.63 million ounces of gold and ~296,000 gold-equivalent ounces (co-product production).
- This solid finish to the year helped Newmont Corporation to deliver its updated FY2022 guidance of ~6.0 million ounces, but below its initial guidance mid-point (6.45 million ounces).
- Unfortunately, we also saw a material increase in costs due to increased sustaining capital, inflationary pressures, and lower sales volumes, with unit costs soaring to $1,211/oz.
- While we may be nearing (or have already seen) peak inflation judging by commentary sector-wide and new high-margin production will pull costs lower post-2023, I don't see Newmont as in a low-risk buy zone yet.
Just over three months ago, I wrote on Newmont Corporation (NEM), noting that the weaker margin outlook (due to sticky inflationary pressures) was mostly priced into the stock, and that pullbacks below $39.75 would provide buying opportunities. The technical picture corroborated that view, with Newmont starting November in an oversold position and nearing key support following its disappointing Q3 results. Since dropping into its buy zone below $39.75, the stock has rallied by more than 40% to a high of $55.00 before retreating following its offer to acquire Newcrest (NCMGF), which was subsequently rejected .
NEM Weekly Chart - November 2022 (NEM Article November 2022, Seeking Alpha Premium)
Unfortunately, while Newmont had a better Q4 from an output and sales standpoint (~1.63 attributable gold ounces and ~1.58 million gold ounces, respectively), its margins have remained under pressure, and FY2022 all-in-sustaining costs [AISC] soared to $1,211/oz. Combined with a flat gold price and a significant increase in capital expenditures, it's no surprise that free cash flow sunk materially, prompting the company to reel in its quarterly dividend, from a previous range of $2.20 - $2.80 per share (calibrated to $1,800/oz gold price) to $1.40 - $1.80 per share currently at a $1,700/oz gold price assumption. Let's take a closer look at the results below:
Q4 & FY2022 Production & Costs
Newmont released its FY2022 results this week, producing ~6.0 million ounces of gold and ~1.3 million gold-equivalent ounces [GEOs] from co-product production, resulting in annual production of ~7.3 million ounces. This translated to more or less flat attributable gold production and GEO production year-over-year, but a ~7% miss vs. its initial guidance mid-point of 6.45 million ounces of attributable gold production. One culprit for the weaker production was a softer year from its Nevada Gold Mines joint-venture [NGM LLC], a sharp decline in output at CC&V in Colorado, and a material drop in production at its polymetallic Penasquito Mine in Mexico, and Pueblo Viejo (40%) in the Dominican Republic.
Newmont - Quarterly Attributable Gold Production (Company Filings, Author's Chart)
Fortunately, there were several bright spots across the portfolio, with a solid year for Tanami and Boddington despite a hard year for most Australian operations (surge in COVID-19 cases and a tight labor market), a near 600,000-ounce year from Ahafo in Ghana helped by a huge Q4 (~177,000 ounces) due to record mill throughput, and an increase in production at Cerro Negro (Argentina). Meanwhile, Boddington also finished the year on a high note with ~209,000 ounces produced. Notably, Newmont reported that it was the best quarterly performance to date for its new autonomous haul truck fleet at Boddington in regards to tons moved per hour, an encouraging sign that this major investment is delivering on its expectations from a productivity standpoint.
Newmont - Annual Attributable Production by Mine (Company Filings, Author's Chart)
However, while Q4 was a solid quarter from a production standpoint, Q4 and FY2022 costs came in well above my previous estimates at $1,215/oz and $1,211/oz, respectively, representing significant increases from $1,056/oz and $1,062/oz in the year-ago period. The sharp increase in AISC was partially related to elevated sustaining capital (~$1,059 million vs. ~$985 million), as well as inflationary pressures felt sector-wide with higher costs due to fuel, spare parts/maintenance, consumables, and labor/contractor costs. Newmont discussed in its Q3 Conference Call that it is assuming "normalizing levels of inflation as we progress through the year" and is assuming that the inflation rate will be ~3%, much better than the double-digit inflation experienced last year for several producers.
The good news for Newmont is that other operators appear to be seeing a slight improvement in the labor situation in Australia, and we have seen a sharp pullback in diesel prices from their peak last year. Meanwhile, supply chain headwinds appear to have moderated, which should help from a cost standpoint, and Newmont has two higher-margin projects in the wings (Ahafo North and Tanami Expansion 2) and NGM LLC will see a material increase in production with Goldrush/Turquoise Ridge #3 Shaft, boosting Newmont's attributable production. Finally, in Newmont's Canadian operations, the company expects to see a sharp decline in unit costs, with it finally able to get the needed expertise to site, with this being a struggle previously due to relatively strict COVID-19 guidelines.
Newmont - Canadian Operations FY2022 Results & 2023 Outlook (Company Presentation)
These benefits will not show up immediately given that Ahafo is a 2025 opportunity, Goldrush is unlikely to see material production until H2 2024, Q1 2022 will be a very soft quarter for Newmont, and annual sustaining capital will increase again by over 5% in 2023. However, we are at least seeing things trend in the right direction, and Newmont is confident it can claw back some lost margins through its Full Potential cost efficiencies.
Margins & Financial Results
Looking at Newmont's margins and financial results, AISC margins declined to $581/oz in FY2022 (FY2021: $726/oz) despite a slight tick up in the gold price ($1,792/oz vs. $1,788/oz). As noted, margin compression was related to inflationary pressures and an increase in sustaining capital year-over-year, with minimal help from the gold price. These costs were miles above the company's guidance of $1,050/oz for gold production (actual: $1,211/oz) and gold-equivalent AISC guidance of $1,030/oz (actual: $1,114/oz) which was exacerbated by lower sales volumes than expected vs. its initial guidance of 6.45 million ounces (guidance mid-point). That said, these are still slightly better margins than the industry average, with the FY2022 industry average AISC likely to come in above $1,300/oz (50+ producers).
Newmont - AISC, Average Realized Gold Price, AISC Margins (Company Filings, Author's Chart)
Given the flat gold price year-over-year and weaker copper/silver prices, revenue came in at ~$11.9 billion, down from ~$12.2 billion in FY2021. This resulted in a significant decline in earnings and free cash flow year-over-year, with annual EPS sliding from $2.96 to $1.85, and free cash flow plunging from ~$2.61 billion to ~$1.07 billion. That said, declining free cash flow was partially related to a significant increase in capital expenditures year-over-year, with capital expenditures up nearly 50% in Q4 2022 vs. Q4 2021, and up ~30% year-over-year to ~$2.13 billion. Assuming a constant capex basis, free cash flow still would have declined materially because of weaker margins, but would have come in at ~$1.55 billion.
Newmont Operations (Company Presentation)
Overall, there's no question that the Q4 and FY2022 financial results were disappointing, but I don't see this as company-specific, with several companies coming in well behind estimates. Given the strength in the gold price to start 2023, many producers rallied against what was likely to be a mediocre Q4 and FY2022 report, with investors hoping that Q1 would be a blowout quarter with an average realized gold price north of $1,900/oz. This no longer looks to be the case, with the average realized gold price quarter-to-date sitting below $1,860/oz and Q1 2023 set to be an ugly quarter given that we'll be lapping a price of ~$1,890/oz in Q1 2022 with the added hit from a year of material cost increases because of higher energy, steel, labor, cyanide, and other costs.
Recent Developments & Mid-Term Outlook
So, what's the good news?
While 2023 isn't likely to be a much better year, with roughly flat production (5.7 to 6.3 million ounces of gold) and similar costs due to an increase in sustaining capital and having to absorb a year of inflationary pressures, the 2024 through 2027 outlook is a little easier on the eyes. In fact, if Newmont can deliver into its 5-year guidance, we could see annual AISC improve to $1,050/oz in FY2025 through FY2027, translating to a 12% plus improvement in unit costs vs. FY2022 levels. I am less optimistic on pulling costs back below $1,050/oz, but even at $1,100/oz and with a production profile of ~6.4 million ounces, this would certainly allow for a significant rebound in annual free cash flow combined with significantly lower capex once the Tanami Expansion and Ahafo North are completed.
Newmont Attributable Production & Cost Profile (Company Presentation)
Meanwhile, in terms of its development pipeline, Newmont gained land access at Ahafo North, a key milestone to begin construction, and this project will set up the Ahafo Complex in Ghana (Ahafo North + Ahafo South) for annual production of 850,000+ ounces per annum on average until at least 2030. Elsewhere, although Tanami had a tough Q1 due to record rainfall and flooding, the overall project is at ~50% completion with engineering and procurement mostly complete, and total project completion is expected in H2 2025. The company has maintained its upward revised capex guidance of $1.2 billion to $1.3 billion, with investors able to breathe a sigh of relief that we haven't seen a further cost blowout like some other operators experienced in 2022 related to a tight labor market, COVID-19 related delays, plus cost inflation.
Valuation
Based on ~795 million shares and a share price of $44.25, Newmont trades at a market cap of ~$35.2 billion and an enterprise value of ~$37.0 billion. This is not what I would consider a cheap valuation for a company that's expected to generate less than $1.5 billion in free cash flow this year, leaving the stock trading at just a ~4% free cash flow yield. Meanwhile, the stock continues to trade at the highest P/NAV multiple sector-wide despite its sharp correction from its 2021 highs, which I see as hard to justify given that there are higher margin producers elsewhere in safer jurisdictions, even if Newmont is a clear leader in scale (attributable production) with a solid track record of replacing reserves.
Using what I believe to be a more conservative multiple of 10.5x cash flow and FY2023 cash flow per share estimates of $4.63, I see a fair value for Newmont stock of $48.60. If we add another $3.5 billion in value to projects that are in construction or likely to be added to its production profile this decade that aren't captured in its 2023 results, this adds another $4.40 per share in value, translating to a fair value for the stock of $53.00. Although this represents 20% upside from current levels or closer to 23% upside on a total return standpoint, I prefer a minimum 30% discount to fair value to justify buying cyclical names. After applying this discount, Newmont would need to dip below $37.10 to bake in an adequate margin of safety to justify starting a new position.
Obviously, there's no guarantee that Newmont will decline to this level, and this doesn't mean that the stock can't bounce short term given that it's just declined ~20% in a straight line since its January highs. However, I prefer to get the right price or pass entirely for cyclical names and with the dividend cut, the total return is lower than it would have been previously for parking one's self in the stock and waiting for the gold price to cooperate. So, although Newmont has done a decent job of navigating the tough environment and we should see a material improvement in margins beginning in 2025 (Ahafo North first gold pour), I don't see any reason to rush into Newmont Corporation stock at current levels.
Summary
Newmont Corporation has had a tough couple of years like the rest of its peers, and this hasn't been helped by operating in prolific regions where labor tightness has been an issue and we've seen meaningful contractor inflation. The good news is that inflationary pressures appear to be calming down, but with a soft Q1 report ahead, momentum to the downside in the gold price, and no clear washout in sentiment sector-wide, I see patience as the best course of action. I could be wrong, and I'm wrong all the time, but I see the more attractive buy zone for Newmont Corporation stock being $37.10 once it's past the tougher comps in Q1/Q2 2022 from a stronger gold price and pressure from energy prices, so I plan to remain on the sidelines for now.
For further details see:
Newmont: A Solid Finish To A Tough Year