2023-03-29 09:56:21 ET
Summary
- Newmont released its FY2022 Reserve & Resource statement last month, reporting a 3.6% increase in total attributable gold reserves to 96.1 million ounces.
- In addition, both measured & indicated and inferred resources increased materially year-over-year, with total resources (exclusive of reserves) sitting at ~111 million ounces of gold.
- That said, the increase in reserves/resources was partially related to acquisitions, reserves per share is flat since the Goldcorp deal, and we saw a tailwind from higher metals price assumptions.
- Overall, I see the report as satisfactory and it's encouraging that Newmont continues to use conservative metals prices like the rest of the sector, but I continue to see more attractive bets elsewhere.
The Q4 Earnings Season for the Gold Miners Index ( GDX ) is ending, and reserves & resource update season is well underway, with several reports trickling out over the past month. One of the first companies to release its updated Reserve & Resource statement was Newmont ( NEM )(NGT:CA), and the company reported 3.6% growth in gold reserves, maintaining its spot as the #1 gold company in the Americas by reserves, but just behind Polyus Gold ( OTC:OPYGY ) regarding total reserves. While Polyus has yet to release its Annual Report, reserves appear likely to come in roughly 10% higher than Newmont at 105.0+ million ounces. That said, Newmont is miles ahead of its closest competitor, Barrick ( GOLD ), and has more than double the reserves of the lowest-cost major producer, Agnico Eagle Mines ( AEM ).
That said, while Newmont grew reserves year-over-year, much of this was related to consolidating Yanacocha, and growth in reserves at non-managed operations. And while exploration played some part in replacing its annual depletion, we saw some offsets from negative net revisions. Plus, while measured & indicated [M&I] and inferred resources increased to 110 million ounces, this was mostly because of a one-time benefit from acquisitions and a much higher gold price assumption ($1,600/oz vs. $1,400/oz). Let's inspect the report below and see how Newmont's reserve per share growth looks after a successful year of reserve replacement.
2022 Reserve Update
Newmont reported its FY2022 reserves last month, reporting total attributable reserves of ~96.1 million ounces of gold, an increase from 92.8 million ounces of gold in the year-ago period. This was driven by 8.8 million ounces of gold added by additions and another 3.1 million ounces of gold from acquisitions (increasing its ownership of Yanacocha to 100%), with this 11.9 million ounce gain offsetting annual depletion (7.2 million ounces of gold) and 1.2 million ounces in net negative revisions. Regarding additions, Newmont saw the largest increase in reserves at managed operations from Cerro Negro (+0.80 million ounces), Merian (+ 0.50 million ounces), and Tanami (+0.20 million ounces), with Cerro Negro's growing to 3.03 million ounces at 10.02 grams per tonne of gold (FY2021: ~2.56 million ounces - 8.89 grams per tonne of gold), making it one of the highest-grade mines globally by reserve grade.
However, the largest addition for Newmont in 2022 came from its equity interest (40%) in the massive Pueblo Viejo Mine in the DRC run by Barrick, with the pre-feasibility study for the new Naranjo tailings storage facility [TSF] which led to significant growth in attributable reserves for Newmont (~4.4 million ounces) and Barrick, and it should extend the mine life well into the 2040s at this low-cost operation which has output growth on deck (throughput expansion to 14 million tonnes per annum). For those unfamiliar, Newmont gained its 40% interest in Pueblo Viejo with its acquisition of Goldcorp in 2018, with it previously being a 60/40 split between Barrick and Goldcorp when the two teamed up in 2005 to break apart Placer Dome (Barrick sold Goldcorp the Canadian assets, its interest in La Coipa, and 40% interest in Pueblo Viejo).
Elsewhere, Barrick added ounces in Nevada, which benefited Newmont because of the shared (38.5%/61.5%) ownership in Nevada Gold Mines LLC. This resulted from the announcement of a maiden reserve at Robertson, a new oxide mill feed for Cortez that should sequence in during 2027. Unfortunately, the increase from Robertson was offset by a decline in reserves at the largest and most famous Nevada complex, Carlin, and a slight decline in reserves at Cortez Underground and Turquoise Ridge surface reserves. To summarize, while Newmont added material gold reserves in 2022, we can attribute much of this to acquisitions and its minority interest in one of Barrick's operations. Finally, Newmont saw net unfavorable revisions from Yanacocha, Merian, and Eleonore, and Carlin/Turquoise Ridge in Nevada, partially offset by favorable revisions at Pueblo Viejo (+0.5 million ounces).
Newmont noted that the net unfavorable revisions at Yanacocha were due to updated models, technical assumptions, and revised mine designs, while the lost ounces at Merian and Eleonore were also due to revised technical assumption and costs.
Finally, looking at reserves from a per share standpoint, Newmont finished the year with approximately 120 ounces of gold reserves per 1,000 shares, roughly flat over the past two years, but with a slightly higher grade year-over-year. However, on a 20-year trailing basis, the trend is clearly down for Newmont. Obviously, we've seen a significant change in the portfolio since then, with the company having a much different portfolio in 2002 that included Mesquite, Golden Giant, Kori Kollo, Pajingo, Kalgoorlie, Yandal, Martha, Ovacik, Zarafshan, and assets now in the NGM joint-venture like Phoenix, Carlin, and Twin Creeks (Turquoise Ridge). However, given the rising costs sector-wide, the fact that most of the major gold discoveries have already been made, and how hard it is to consistently replace 5.0+ million ounces per annum without M&A, investors continue to see fewer reserves per share held at Newmont.
Replacing reserves for the world's top gold miner by attributable production is not an easy feat, and while Newmont increased its metals price assumption to $1,400/oz (slightly above Barrick at $1,300/oz), this is still what I would consider a very conservative assumption for deciding on mine plans. Plus, nearly all producers sector-wide are struggling to replace reserves on a per share basis since the turn of the century, and especially those that did share deals in frothy markets like Kinross ( KGC ) with Red Back Mining (2010). However, there is one miner that stands out in Newmont's peer group with a glowing track record of reserve replacement, helped by immense exploration success, a very aggressive exploration budget and very well timed acquisitions and capital discipline.
This miner is Agnico Eagle, and as we can see below, if an investor wants each share that it holds to maintain or grow its ownership of gold reserve backing, this is certainly one of the better prospects to own. In fact, Agnico has nearly doubled its gold reserves per share from 56 to 111 ounces per 1,000 shares over the past 20 years and has clearly maintained a very tight share structure. Notably, the company looks to have material growth in reserves per share on deck despite recent share dilution in the Yamana deal ( AUY ), with Wasamac, Upper Beaver, and considerable ounces from Odyssey likely to enter its mine plans over the next several years, as well as the Detour West Pit Extension, and the potential for additional growth at Detour Lake from an underground standpoint.
Resources
Moving over to resources (M&I and inferred), Newmont reported M&I resources of 75.3 million ounces of gold with an additional 36.1 million ounces of inferred resources. This placed Newmont's total resources at 111.4 million ounces of gold, giving the company a total resource base (reserves + M&I + inferred) of ~207 million ounces of gold. Digging into the categories a little closer, M&I resources increased 10% to 75.3 million ounces, driven by primary acquisitions and despite losses from conversions to reserves and the headwind from its divestiture of its minority stake in Agua Rica. In regards to additions before revisions, the growth came from Ahafo South Underground and Ahafo North (0.7 million ounces combined), Yanacocha (0.5 million ounces), its share of Nevada operations (0.4 million ounces) plus ~200,000 ounces at Cerro Negro, and Penasquito.
That said, the majority of growth in M&I resources was once again driven by acquisitions, with significant growth from Conga (7.1 million ounces of gold located 15 kilometers northeast of Yanacocha) and an additional 1.1 million ounces from taking over full ownership of Yanacocha. Conga has faced opposition in the past so it's not clear whether these ounces will ever materialize, but they had the most significant impact to growth in M&I resources in the period. Finally, Newmont saw positive net revisions of 4.4 million ounces, with the most significant revisions at Nevada Gold Mines, Pueblo Viejo (40% interest), Penasquito, Tanami, CC&V, Musselwhite, and Ahafo South Underground.
As for inferred resources, Newmont reported that it added 2.6 million ounces through exploration with an additional 4.3 million ounces added through acquisitions (offset by 0.40 million ounces due to the divestment of its stake in Agua Rica). Once again, a key contributor was Cerro Negro in Argentina, and Ahafo South Underground, in addition to Porcupine Underground, Tanami, and Eleonore. The most significant contributor was Nevada Gold Mines (38.5% interest) with 0.90 million attributable ounces added, and we also saw 4.0 million ounces added at Yanacocha and Conga combined. Overall, this inferred and M&I resource base provides a solid back up to an already strong reserve base, but it would have been nicer to see more ounces added through exploration.
Looking ahead to this year, Newmont has budgeted $200 million at managed operations, with plans to spend ~$160 million on near-mine expansion programs and $40 million on the advancement of greenfield projects. I continue to see this as a relatively modest amount of spending on exploration, especially considering that it was spending the same amount in 2017, but exploration dollars aren't going as far due to inflationary pressures with higher contractor costs, and this was when it had a much smaller portfolio (pre-Goldcorp acquisition). In comparison, Barrick has guided for a similar amount to be spent on exploration/evaluation ($180 million to $200 million in 2023), but producing much fewer ounces on an attributable basis.
Lastly, there were some major changes to pricing assumptions in 2022, which benefited Newmont's ability to declare higher reserves and resources. Unlike year-end 2021 when Newmont had one of the lowest metals price assumptions for gold at $1,200/oz, it raised its metals price to $1,400/oz for year-end, $100/oz above Barrick and Agnico Eagle which was a tailwind in regards to resource and reserve conversion, partially offset by the higher oil price assumption. In addition, it increased its price for calculating resources to $1,600/oz, though this is more in line with its peer group and what I consider conservative.
In summary, Newmont successfully replaced reserves in 2022 after significant depletion, and this is no small task given that it's depleting at twice the rate of other major producers in the sector like Agnico Eagle. However, much of these gains were from non-managed operations, considerable growth was from acquisitions, and the gains from exploration were lower than what I would have liked to see, though this is still a very strong portfolio and Newmont remains better positioned than many producers who have under-spent or have marginal ounces that could come out of mine plans. Still, with less aggressive spending on exploration, I continue to see Agnico Eagle being the much better bet from a reserve growth per share standpoint, which is what investors should be most focused on in the sector given that if per share metrics aren't growing, they might be better off owning the metal itself.
So, is the stock a Buy?
Based on ~795 million shares and a share price of $48.40, Newmont trades at a market cap of ~$38.5 billion and an enterprise value of ~$40.3 billion. This makes Newmont one of the most expensive names sector-wide on a P/NAV basis and also leaves it trading at one of the richer cash flow multiples among its peer group, In fact, it currently trades right in line with its historical cash flow multiple of 9.8 (10-year average) based on FY2023 cash flow per share estimates of $4.96. Even if we assume a fair multiple of 11.0x cash flow given that its larger scale and increased exposure to Tier-1 mines (Penasquito, equity ownership in Pueblo Viejo, consolidated ownership of Yanacocha) and a brighter future for Nevada Gold Mines with the "borders" removed to offer optimization/synergies, this places Newmont's fair value at $54.45 per share.
To be fair, Newmont has a solid development portfolio that isn't captured in its FY2023 cash flow per share estimates, and I see a conservative value for probable projects of $3.5 billion ($4.40 per share). After adding this to Newmont's fair value based solely on an 11.0x cash flow multiple, I see a fair value for the stock of $58.85. If we measure from the current share price and adding in an annualized yield of ~3.0%, Newmont's total return comes in at 24%. Although this points to a solid upside for one that wants exposure to gold while getting paid to wait, I still don't see nearly enough margin of safety. This is because I want a minimum 30% discount to fair value for large-cap producers, and this places Newmont's ideal buy zone at $41.20 or lower.
Summary
Newmont reported a satisfactory year of reserve replacement in 2022, but given its size, growing its reserves on a per share basis continues to be a difficult endeavor. The good news is that the company continues to have a 10+ year mine life at several of its lowest-cost assets (Penasquito, Boddington, Tanami, Merian) and we should see minor cost improvements with higher production at major Nevada assets (38.5% ownership) like Turquoise Ridge and Carlin, plus Pueblo Viejo (40% interest) in the DRC where we also saw reserve growth. That said, I prefer to invest in miners consistently growing reserves per share, and if I am going to larger names like Newmont that have a harder time growing metrics on a per share basis, I prefer to buy at deep discounts or pass.
So, while I see NEM as a decent choice for yield in the sector given that it's diversified and looks to have upside in its dividend if gold prices are able to find a new floor above $1,900/oz, I would need a pullback below US$41.20 to get more interested.
For further details see:
Newmont: Successful Reserve Replacement In 2022