2023-03-10 10:21:16 ET
Summary
- Despite sporting rock-solid fundamentals, the shares of Newmont endured further selling pressure thus far into 2023.
- The main culprit is the economy, which continues surprising and thus increases the prospects of even tighter monetary policy to combat inflation.
- This puts further pressure on gold prices and thus oddly enough, it could be said we actually need some bad news.
- Since the United States treasury yield curve is inverted, it signals the day is coming when the Federal Reserve will pivot to a dovish stance.
- Despite the bumpy start to the year, I still believe that my buy rating is appropriate.
Introduction
When last discussing Newmont (NEM), my previous article highlighted how their shares made great insurance for the everyday investor given their rock-solid financial position and solid history of generating free cash flow in a range of operating conditions. This insurance was not a smooth ride thus far as their share price subsequently endured further selling pressure as the economy continues surprising and thus, it could be said that we actually need some bad news, as discussed within this follow-up analysis alongside a review of their outlook for 2023 in light of their new guidance.
Coverage Summary & Ratings
Since many readers are likely short on time, the table below provides a brief summary and ratings for the primary criteria assessed. If interested, this Google Document provides information regarding my rating system and importantly, links to my library of equivalent analyses that share a comparable approach to enhance cross-investment comparability.
Author
Detailed Analysis
After seeing their cash flow performance suffer during the third quarter of 2022 alongside gold prices when conducting the previous analysis, the fourth quarter rebounded. Although positive, it was only modest and thus as a result, their operating cash flow only ended the year at $3.22b, which represents a large near-25% decrease year-on-year versus their previous result of $4.279b during 2021.
When viewing their operating cash flow on a quarterly basis, it shows their reported result during the fourth quarter was $1.01b and thus decent historically speaking but certainly nothing investors will remember well into the future. Whilst it only saw an immaterial working capital build of $29m, it also means the large builds during prior quarters that were flagged within the previous analysis have still not reversed into draws thus far. Since these now aggregate into a significant $841m across full-year 2022, it means 2023 may enjoy this additional cash inflow if these working capital builds finally reverse into draws but alas, this remains a wait-and-see situation.
Newmont Fourth Quarter Of 2022 Results Presentation
Whilst no one can predict their financial performance during 2023 with certainty due to the inherent volatility of gold prices, it is nevertheless positive to see management controlling costs without hindering their gold production. In the case of the former, they forecast all-in sustaining costs of $1,200 per oz at the midpoint during 2023, which is broadly equal to their cost of $1,211 per oz during 2022, as per their fourth quarter of 2022 results announcement. Likewise on the capital expenditure front of their costs, they expect respective sustaining and development costs of $1.1b and $1.3b at the midpoints, which aggregates to circa $2.4b and thus broadly equal to their capital expenditure of $2.325b during 2022. In the case of their production, they forecast gold production of 6 million oz at the midpoint during 2023, which is right on par with that of 2022, as per their previously linked fourth quarter of 2022 results announcement.
When combined, this means management is doing what they can to fight cost pressures and ensure the company is ready to capitalize on higher gold prices, if forthcoming. That said, herein lies the biggest and most important uncertainty of when will operating conditions improve, especially in light of these abnormal times. As everyone knows, commodities are inherently volatile and enjoy both good and bad years, although in the case of gold, its shine to investors is heavily influenced by monetary policy. Due to the Federal Reserve taking an increasingly hawkish stance to combat inflation throughout most of 2022, the resulting rapidly tightening monetary policy saw the USD rise to levels not seen in decades and thereby placing pressure on gold prices.
Whilst many economists, analysts and investors alike have often touted the risks of a recession on the horizon during 2023, thus far this same dynamic continues playing out, despite the end of the first quarter already only weeks away. Normally investors hope for good economic news, although in this case, the news of stronger-than-expected data on the back of a strong jobs market indicates the fight against inflation is far from over, nor have we reached the point whereby the Federal Reserve can finally pivot to a dovish stance.
Oddly enough, this situation means we actually need some bad news to ease the pressure on gold prices and thus by extension, see their financial performance surge alongside their beaten-down share price. Normally a recession would be considered bad news, although it should ease inflation and allow the Federal Reserve to pivot to a dovish stance and therefore, inadvertently ease the pressure on gold whilst weakening the USD from its recent incredible strength. Not only would this create upside potential, it also further highlights how their shares can be great insurance for market turmoil that may allow in tandem with a recession, as my previous article discussed.
The game of timing the economy is fraught with dangers and disappointments but nevertheless, the United States treasury yield curve is inverted, which is a widely known sign that a recession is lurking on the horizon as longer-dated yields are lower than shorter-dated yields. Even though this does not necessarily tell investors exactly when the Federal Reserve will pivot, it nevertheless provides strong evidence the day is coming, which I suspect to be forthcoming later during 2023 or early 2024 because there is only so long the highly indebted economy can withstand the pressure of tight monetary policy.
Even though their cash flow performance rebounded back above $1b during the fourth quarter of 2022, it was outpaced by their accompanying capital expenditure of $688m and dividend payments of $436m. As a result, their net debt edged slightly higher to $1.814b versus its previous level of $1.756b following the third quarter.
Going forwards into 2023, it is impossible to predict exactly where their net debt will head given the inherent volatility of gold prices and thus by extension, their free cash flow. At least their guidance forecasts similar capital expenditure and operating costs as during 2022, which in turn should help support their free cash flow. In light of their capital structure only seeing a slight change following the previous analysis, it would be redundant to reassess their leverage, debt serviceability and liquidity in detail, especially as their outlook for 2023 was the primary focus of this follow-up analysis.
The three relevant graphs are still included below to provide context for any new readers, which once again shows their leverage is very low with their net debt-to-EBITDA of 0.49 and a net debt-to-operating cash flow of 0.56 both far beneath the applicable threshold of 1.00. Likewise, their debt serviceability is perfect when their interest coverage is compared against their operating cash flow with a result of 14.19. Although, I prefer to judge on the worse side that in this instance means comparing their interest expense against their EBIT that sees coverage of 6.71, which despite being noticeably lower is still healthy. Meanwhile, their liquidity is once again very strong with a current ratio of 2.23 and more importantly, a cash ratio of 1.28. If interested in further details regarding these topics, please refer to my previously linked article.
Conclusion
Normally we hope for good economic news both as citizens and investors but alas, it could be said that in this instance we actually need some bad news to finally put an end to this problematic inflation and thus see the Federal Reserve pivot to a dovish stance. Notwithstanding the loss of jobs, objectively speaking this would help ease the pressure on gold prices and therefore allow their beaten-down share price to surge in tandem alongside their financial performance. Despite the often touted risks of a recession on the horizon that should foretell an end to inflation, this is seemingly still elusive as we approach one-quarter of the way through 2023. Since I continue to feel their shares offer great insurance for the everyday investor as my previous analysis highlighted, I believe that maintaining my buy rating is appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from Newmont's SEC filings , all calculated figures were performed by the author.
For further details see:
Newmont: We Actually Need Some Bad News