Newmont Is A Tremendous Dividend Growth Idea (NYSE:NEM)

Gold bullion on pile golden coins a lot of

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By Callum Turcan

Rising geopolitical tensions have pushed COMEX gold prices to the $1,900-$2,000 per troy ounce range as of this writing in mid April 2022. We like the gold miner Newmont Corporation (NYSE:NEM) to gain exposure to the gold industry in the wake of the current turbulent backdrop. Shares of NEM have boomed higher over the past year, though what we are interested in the most is its income growth potential. Newmont has a variable dividend policy that includes a base and variable payout. Shares of NEM yield ~2.7% on a trailing twelve month basis, and we continue to be big fans of the name.

Dividend Considerations

At the end of December 2021, Newmont had $5.0 billion in cash and cash equivalents on hand (excluding $0.1 billion in current “investments” and $3.2 billion in non-current “investments”) versus $0.2 billion in short-term debt (inclusive of “current lease and other financing obligations”) and $5.6 billion in long-term debt. The firm’s $0.8 billion net debt position at the end of last year is manageable, in our view, given Newmont’s ample liquidity on hand and its nice free cash flow generating abilities in the current environment.

In 2021, Newmont generated $2.6 billion in free cash flow and spent $2.0 billion covering its total dividend obligations (dividends to common shareholders and distributions to noncontrolling interests) along with an additional $0.5 billion buying back its stock. These measures were fully funded by its free cash flows.

A picture of Newmont

In 2020 and 2021, Newmont generated substantial free cash flows. (Newmont – 2021 10-K SEC Filing)

Newmont provides an overview of its variable dividend program in the upcoming graphic down below, which is based primarily on where the price of gold is trading and how that impacts its incremental free cash flows over a certain gold pricing threshold. Last year, Newmont had an average realized gold selling price of $1,788 per troy ounce, which is well below where near term gold futures are trading at as of this writing. Expectations that Newmont’s production levels will grow while its per unit production costs shift lower in the medium-term combined with the uplift provided by rising gold prices supports Newmont’s cash flow outlook, though we caution that its capital expenditure expectations are also rising in the medium-term.

A slide from Newmont

An overview of Newmont’s variable dividend program. (Newmont – March 2022 IR Presentation)

During Newmont’s fourth quarter of 2021 earnings call, management had this to say on Newmont’s dividend policy and free cash flow performance:

Our balanced global portfolio, combined with our discipline and integrated-operating model, provides significant leverage to higher gold prices from the largest production base in the world. And for every $100 increase in gold prices, above our base assumption, Newmont delivers $400 million of incremental attributable free cash flow per year.

Nearly 18 months ago, we led the gold industry by announcing our dividend framework, differentiating ourselves with a clear and decisive strategy to provide stable and predictable returns to our shareholders. This framework provides a stable base dividend and returns 40% to 60% of the incremental attributable free cash flow generated above a $1,200 gold price.

The fourth quarter dividend declared was consistent with the last 4 quarters, calibrated at an $1,800 gold price assumption and a 40% distribution of incremental free cash flow. — Nancy Buese, EVP and CFO of Newmont

We appreciate Newmont’s commitment to income seeking investors.

Overview

The company’s underlying business and financial outlook improved considerably in the wake of the merger between Newmont and Goldcorp that was finalized in April 2019. Significant synergies were expected to be realized through this merger, though headwinds caused by the coronavirus (‘COVID-19’) pandemic have made it difficult to fully realize those goals so far. Going forward, a normalization of its operations as the pandemic fades globally should provide a powerful tailwind to Newmont’s future financial performance.

Newmont’s merger with Goldcorp set the stage for Newmont to establish a joint-venture with Barrick Gold Corporation (GOLD) involving both firm’s Nevada mining operations, and that JV was formerly launched in July 2019. Significant synergies from that tie-up are expected to be realized as well over the coming years. Newmont owns a 38.5% equity stake in Nevada Gold Mines LLC (‘NGM’) and Barrick owns the remainder.

For reference, gold equivalent ounces (“GEO”) is how Newmont makes viewing its production of non-gold commodities comparable with its gold production streams. Beyond gold, Newmont produces copper, silver, lead, and zinc.

Back in 2019, Newmont produced 6.3 million attributable troy ounces of gold and 0.6 million attributable GEO. The company’s attributable gold production fell in 2020 by 6% year-over-year as the COVID-19 pandemic negatively impacted its mining operations, though its GEO production shot higher as it resolved some community issues at its Peñasquito mine in Mexico which produces gold, silver, lead, and zinc. The resolution of the community issues offset headwinds from the Peñasquito mine getting temporarily placed on care and maintenance in mid-2020 due to COVID-19 before later resuming operations.

In 2021, Newmont produced 6.0 million attributable troy ounces of gold (up 1% year-over-year) and 1.3 million GEO (up 23% year-over-year) as it benefited from a normalization of its mining operations. The firm’s resource base is expansive and supported by its exploration activities. Newmont plans to spend around $0.3 billion on exploration expenses in 2022 across brownfield and greenfield opportunities in North America, South America, Africa, Australia, and Japan. While Newmont is a gold miner, the firm is also focused on growing its GEO production, particularly its copper and silver output.

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Newmont has an expansive portfolio of mining properties. (Newmont – March 2022 IR Presentation)

Vast Resource Base

At the end of 2021, Newmont’s gold reserves stood at 92.8 million attributable troy ounces. Management noted that the lion’s share of Newmont’s gold reserves are located “in top-tier jurisdictions” meaning locations where civil unrest and/or asset nationalization are not likely, something global mining firms need to be cognizant of.

Please note that these are its proven and probable gold reserves, meaning resources that Newmont has a highly degree in confidence that it will be able to extract in an economical manner (proven is the highest degree of confidence, probable is a high degree of confidence). Furthermore, Newmont had 68.3 million troy ounces of measured and indicated gold resources (the miner can confirm or reasonably assume geological and grade continuity to move forward with development planning schemes for these resources) along with 33.2 million troy ounces of inferred gold resources (additional exploration and appraisal activities, such as drilling for additional core samples, are required to have confidence in these resources) at the end of last year.

Newmont added 6.5 million troy ounces of gold reserves to its asset base in 2021, primarily through drilling activities. Depletion activities and downward revisions in some of its reserve estimates saw its attributable gold reserve base drop in 2021 by 1.4 million troy ounces versus levels seen at the end of 2020. However, a recent acquisition added significant resources to its asset base.

In February 2022, Newmont announced it had entered into an agreement to acquire Compania de Minas Buenaventura SAA’s (BVN) stake in the Minera Yanacocha, an entity that owns gold mining properties in Peru. Newmont is paying $0.3 billion along with up to $0.1 billion in contingent payments (tied in part to metals prices) to acquire Buenaventura’s ~44% stake in Minera Yanacocha, adding to the ~51% interest Newmont already owned at the end of December 2021. Depending on how things play out, Newmont may end up owning all of Minera Yanacocha should Sumitomo (OTCPK:SSUMY) exercise its right to sell its 5% stake in Minera Yanacocha at its original purchase price, though we view such an event as unlikely in the current gold pricing environment.

Newmont notes in its 2021 Annual Report that the deal with Buenaventura closed in February 2022. This deal also involved Newmont transferring its ~47% stake in Minera La Zanja (owns a gold mine in Peru) to Buenaventura while paying $45 million to assist in future closure costs at the mining operation, though Newmont will receive royalties on any future production at the La Zanja mine. The La Zanja mine’s best days are behind it, though it still produces a modest amount of gold and silver. Buenaventrua estimates that at a 100% ownership rate, the La Zanja mine will produce 37,000 – 45,000 ounces (likely troy ounces) of gold in 2022.

The firm is working on a sulfides project at the Yanacocha mine, though that endeavor has faced delays due to COVID-19 and other factors. That development is expected to extend the life of the Yanacocha mine past 2040, though it is not expected to begin producing significant amounts of additional gold, copper, and silver until 2025 at the earliest according to Newmont’s estimates.

Minera Yanacocha also owns the Conga project that is in Peru, though construction activities at this development were paused back in 2011 and are unlikely to resume for the foreseeable future. Please note that the increased equity interest in Minera Yanacocha raised Newmont’s forecasted sustaining and development capital expenditure requirements over the coming years.

The additional reserves from the increased interest in Yanacocha saw Newmont’s pro forma gold reserves rise to 95.5 million troy ounces at the end of 2021 (up modestly from year-end 2020 levels). Newmont also exited 2021 with 15.1 billion pounds of copper reserves, 568 million troy ounces of silver reserves, 2.6 billion pounds of lead reserves, and 6.3 billion pounds of zinc reserves with room for upside. The miner’s resource base is expansive and supports its outlook for a relatively flat production base over the next decade.

Slide from Newmont

Newmont’s vast reserve base is expected to keep its production profile broadly flat over the coming years which in turn supports its longer term cash flow outlook. (Newmont – March 2022 IR Presentation)

Outlook

In the medium-term, Newmont expects to benefit from its operations recovering from the COVID-19 pandemic and the uplift its development pipeline should provide. Newmont forecasts its attributable gold production will climb to 6.2 million troy ounces in 2022 (up 4% year-over-year) while its GEO production is expected to stay broadly flat year-over-year at 1.3 million. Looking farther ahead, Newmont aims to grow its attributable gold production to 6.2-6.8 million troy ounces and its GEO production to 1.4-1.6 million by 2024 (it GEO production is expected to hit that level by 2023).

Part of its expected production growth is due to Newmont sanctioning the Ahafo North project in July 2021, which is expected to develop substantial low-cost gold resources in Ghana near Newmont’s existing operations (Ahafo South). Construction at the Ahofa North project is expected to be completed by the second half of 2023. Back in November 2019, Newmont sanctioned the Tanami 2 Expansion project which seeks to extend the life of its Tanami gold mine in Australia past 2040. This expansion project is expected to support Newmont’s production profile starting in 2022/2023. Please note that this is not an exhaustive list. Newmont’s project pipeline can be viewed in the upcoming graphic down below which includes exploration, appraisal, and development opportunities.

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Newmont’s project pipeline is robust. (Newmont – March 2022 IR Presentation)

Another key consideration is the ramp up of production at its Musselwhite gold mine in Canada as Newmont recently completed remediation activities and a materials handling upgrade project at the site. The Musselwhite mine experienced a fire in 2019, which forced mining activities to shut down for some time. Newmont owns 100% of the Ahafo South (currently producing) and Ahofa North (sanctioned development) operations, 100% of the Tanami operation, and 100% of the Musselwhite mine.

Newmont is laser-focused on improving its operations and cost structure. The firm expects to realize $290 million in savings in 2022 through its “full potential improvements” program by targeting opportunities in the realm of processing, mining improvement, supply chain, and back office activities.

Slide for Newmont

Newmont aims to significantly improve its cost structure over time, and we appreciate management’s relentless focus on this front. (Newmont – March 2022 IR Presentation)

Among other things, Newmont’s full potential improvements program involves deploying autonomous haulage systems (‘AHS’), which the firm has already done at its Boddington gold and copper mine in Australia (100% owned by Newmont). In October 2021, Newmont announced it had invested $150 million rolling out a fleet of three dozen AHS trucks at the Boddington mine, which are expected to significantly improve mine safety and boost its productivity. Newmont lays out the advantages of its AHS investments in the upcoming graphic down below.

Slide from Newmont

Rolling out a fleet of AHS trucks at its Boddington mine in Australia has significantly improve mine safety while improving reliability and productivity at the site. Newmont’s efforts here indicate there is ample room for upside by rolling out fleets of AHS trucks at its other mining operations. (Newmont – Fourth Quarter of 2021 IR Earnings Presentation)

Combined, these efforts and others are expected to provide a nice tailwind to Newmont’s medium-term production trajectory while putting downward pressure on its per unit production costs. The miner’s gold all-in sustaining costs (‘AISC’) are expected to drop from $1,062 per troy ounce in 2021 to $1,050 per troy ounce in 2022 and down to $920-$1,020 per troy ounce by 2024. Newmont expects its GEO AISC will climb higher in 2022 versus 2021 levels before moving significantly lower in 2023 onwards.

Please note that Newmont expects its capital expenditures will come in at $2.3 billion in 2022 versus $1.7 billion in 2021 and will stay elevated (above $2.0 billion) until 2025 as it seeks to complete some of its big developments. By 2025, Newmont forecasts its capital expenditures will drop back down to $1.3-$1.5 billion and down further in 2026 to $1.0-$1.2 billion. However, this guidance assumes gold prices stay around $1,800 per troy ounce and that Newmont does not sanction any other significant developments. We support Newmont’s plan to invest in the business.

Slide from Newmont

Newmont’s capital expenditures are expected to be elevated in 2022-2024 versus 2021 levels before shifting lower in 2025 and 2026 as the miner works on finishing major projects that have already been sanctioned. (Newmont – March 2022 IR Presentation)

Concluding Thoughts

In light of elevated geopolitical tensions stemming from the Ukraine-Russia crisis along with the sizable inflationary pressures seen in recent months, having exposure to the gold mining industry is desirable, in our view. Newmont is a top-notch gold miner that is incredibly committed to returning cash to shareholders, and we appreciate its variable dividend program. Expectations that Newmont will grow its production base while reducing its per unit costs support its cash flow and ultimately dividend growth outlook. We continue to be big fans of Newmont and view its dividend growth outlook quite favorably in the current gold pricing environment.

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