/ Equity Research / NEM | Page 2
Newmont Mining Corp.
/ (NEM-NYSE)We are maintaining our Neutral recommendation on Newmont. The company swung to a profit on a reported basis in the fourth quarter of 2014. However, revenues fell on lower gold and copper pricing. Both revenues and adjusted earnings beat Zacks Consensus Estimates. The company saw a decline in gold production in the quarter. Newmont is making notable progress with its growth projects that are expected to boost its production performance. We are also impressed by its cost management initiatives. However, Newmont is exposed to a weak gold and copper price environment. Its production may also be affected by lower grades across specific mines and geopolitical issues.
/ Equity Research / NEM | Page 2
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/25/2014
Current Price (02/23/15) / $25.96
Target Price / $27.00
SUMMARY
/ Equity Research / NEM | Page 2SUMMARY DATA
52-Week High / $27.0952-Week Low / $17.78
One-Year Return (%) / 11.42
Beta / -0.22
Average Daily Volume (sh) / 7,758,486
Shares Outstanding (mil) / 499
Market Capitalization ($mil) / $12,954
Short Interest Ratio (days) / 1.63
Institutional Ownership (%) / 77
Insider Ownership (%) / 0
Annual Cash Dividend / $0.10
Dividend Yield (%) / 0.39
5-Yr. Historical Growth Rates
Sales (%) / -4.7
Earnings Per Share (%) / -25.3
Dividend (%) / -18.9
P/E using TTM EPS / 23.8
P/E using 2015 Estimate / 26.2
P/E using 2016 Estimate / 23.2
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Value
Industry / Mining -Gold
Zacks Industry Rank * / 75 out of 267
OVERVIEW
Colorado-based Newmont Mining Corporation (NEM) is one of the world's largest producers of gold with several active mines in Nevada, Peru, Australia/New Zealand, Indonesia and Ghana. It is the only gold company included in the S&P 500 Index and Fortune 500. As of December 31, 2014, Newmont had gold reserves of 82.2 million ounces and copper reserves of 7.9 billion pounds.
Newmont’s operating segments are North America, South America, Australia/New Zealand, Indonesia and Africa.
The North America segment is represented by operations at Nevada. In Nevada, Newmont’s operations include the Carlin, Twin Creeks and Phoenix mines. The South America segment is represented by operations in Yanacocha, Peru. Newmont owns 51.35% of the Yanacocha mine in the north of the city of Cajamarca. In Australia/New Zealand, Newmont fully owns and operates the Tanami and Waihi gold mines. The Super Pit mine in Kalgoorlie are jointly owned with Barrick Gold. Newmont also owns 100% of the Boddington mine.
In Indonesia, Newmont owns 48.5% in the Batu Hijau copper and gold mine through the Nusa Tenggara Partnership (NTP) with an affiliate of Sumitomo Corporation of Japan. NTP in turn owns 56% of P.T. Newmont Nusa Tenggara (PTNNT), the Indonesian subsidiary that owns Batu Hijau. The Africa segment operations are represented by the fully-owned Ahafo and Akyem mines in Ghana.
Newmont, in December 2013, landed a deal to sell its Midas underground operation and mill complex to Klondex Mines Ltd. for $55 million in cash and $28 million for the replacement of its surety arrangements with Nevada and federal regulatory authorities. The company completed the sale in February 2014.
Newmont, in March 2014, sold its 5.4% equity interest in Paladin Energy Ltd. through a block sale deal with UBS Australia. The company acquired its interest in Paladin after the acquisition of Fronteer Gold in 2011.
Newmont, on May 12, 2014, cut a deal to divest its Jundee underground gold mine in Australia to Northern Star Resources for roughly $91 million, consisting of around $77 million of cash and $14 million for working capital. The transaction closed in July 2014. Under the agreement, Northern Star bought all of Jundee’s assets and liabilities including all environmental and employee obligations. All existing fixed plant and onsite equipment owned by Newmont has been transferred to Northern Star. Moreover, most of Jundee’s non-contract staffs were offered continuing employment.
On October 7, 2014, Newmont completed the sale of its 44% stake in the Penmont joint venture in Mexico to Fresnillo plc for $477 million, including cash proceeds of $450 million.
REASONS TO BUY
Ø Newmont continues to invest in growth projects in a calculated manner, and expects to produce between 4.7–5.1 million ounces annually by 2017. The company is pursuing a number of projects including Ahafo project in Ghana, Long Canyon in Nevada and Merian in Suriname. The company has made a significant progress with respect to the Akyem project that commenced operation in October 2013. Akyem is a core asset of Newmont and it is expected to produce average annual gold of 350,000 to 450,000 ounces in its initial five years of production. Moreover, Newmont remains optimistic about its Long Canyon project in Nevada and expects to reach a decision to proceed with the first phase of development in first-quarter 2015 with a potential start of production in 2017. The company has also commenced commercial production from its Phoenix copper leach project in Nevada. Moreover, Newmont’s Merian project remains on track to start production in late 2016. During the mine’s first five years of operation, Newmont expects average annual production between 400,000 and 500,000 attributable ounces of gold. The company also announced that the government of Suriname has decided to exercise its option to participate in the Merian project. Newmont will have the majority 75% stake in the project while the remaining 25% will be owned by Staatsolie, a corporation wholly-owned by the State of Suriname.
Ø Newmont is making significant progress with its cost and efficiency improvement programs. Successful cost reductions are allowing the company to generate positive free cash flow and helping it to mitigate the unfavorable impact of lower commodity prices. Newmont achieved costs reductions of nearly $1 billion in 2013. The company also reduced its all-in sustaining costs (AISCs) by over $500 million in 2014. Newmont expects gold costs applicable to sales (CAS) in the band of $660–$710 per ounce for 2015 which reflects a decline from $706 per ounce in 2014.
Ø Newmont’s unique gold price-linked dividend policy is another area to look out for. Under this policy, the company’s annual dividend has the potential to increase to $4.70 per share if the company’s average realized gold price exceeds $2,500 per ounce, which will give a very impressive dividend yield when it happens. Since the introduction of its dividend policy, the company has returned more than $1 billion to its shareholders.
REASONS TO SELL
Ø The weak gold price environment represents another concern. Spot gold prices fell sharply in April 2013 to $1,360.60 per ounce, the steepest fall in three decades, putting the yellow metal into bear market territory. Gold prices slumped to four-and-half year lows to $1,143 per ounce in November 2014 due to a strong U.S. dollar and a steady climb in the equity market. Average price in 2014 stood at $1,266.4 per ounce, a 10% drop from the average price of $1,411 per ounce in 2013. Gold prices have suffered a heavy beating and currently remain below the psychological level of $1,200. As such, weak gold pricing continues to serve as a headwind.
Ø In the gold industry, gold grades have been declining over the past few years. As operations mature, gold producers, including Newmont, are forced to extract ores with lower grades that are often accompanied by higher separation and extraction costs. Lower ore grades are affecting production in the company’s Asia Pacific operation.
Ø Newmont still faces challenges in Indonesia as the country’s government has come up with new requirements for the continued export of copper concentrates, including imposition of export tax. Under the mandate (as revised in Sep 2014), Newmont has agreed to pay export duties of 7.5% on copper concentrate and higher royalties for gold, copper and silver. The company will also provide an assurance bond worth $25 million in support of a smelter development in Indonesia. Moreover, production remains challenged at the Batu Hijau mine as certain geo-technical issues are impacting weight stripping capability.
RECENT NEWS
Newmont Beats on Q4 Earnings and Revenue Estimates – February 19, 2015
Newmont registered fourth-quarter 2014 adjusted earnings of $0.17 a share, beating the Zacks Consensus Estimate of $0.11.
On a reported basis, the company posted net earnings from continuing operations of $39 million or $0.08 per share in the fourth quarter versus net loss of $1,195 million or $2.39 per share a year ago. The bottom line was positively impacted by the sale of Newmont’s stake in the Penmont joint venture in Oct 2014.
Newmont’s revenues fell nearly 7.8% year over year to $2,017 million in the quarter on reduced gold and copper pricing, but surpassed the Zacks Consensus Estimate of $1,834 million by a wide margin.
For full-year 2014, adjusted earnings were $1.09 per share. The results also beat the Zacks Consensus Estimate by a $0.01. Reported net income from continuing operations for 2014 totaled $548 million or $1.10 per share versus a loss of $2,595 million or $5.21 per share in 2013.
For full-year 2014, revenues decreased roughly 13.3% to $7,292 million from $8,414 million in 2013, but surpassed the Zacks Consensus Estimate of $7,135 million.
Newmont’s attributable gold production in the fourth quarter was 1.26 million ounces, down 13% year over year, due to the impact of divestments. Attributable copper production was 28,700 tons, up 30% year over year. Attributable gold and copper production for full -year 2014 was 4,845 million ounces and 86,500 tons, down 4% and up 6% year over year, respectively.
Gold and copper CAS were $631 per ounce and $1.86 per pound in the reported quarter, down 18% and 51% year over year, respectively. Gold and copper CAS in 2014 was $706 per ounce and $2.88 per pound, down 9% and 30% year over year, respectively.
AISCs were $927 per ounce in the fourth quarter, down 11% from the prior-year quarter. AISC for 2014 was $1,002 per ounce, down 10% from the previous year.
Regional Performance
North America
Attributable gold and copper production in North America was 396,000 ounces and 5,200 tons, respectively, in the fourth quarter of 2014. Gold production was down 29% due to planned stripping campaigns at Carlin and Twin Creeks, and the divestment of Midas and La Herradura mines.
Copper production, however, increased 13% year over year in the fourth quarter. Gold and copper CAS for this region in the reported quarter was $756 per ounce and $2.64 per pound, down 3% and up 51% year over year, respectively. In the reported quarter, gold and copper AISC was $1,010 per ounce and $2.82 per pound, respectively, up 4% and down 6% year over year.
South America
Attributable gold production in South America was 201,000 ounces, up 81% year over year. Gold CAS for this region fell 54% year over year to $409 per ounce, while AISC slipped 52% year over year to $650 per ounce in the reported quarter.
Australia/New Zealand
Attributable gold and copper production in Australia/New Zealand was 404,000 ounces and 8,400 tons, down 16% and up 12%, year over year, respectively. The fall in gold production in this region was a result of the sale of the Jundee mine. Gold and copper CAS for this region was $757 per ounce and $2.10 per pound, down 15% and 31% respectively from the year-ago quarter. Gold and copper AISC was $978 per ounce and $2.90 per pound, down 11% and 23%, respectively, from the year-ago quarter.
Indonesia
Attributable gold and copper production in Indonesia in the fourth quarter was 21,000 ounces and 15,100 tons, soaring 276% and 51% year over year, respectively. Gold and copper CAS for this region was $780 per ounce and $1.72 per pound, decreasing 60% and 61% respectively, from the year-ago quarter. Gold and copper AISC in the reported quarter was $958 per ounce and $2.22 per pound, down 52% and 57% respectively, from the fourth quarter of 2013.
Africa
The region produced 239,000 ounces of gold in the fourth quarter, down 18% year over year. Gold CAS and AISC were $488 per ounce and $722 per ounce, respectively, up 24% and 39%, respectively.
Financial Position
Newmont had cash and cash equivalents of $2,403 million as of Dec 31, 2014, up 54.5% year over year. The company’s long-term debt increased roughly 5.5% year over year to $6,480 million.
Project Update
The Turf Vent Shaft project at Nevada is all set to commence commercial production in late 2015 and is expected to add 100,000–150,000 ounces of annual production to Leeville. Out of the total capital costs in the range of $350–$400 million for the project, around $70–$80 million will be spent in 2015.
For the Merian project, which is still under construction, average gold production is expected in the range of 400,000–500,000 ounces on a 100% basis during the first five years. Respective CAS and AISC are estimated to be in the range of $575–$675 per ounce and $650–$750 per ounce. This project helps Newmont to expand in a new district with good potential. Capital cost for this region is expected to be in the band of $600–$700 million in 2015. The project with its first production is expected in late 2016.
Outlook
Newmont’s attributable gold production is expected to increase from 4.6–4.9 million ounces in 2015 to 4.7–5.1 million ounces in 2017. Fresh production at Merian and higher grades in Nevada and Indonesia are anticipated to offset lower grades at Yanacocha and Ahafo. Copper production is anticipated in the range of 130,000–160,000 tons in 2015 and 115,000–135,000 tons in 2016 and 2017.