Newmont Goldcorp Entering A New Business Cycle – Seeking Alpha

The image above: Twin Creeks Mine in Nevada USA

Investment Thesis

Newmont (NEM) is one of the largest gold producers and is about to get even bigger with the merger now completed with Goldcorp. Newmont has been associated with my other two long-term gold miners “base,” including Agnico Eagle (AEM) and Barrick Gold (GOLD).

Investors often use gold miners as a hedge against inflation/US dollar, and it is the traditional principle behind why I am holding a permanent gold position, including stable gold miners like Newmont Goldcorp.

I generally allocate between 5% to 8% of my total portfolio to precious metals – gold, platinum, and palladium mainly – for this exact purpose without focusing much on the short-term volatility.

The mighty dollar continues to be firm this year, and the gold price has weakened after a good start early this year. The entire gold industry plummeted into correction territory recently with miners underperforming the price of gold with some exception (e.g., AEM).

ChartData by YCharts

Newmont dropped even more precipitously in reaction to the recent merger with Goldcorp and in a lesser extent with the JV with Barrick, which I will comment later.

However, the last drop is more likely to be attributed to technical issues such as the temporary shut-down of the operations at the Penasquito Mine in Mexico.

The mine produced 272,000 ounces of gold in 2018 for Goldcorp. It is the first “hiccup” coming from Goldcorp troubled assets (Penasquito, Eleonore, Cerro Negro, and few others) but probably not the last one. According to the article linked above:

The move is in response to the pending resolution of an illegal blockade by a trucking contractor and certain members of the Cedros community that started on Mar 27, 2019.

Gary Goldberg, the CEO, said in the conference call:

Newmont delivered solid first quarter results as we continue to execute our strategy which includes delivering superior operational execution by running our mine safely and efficiently, sustaining a global portfolio of long life assets by advancing profitable expansions and exploration on four continents and leading the gold sector in profitability and responsibility.

The investment strategy that I recommend keeping a long-term position in this company and slowly accumulating using weakness. However, it is imperative to apply the right approach by combining a long-term investment goal supported some short-term trading. I always recommend trading about 30% of your position based on technical analysis (e.g., RSI, etc.).

The market is highly dynamic, especially the gold sector, which implies an active involvement. Furthermore, Newmont Mining trades in correlation with the gold price, and it is imperative to adopt a strategy tightly related to the future gold price.

Newmont Goldcorp assets’ portfolio worldwide

Source: NEM presentation

Newmont Mining: Financials and Production in 1Q 2019. The raw numbers (Not including Goldcorp merger and 38.5%/61.5% JV with Barrick Gold)

Newmont Mining 2Q’17 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18 4Q’18 1Q’19
Total Revenues in $ Billion 1.88 1.88 1.94 1.82 1.66 1.73 2.05 1.80
Net Income in $ Million 177 206 −527 192 292 -145 2 87
EBITDA $ Million 677 649 694 637 633 222 668 645
Profit margin % (0 if loss) 9.4% 11.0% 0 10.6% 38.1% 0 0.1% 4.8%
EPS diluted in $/share 0.33 0.38 −0.98 0.36 0.54 -0.27 0.00 0.16
Cash from operations in $ Million 526 685 751 263 399 425 740 571
Capital Expenditure in $ Million 183 194 309 231 258 274 269 225
Free Cash Flow (YChart) in $ Million 343 491 442 32 141 151 471 346
Total Cash $ Billion 3.17 3.05 3.32 3.17 3.18 3.13 3.45 3.60
Long-term Debt in $ Billion 4.62 4.05 4.07 4.10 4.06 4.04 4.04 4.05
Dividend per share in $ 0.05 0.075 0.14 0.14 0.14 0.14

0.14

Special dividend of $0.88 paid in May 1st

0.14

Shares outstanding (diluted) in Million 535 542 538 535 535 535 535 534

Source: Company filings and Morningstar.

Gold Production details

1 – All-In Sustaining Costs or AISC

All-in Sustaining Costs or AISC (co-product) has decreased slightly this quarter to $896 per ounce, but while still a bit high, AISC is considered acceptable by industry standard. The company guided $970 per ounce in 2018 (mid-point), and it is well below this number now.

Gold production was stable this quarter with 1,230k Oz of gold (gold sold 1,338K Oz) or up 1.7% compared to the same quarter last year, but down 14.8% sequentially.

Note: Newmont is also producing copper (North America and Australia) with a 1Q’19 production of 10K Ton, but I will not comment further on this nonessential production.

Presentation of Newmont Mining production in two charts

1 – Total Gold Production since 1Q’15.

2 – Gold Production in 1Q’19 per producing mine (Not including Goldcorp mines or JV with Barrick Gold).

2 – Newmont Revenues were $1.803 Billion in 1Q’19

Newmont Mining posted its first-quarter of 2019 results, which missed consensus on quarterly revenues slightly by $11 million and beat consensus on earnings by $0.06 per share. Revenues were $1.803 billion, slightly down from a year ago, and down 12.2% sequentially.

Gold price realized declined $26 this quarter compared to 1Q’18 with $1,300/Oz. The average price for gold achieved by Newmont since 1Q’15 is $1,230 per Oz.

3 – Newmont Free Cash Flow

NEM’s free cash flow is impressive at $1.109 billion yearly (“TTM”) and $346 million in 1Q’19 alone. NEM is a cash machine that has delivered free cash flow since 2016.

Unfortunately, the company is not rewarding its shareholders sufficiently, and I believe Newmont Goldcorp could have done better at this level. The dividend yield is 1.85% right now. However, with the recent merger with Goldcorp, I understand why the company is postponing any dividend increase or share buyback.

However, a special dividend of $0.88 per share was paid on May 1, 2018.

4 – Newmont Net Debt was $0.45 billion at the end of March.

Newmont Mining’s net debt is now $0.45 billion (Before Goldcorp merger and JV with Barrick). With liquidity of $6 billion as of March 31, 2019, with a net debt-to-adjusted EBITDA of 0.21x, the company is showing an excellent position.

However, starting Q2’19 Newmont will be a different company due to two majors events:

  1. Newmont’s merger with Goldcorp in April. I was not positive on this merger, and I believe Newmont should have better off by concentrating more on its assets. The first sign of trouble came very quickly with the suspension of operations at the Penasquito mine.
  2. Creation of a 38.5%/61.5% Joint Venture with Barrick Gold in Nevada.

Newmont Goldcorp paid off $1.5 billion of Goldcorp at closing and completed the exchange of Goldcorp senior notes. On April 24, Moody’s had a favorable comment about the Newmont Goldcorp:

Although Newmont’s cash position on a pro forma basis for closing of the acquisition is expected to be $1.8 billion following the repayment of the Goldcorp term loan and revolving credit facility, liquidity remains solid. With this acquisition, Newmont has entered into a new $3 billion revolving credit facility on terms similar to its prior $3 billion facility, including a financial covenant stipulating that net debt/total capitalization not exceed 62.5%. The company remains comfortably in compliance. Newmont has $626 million in notes maturing on October 1, 2019, which can easily be accommodated within the company’s cash generating capacity and liquidity profile.

Newmont/Goldcorp synergies.

Source: NEM Presentation

However, the 38.5%/61.5% with Barrick as an operator for the eight assets located in Nevada seems a better deal in my opinion. Closing expected in 2019.

Source: NEM presentation.

Conclusion and Technical Analysis

Newmont Goldcorp is entering a new chapter that will hopefully provide some reasons to celebrate later this year. So far, it seems that the negative influence coming from Goldcorp’s assets is altering Newmont’s cleanliness. I was against the merger, and I am still against it now.

However, I believe the creation of a joint venture for the Nevada assets with Barrick Gold is a good deal that will potentially create real synergies.

I do not see why Newmont wanted to get bigger by incorporating troubled assets, instead of continuing business as usual and harvest a stable free cash flow. Why is management equating bigger with better when, in fact, it is often the opposite? It was the same situation for Barrick Gold, which decided earlier to acquire Randgold, turning the company into a colossal business stretched to its limit. There is no gain for shareholders in this “all-you-can-eat” buffet. However, now it is done, and hopefully, this enigmatic move will pay off not only for the company but for us, shareholders, who end up often short-changed with this type of unnecessary deal.

Technical Analysis (short-term).

NEM is forming a descending wedge pattern with line resistance at around $32.50 – I recommend selling about 20% of your position at this level unless gold price turns bullish and cross $1,325 per ounce -and line support potentially between $28.25-$29.50 – I recommend adding cautiously depending on the future price of gold and how the situation in Penasquitos is developing.

Author’s note: If you find value in this article and would like to encourage such continued efforts, please click the “Like” button below as a vote of support. Thanks!

Disclosure: I am/we are long NEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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