Newmont Mining Target: $45

November 18, 2017 04:16 PM

As metals prices generally grind higher, we believe investors will be increasingly seeking out attractive and cost supportive exposure to commodity markets in general and gold in particular. In that regard, we toured the Nevada operation of Newmont Mining (NEM) and found its scale, management, historical execution and global operations should remain supportive for investors. We came away with a more confident view on additional reserve and resource growth potential, management’s ability to generate additional net operating cost reductions through its “Full Potential” program as they implement throughout a more regional platform and enhanced and innovative safety and productivity measures.

Our $45 price target is based on an 8.5x enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA) multiple on our 2019 estimate EBITDA of $3 billion and 28x P/E multiple on our 2019 estimate earnings-per-share of $1.60. We would add to or introduce positions at current levels.

At its Long Canyon mine, Phase 1 startup has been positive with only 18 months from approval to first gold. Long Canyon mine’s current 26% internal rate of return on Phase 1 investment is up 900 basis points from initial approval.

Long Canyon’s mineralization remains open in all directions and appears to have strong upside to its current 3.2 million ounce reserve. Management highlighted a 2017 guidance bump for output (2.1 to 2.2 million ounces) and an all-in sustaining cost of $855 to $930 per ounce, and stressed long-term efforts to continue to lower cost production at new operations.

North America Full Potential delivered $85 million from surface mining optimization, processing improvement, underground operation savings and supply chain and capital. Newmont is targeting added margin lift from a more regional basis. There is strong focus on semi–autonomous underground equipment use that could allow for 10% to 20% productivity gains.

Management continues to progress the next generation of underground operations at its Carlin operation with Rita-K, Pete Bajo and Fence deposits as well as Carlin’s next multi-million ounce underground potential at Northwest Exodus.

In Australia, Newmont remains interested in Barrick’s share of KCGM, but remains patient and any capital allocation must achieve the hurdle. Boddington enjoyed strong operating performance with a mill throughput record in August driven by Full Potential debottlenecking.

In Peru, management still struggles with how to attack the sulfides at Yanacocha. Prospective greenfield work in the Yukon and Colombia (reminds management of Peru in 1990s) is targeted for mid-2020s contributions.

In early December, Newmont will update its seven-year plan. Today, we note that when we look at labor productivity, Newmont produces as much gold as it did during 2013, with about 50% less labor input. We agree with management’s view that its current 13-year mine life, with a solid mix of underground assets, remains comfortable and does not need to spend above budget to prove up more, and we note that the life statistic supports operational reserves. Board dividend discussions continue, even after a raise this year, to target payout ratios, absolute levels and whether a variable price driven payout could be appropriate.

Currently, Newmont pays about 25% of its free cash flow post spending. Management remains committed to a healthy sustaining capital spend.

During the downturn, Newmont strategically added longer life and lower cost deposits. We note that in its seven year plan, Newmont has not added any unapproved projects within its pipeline, so some net upside remains plausible. Newmont remains very focused on risk-adjusted deposits and will not pursue investments in higher operating and political risk regions such as China and Russia. 

Michael S. Dudas is an analyst with Vertical Research Partners, LLC.

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