Newmont Corporation (NEM)

[NYBob]

Gold Will Trend Higher And So Will Newmont Goldcorp
Sep. 24, 2019 3:25 PM ET |


About: Newmont Goldcorp Corporation (NEM)
Disruptive Investor
Long/short equity, Deep Value, event-driven, macro
(4,510 followers)


Summary
Gold is likely to trend higher with several fundamental triggers. Expansionary monetary policy being the key gold price catalyst.

Expecting significant EBITDA margin expansion and cash flow growth for Newmont in the coming quarters.

Dividends likely to increase in 2020 and that will translate into positive stock re-rating.

Strong fundamentals for investment towards stable production with robust cash buffer and ample leveraging headroom.

Investment Overview
In the last four months, Newmont Goldcorp (NEM) has moved higher by 25.9% and this upside has largely been in-sync with gold price trending higher.

I am of the opinion that gold will continue to rally and Newmont Goldcorp is an attractive “Buy” even at current levels.

This coverage on Newmont Goldcorp will focus on the factors that can trigger a sustained rally for the stock in the next 12-18 months.

The focus of the coverage will be on factors that will boost gold prices. In addition, the coverage will discuss company specific factors from a production and balance sheet perspective.

Bullish On Gold
Before discussing the fundamental factors to be bullish on gold, it is worth looking at the technical perspective. Gold was in a trading range of $1,100 an ounce to $1,300 an ounce for nearly 5 years.

Therefore, the current breakout on the upside has been after years of consolidation. I am of the opinion that the trading range now forms a strong support zone for gold on the downside. At the same time, I believe that gold is unlikely to re-visit levels of $1,100 or $1,200 an ounce.

On the contrary, the current upside can potentially take gold to all-time highs in the next 18-24 months.

Coming to the fundamental factors, the probability of recession in the United States, as predicted by the Treasury spreads, is the highest since the financial crisis of 2008-09. The Federal Reserve is back to pursuing expansionary monetary policies and it’s likely that more rate cuts are coming in 2020.

As interest rates trend lower, the dollar is likely to get weaker on liquidity glut and gold price will be supported at higher levels.

It is important to note that Euro zone is already in a manufacturing recession, the United States is in a manufacturing recession and China’s GDP growth is at the lowest level in almost 3 decades. India’s GDP growth has also been faltering.

Clearly, the downturn risk is global and the trade war hasn’t helped. In such a scenario, the expected action of central bankers globally is to pursue expansionary policy, which is bullish for gold.

Another big trigger for sustained upside for gold is purchases by central banks. For the first half of 2019, central banks made record purchase of gold amounting to $15.7 billion. The central banks of China and Russia have been active buyers and I believe that aggressive gold buying will continue. This should support gold prices on the upside.

Bullish on Newmont Goldcorp
As gold price remain firm and is likely to trend higher, there are strong fundamental reasons to be bullish on Newmont Goldcorp. Some of the key factors are as follows –

First, Newmont Goldcorp expects all-in-sustaining cost of $975 an ounce for 2019. With realized gold price currently at $1,500 an ounce, I expect robust EBITDA margin expansion in the coming quarters. For the first half of 2019, the company reported operating cash flow of $870 million. With gold surging higher, I believe Newmont is positioned to close 2019 with OCF of approximately $2.0 billion. EBITDA margin expansion and strong cash flows will take the stock higher.

Second, for 2Q19, Newmont Goldcorp declared dividend of $0.14. The realized gold price for 2Q19 was $1,317 an ounce. As realized gold price increases significantly, I expect dividends to increase in 2020. This will translate into stock re-rating.

Third, as of 2Q19, Newmont Mining has a robust cash buffer of $1.8 billion with net debt to adjusted EBITDA of 1.5. Further, the company’s liquidity (including undrawn facilities) stands at approximately $5.0 billion. Therefore, with ample liquidity, leveraging headroom and potentially higher cash flows, Newmont Mining is financed for sustaining and growth capital expenditure in the coming years.

In the coming years, Newmont Goldcorp expects stable production in the range of 6 to 7 million ounces on an annual basis. However, the factors that will trigger revenue and cash flow growth are gold price upside and improvement in all-in sustaining cost. Just as an example, the company expects AISC to decline to $935 an ounce in 2020 from $975 an ounce in 2019.

Of course, one of the strategic objectives of Newmont is to growth through M&A. However, I don’t see another big M&A coming after the merger with Goldcorp. Therefore, the focus in the coming years will be to reduce cost and unlock value from existing assets.

Conclusion
Newmont Goldcorp is well positioned to sustain production in the range of 6 to 7 million ounces on an annual basis. As gold trends higher, the company’s EBITDA margin will expand and free cash flow will swell. This is likely to take the stock higher.


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In the next 12-18 months, I expect gold to surge further and Newmont Goldcorp will rally in-sync with gold price upside. In addition, potentially higher dividends in 2020 will also support the stock on the upside.

Overall, I believe that the rally in gold will sustain after a prolonged phase of consolidation in the precious metal. Newmont Goldcorp is well positioned to benefit from the rally, and as fundamentals improve, the stock will trend higher.