Newmont: Q2 Margins Soar On Back Of Record Gold Price

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Newmont reported mediocre Q2 operating results with production dragged down by a suspension of operations at Cerro Negro and weaker output from NGM and Pueblo Viejo.Fortunately, higher metals prices (...

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The company had a mediocre quarter operationally with production down slightly sequentially (~1.68 million ounces vs. ~1.61 million ounces), but higher gold, silver, and copper prices picked up the slack, translating to a nearly 10% increase in revenue quarter-over-quarter. Fortunately, H2-24 is expected to be stronger from a production standpoint and coupled with record gold prices, Newmont is on track to see a massive turnaround this year after two tough years in 2022 and 2023. In this update, we’ll dig into the Q2 results, recent developments, and whether the stock is worthy of investment ahead of further margin gains in 2025. Brucejack Operations - Company WebsiteAll figures are in United States Dollars unless otherwise noted. GEOs = gold-equivalent ounces. AISC = all-in sustaining costs. Q2 Production & Sales Newmont released its Q2 results this morning, reporting quarterly attributable production of ~1.61 million ounces of gold and ~477,000 gold-equivalent ounces [GEOs]. This translated to a ~30% increase in gold production year-over-year with the addition of new assets from the Newcrest acquisition and an 86% increase in GEO production with higher production at Penasquito and ~152,000 combined GEOs from Red Chris and Cadia. Although these headline numbers are impressive, production came in slightly below my estimates in Q2 and gold production per share was much lower when factoring in the ~45% increase in Newmont’s share count (shares issued as part of the Newcrest deal). Newmont Quarterly Gold Production - Company Filings, Author's ChartIn fact, gold-equivalent production per share was actually down slightly year-over-year and will remain in a downtrend given that Newmont is planning to divest up to 1.3 million ounces of gold production per annum in what the company has identified as non-core assets. Newmont Quarterly Production by Mine - Company Filings, Author's ChartDigging into the results a little closer, Newmont had a decent quarter overall from its \"Tier-1\" portfolio, producing ~1.30 million ounces of gold, down slightly from ~1.38 million ounces in Q1-24. The lower production was related to a much weaker quarter at Cerro Negro (~19,000 ounces at $3,010/oz AISC) following the suspension of operations (*) after two tragic fatalities in April. In addition, Lihir had a softer quarter with production of ~141,000 ounces at $1,212/oz AISC, down from ~181,000 ounces at $1,256/oz in Q1-24. Newmont noted that this was due to heavy rainfall that affected mine sequencing, and with this being a top-3 asset by production (managed operations), the lower production at Lihir and Cerro Negro put a dent in Tier-1 Portfolio production. (*) Cerro Negro operations were restarted in late May and should have a much better H2 (*)  As for managed operations and the rest of the portfolio, Newmont didn't get much help from its non-managed Tier-1 portfolio either. This was evidenced by attributable production of ~253,000 ounces at $1,689/oz in Q2-24, down from 287,000 ounces at $1,388/oz in the year-ago period. The lower output was related to a dip in production year-over-year at Carlin, Cortez, and Phoenix, and Newmont's 40% interest in Pueblo Viejo contributed just ~53,000 ounces in Q2-24, up only marginally from Q2-23, but this will reverse sharply by year-end as the massive Pueblo Viejo Expansion (14 million tonnes per annum) is now past its setbacks and now working on recovery rate optimization in the second half of this year, with Pueblo Viejo's operator stating the following in Q1:  \"The replacement conveyor has now been commissioned and the plant is expected to ramp up during the second quarter. As production increases, we expect costs to come down. With the plant expansion now substantially complete, the focus has shifted to the related new tailing storage facility where work is progressing as planned and the feasibility study is expected to be completed in quarter three. I referred to the Pueblo Viejo expansion earlier as our flagship organic growth project and this is why. It will increase and sustain gold production at or above 800,000 ounces for at least 20 years.\" - Q1 2024 Conference Call  While the softer production from its non-managed joint ventures has been a drag on Newmont's results, Fruta del Norte operated by Lundin Gold (OTCQX:LUGDF) was a bright spot, contributing ~34,000 ounces in the quarter with a one quarter lag (equity-method investment). In addition, while Nevada Gold Mines (38.5%) and Pueblo Viejo (40%) have been a drag, this is expected to change in 2025 with both assets set to see higher production at lower costs. Hence, while these major non-managed assets have been a headwind as Newmont has worked to integrate the Newcrest portfolio, they will provide a tailwind (*) from a margin and production standpoint to help offset some of Newmont's planned divestments. (*) Pueblo Viejo is in the process of ramping up to over 800,000 ounces of gold production per annum (100% basis), with peak production expected to come in above 1.0 million ounces (2028). Meanwhile, Turquoise Ridge Complex is set to see higher production in 2025 in addition to Cortez (Goldrush), offsetting flat to declining production at Carlin. (*)  Cadia Mine - Newcrest Mining VideoAs for Newmont's other operations, Cadia had a solid quarter overall with production of ~117,000 ounces at $1,064/oz AISC and Ahafo had another exceptional quarter despite expected downtime to install replacement girth gear with ~184,000 ounces of gold produced at $1,184/oz AISC. Unfortunately, Boddington and Tanami in Australia combined for just ~246,000 ounces in Q2-24 (Q1-24: ~335,000 ounces) lapping difficult comps which also weighed on Newmont's results. Finally, as for smaller operations, Brucejack had another tough quarter with ~60,000 ounces at $1,929/oz AISC, offset by higher production at Merian and Penasquito. Newmont Quarterly Revenue, Operating Cash Flow & Capital Expenditures - Company Filings, Author's ChartLooking at Newmont's sales performance, the company sold ~1.53 million ounces of gold and ~453,000 GEOs and benefited from much higher average realized prices of $2,347/oz gold, $4.47/lb copper and $26.20/oz silver. When combined with a larger portfolio following the Newcrest acquisition, this resulted in a ~64% increase in revenue to ~$4.40 billion and operating cash flow surged to ~$1.39 billion (Q2-23: ~$481 million). Given that gold and silver prices are sitting at higher levels today and we should see slightly higher production in H2, Newmont will certainly be building on this strength from a financial standpoint. Costs & Margins Moving to costs and margins, all-in sustaining costs [AISC] soared to $1,503/oz in Q2-24 for its Tier-1 portfolio, up from $1,378/oz in Q1-24. Aside from higher royalties, this was partially related to an increase in sustaining capital in the period (~$402 million) and Tier-1 AISC are tracking ahead of its full-year guidance at $1,438/oz (FY2024 guidance: $1,300/oz). However, I would expect to see improved costs for the total portfolio ($1,500/oz year-to-date) and Tier-1 portfolio in H2 with the benefit of higher production and things should look much better on a consolidated basis a year from now as Newmont works to shed some of its higher-cost assets. Newmont - AISC, Realized Gold Price & AISC Margins - Company Filings, Author's Chart Given the spike in costs to $1,562/oz (Q2-23: $1,472/oz prior to acquiring Newcrest assets), free cash flow came in below my expectations but still soared to ~$594 million in Q2-24. Obviously this was a material improvement, resulting in a $292/oz increase in AISC margins to $785/oz vs. $493/oz or ~33.4% AISC margins vs. ~25.1% in the year-ago period. While this is excellent news and has certainly improved Newmont's cash flow outlook for 2024 and 2025 if metals prices hold up, Newmont remains a high-cost producer for the time being with its non-core portfolio (Q2-24 AISC: $1,770/oz) dragging on its margins. Newmont Quarterly Free Cash Flow & Trailing Twelve Month Free Cash Flow - Company Filings, Author's Chart Some investors might be scratching their heads at how a company with ~$600 million in trailing-twelve-month free cash flow justifies a ~$60 billion valuation, as highlighted by the above chart. However, it's important to note that Newmont's core and Tier-1 portfolio has a path to $1,000/oz AISC margins by 2026/2027 even assuming a $2,250/oz gold price which would translate to ~$3.0 billion in annual free cash flow. This margin expansion is being driven by Newmont's work to apply its Full Potential initiatives to its new assets (namely Lihir) and the shedding of non-core assets, which should ultimately see AISC for its Tier-1 portfolio come in closer to $1,250/oz. Newmont Conceptual Margin Profile (Core Tier-1 Portfolio 2024 & Later) - Company Filings, Author's Chart & EstimatesTo summarize, while it's easy to be turned off by Newmont's portfolio today given its high operating costs relative to peers, we look to be at peak costs currently with a clear path to driving costs down over the coming quarters and years, as explained above. Recent Developments As for recent developments, Newmont didn't provide too much information on its planned divestments of \"at least $2.0 billion\" but did report ~$197 million in Batu Hijau contingent payments, with an agreement to sell 100% of its deferred payment rights related to this Indonesian asset (initially sold in 2016) for $153 million in cash. Additionally, the company agreed to sell its stream facility and offtake agreement on the Fruta del Norte Mine (acquired in the Newcrest deal) for $330 million. This will leave Newmont with its major equity interest in Lundin Gold, but monetize this non-core to help pay down its debt. So, with over $500 million monetized to date and none of its non-core assets sold yet, Newmont is in a great position to meet and likely beat the $2.0 billion divestment target. As for other recent developments, Newmont repurchased ~$250 million worth of shares at an average price of US$43.34, with the bulk of these purchases completed in July ($104 million on repurchases in Q2-24). While I think this was the right move to buy back shares at depressed prices, I certainly wish these share purchases had been executed earlier in Q1-24, with a much less favorable price for retiring shares at US$43.00+. That being said, clawing back some shares from the Newcrest deal will help with Newmont's declining per share metrics and while I don't love share repurchases at US$43.00+ and prefer the more opportunistic approach other producers have employed like Alamos Gold (AGI), it's nice to see some capital returned to shareholders after the dividend cut and the company's balance sheet improving. As for Newmont's balance sheet, net debt is sitting at ~$6.4 billion but we should see this cleaned up pretty quickly if gold prices can continue hanging out above $2,300/oz. This is because between $3.5+ billion in free cash flow expected to be generated in the next 18 months and planned divestments, Newmont is set to rapidly de-lever over the coming year and a half. And while it's not ideal to see declining production/reserves per share following planned divestments, I think Newmont's decision to focus on the highest margin ounces vs. an absolute ounce figure is the right move that should help it to regain attractiveness as an investment vehicle to gain leverage to gold vs. what's been a trading vehicle over the past three years as free cash flow generation fell off a cliff. Valuation Based on ~1.16 billion shares and a share price of $47.70, Newmont trades at a market cap of ~$55.3 billion and an enterprise value of ~$61.7 billion. This continues to leave Newmont with the title of the highest market cap name in the gold space by a wide margin, trading at nearly double the valuation of the #2 and #3 gold producers combined. And while a premium multiple makes sense for a business with this level of diversification with exposure to over ten world-class assets and a robust pipeline, the time to rush into Newmont stock was when it briefly traded at a massive discount to its million-ounce producer peers at its lows in February near US$30.00 per share. Newmont Historical Cash Flow Multiple & Current Valuation (February 2024) - FASTGraphs.comNewmont Historical Cash Flow Multiple & Current Valuation (June 2024) - FASTGraphs.com In fact, if we look at how Newmont stacks up below, we can see that it was trading at just ~7.5x FY2024 cash flow estimates using much more conservative estimates of US$4.00 at the time of its dividend cut. Today, Newmont trades at ~10.7x cash flow on upwardly revised estimates of $4.50 and at a minor premium to its 10-year average cash flow multiple. This does not mean that the stock can't head higher and if we are in a new bull market for gold and miners, Newmont will be one name that attracts significant generalist capital. However, I prefer to buy at a deep discount to fair value when stocks are ideally the most hated they've been in years, and while NEM was a steal at $30.00, I am more neutral short-term at US$48.00 after a 60% rally in less than six months. Newmont Valuation vs. Peers - Koyfin So, what's a fair value for the stock? Using what I believe to be fair multiples of 10.0x operating cash flow and 1.40x P/NAV and a 65/35 weighting to P/NAV vs. P/CF, I see a fair value for Newmont of US$57.50. This points to a 21% upside from current levels or ~23% on a total return basis. That said, I am looking for a minimum 30% discount to fair value to justify starting new positions in large-cap commodity stocks, and ideally closer to 35% for producers. Hence, while I continue to see NEM as a solid buy-the-dip candidate and I think higher prices are likely in store over the next 6-12 months, I don't see enough margin of safety to justify jumping into the stock today above US$48.00. Summary Newmont put together a decent quarter in Q2 despite minimal help from its managed Tier-1 portfolio that had a softer quarter (NGM 38.5%, Pueblo Viejo 40%), and significantly lower production at two of its managed operations: Cerro Negro and Lihir. Fortunately, higher gold, silver and copper prices picked up most of the slack and Newmont returned to generating significant free cash flow in the quarter, with free cash flow up over 1300% year-over-year to ~$590 million. And while this significant increase was largely due to easy year-over-year comps (Q2-23: ~$40 million), it's clear that the business stands on much stronger footing today with help from higher commodity prices and with a monster H2 on deck. However, while Newmont did see significant margin expansion in the period and is working to optimize its portfolio to focus on margins vs. absolute ounces, costs have remained above my expectations. Fortunately, Newmont's Full Potential initiatives combined with shedding higher-cost and non-core assets will bring these costs down, translating to further margin expansion in the coming years. However, while NEM had a clear path to a re-rating in late February with expectations far too low and a depressed valuation, I think there are far more attractive names elsewhere today that are set up similar to how NEM was in February with ultra-low expectations and well over 60% upside to fair value.  To summarize, while I would consider adding to my NEM position, I see far more attractive miners elsewhere today. I discussed some of those names in a recent article shared with my Investing Group members.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.3","shortVersion":"4.26.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454338183"}