Newmont Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Newmont Corporation is the world’s leading gold producer, operating gold mines and projects in various countries. While primarily focused on gold, Newmont also extracts copper, silver, lead, and zinc.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Newmont (NEM) is a gold producer, primarily, but not exclusively, in gold mining and exploration, with its main operations in North America, South America, Australia, and Africa.

  • Revenue Distribution: Newmont’s revenue is primarily driven by the sale of gold, although the company also produces and sells copper, silver, lead, and zinc, contributing to a more diversified earnings profile. Their revenues, therefore, come from different metals with different profitability levels and varied pricing.
 *   **Geographic Revenue**: Newmont's operations are diversified geographically, with significant revenue generation in North America, Australia, Africa, and Latin America.    *  **Production**: Gold produced comes from mines they operate directly or their proportional ownership of Joint Ventures.  The ore is mined, crushed, processed, and then sold to either refineries or customers, depending on contract terms.  *  **Industry Trends**: The mining industry is capital-intensive, and the company is subject to the volatility of commodity prices. Mining companies are increasingly subject to environmental regulations. The current environment has seen increased awareness among stakeholders on the issues of ethical and responsible supply chains for minerals.   *   **Competitive Landscape**: Newmont competes with other gold producers such as Barrick Gold, Agnico Eagle, and AngloGold Ashanti. These companies compete on a range of factors including operational efficiency, project development, and access to reserves. Competition is especially fierce over the acquisition of the mining rights.

Margins:

  • The company’s profitability is significantly affected by the price of gold and production costs. * Operating margins are primarily driven by revenues generated from gold, with other metals and byproducts contributing a smaller proportion of overall sales. * The high cost of producing and refining gold (as explained below) reduces the profit margin of gold sales, although that could fluctuate.
  • The company’s financials show that returns are also correlated with the cost of energy and oil, given they are necessary inputs for mining operations.

What makes the company unique?:

  • The most significant factor separating Newmont from the rest of the gold mining industry is its size and geographic diversification.
  • Newmont is also investing in a wide range of new technologies in order to improve efficiency and reduce costs, specifically in automation and data management.
  • The company is a leading player in sustainable gold mining, focusing on responsible practices and partnerships with local communities.
  • The company’s exploration capabilities and its relationships with various jurisdictions allows it to obtain a greater share of mineral deposits.

Recent Developments and Management Commentary 

*   Newmont has recently completed an acquisition of Newcrest Mining Limited, to increase its total reserves and boost production. The recent management commentary focuses on integrating the two businesses and achieving financial synergies. The financial implications of the deal have also garnered significant attention in the earnings reports.
*   The company has noted that it will continue to pursue sustainability and environmentally responsible strategies with its mining operations. The need for new regulations and higher expectations from the community is likely to mean that the company has to put in a greater effort to achieve compliance.
*   The company is expecting an improvement in production in the following quarters due to the commissioning of new mines and the ramp-up of existing ones.
* The management team has also highlighted the impact of rising inflation and energy costs on their profitability. The company believes that it can effectively manage these challenges through hedging strategies.
*   The management believes that the gold industry will grow more concentrated as more miners look to consolidate. They believe this concentration will produce more stable profitability as companies will be able to have economies of scale and pricing power, although some of that will have to come from the decline of smaller companies.
*   The management has also stressed that the company will continue to invest in exploration and continue to improve its ability to develop profitable mines.

Financial Analysis 

*   **Revenue**: Newmont’s revenues are largely dependent on gold prices, with some diversification through other metals. Revenue can fluctuate widely due to the volatility of metal prices.
*   **Operating Income**: The operating income shows reasonable profitability with good margins, despite the variability in prices.
*   **Net Income**: The company has seen recent profits in its net income although that can fluctuate greatly depending on the price of gold and expenses. Some one-off events like impairments or gains from dispositions can also swing results widely.
*   **Cash Flows**: Despite these fluctuations in net income, the company has been able to consistently show positive cash flow, giving them access to liquidity and capital when needed.
*   **Debt**: Debt has remained relatively stable over the past few years, but has increased after the purchase of Newcrest. Overall, a decent debt to equity balance has been maintained.
*   **Debt Maturities:** The short term debt is mainly driven by a revolving credit facility and letters of credit with maturities up to 2027, the senior notes are long-term. The company has also raised capital through long-term notes in 2020, 2021 and 2022, maturing in the following years.
*   **Share Repurchase:** The company has a share repurchase program, intended to boost shareholder returns.
*   **Dividends:** Dividends are stable and growing over the years, and the dividend program is a long-term target and can continue to be a form of returning profits to shareholders.
* **Goodwill & Intangibles:** Goodwill accounts for a larger proportion of total value than many other industries. The recent addition of Newcrest increases the goodwill significantly, but it should be viewed in the context of a company that makes acquisitions.

Moat Assessment: 3 / 5

Newmont possesses a narrow moat due to a combination of scale-based cost advantages and niche position, plus limited intangible assets within specific regions and product lines, rather than the company’s global operations. Although it is a leading gold producer and has some strong regional positions, the industry it operates in is still largely a commodity business. The size helps it reduce average cost but doesn’t protect its sales and revenues from competition.

  • Low-cost production: Newmont’s vast resources and operational efficiency in their existing properties does give them an advantage over smaller players, but it is vulnerable to commoditization and changes in mining technology, which are quite frequent.
  • Location: For some operations, like the ones in the Powder River Basin, and others, they benefit from geographic positioning, which provides access to high-quality deposits and lower operating costs, giving them an advantage over many peers.
  • Niche Markets: Newmont does have a niche market in the supply of certain gold qualities in many regions that smaller companies cannot reach, allowing them to extract value without much risk of competition.
  • Intangible Assets: The company benefits from brand recognition and has some access to proprietary techniques in the mining space that improves its operational efficiency. Some of the mineral licenses are hard to obtain due to regional regulations and can create a barrier to entry, however, that does not preclude competition on pricing.

Risks to the Moat and Business Resilience

  • Commodity Price Volatility: Gold and other metal prices are inherently volatile and are subjected to major market fluctuations. The price can go up or down based on sentiment and external factors, reducing demand and also the profits of the company.
  • Operational Issues: Mining operations are complex and have many risks. Operations can be greatly impacted by geological and environmental problems that cannot be predicted or accounted for ahead of time, resulting in disruption of production and higher costs.
  • Political and Regulatory Risks: Newmont’s operations are vulnerable to geopolitical and regulatory risks, as it has assets in multiple different continents. This means new regulations, changing laws and nationalization risks can have an impact on the cost structure and the operation of their mines.
  • Competition: As a gold producer, it faces tough competition from other companies in the mining industry, as well as competition from other investments.
  • Technological disruption: As with all high-tech businesses, changes in mining technology and extraction methods could change the competitive landscape and negatively impact the cost and margins of the company, as it could become comparatively less efficient than competitors.
  • Inflation and Interest Rates: These are the primary drivers of the cost of capital and can materially affect returns on invested capital. It has been observed that there is a negative correlation between gold and interest rate fluctuations. Inflation can also significantly drive prices up in various aspects of its business and the company has to manage the inflationary environment to prevent value destruction.

Newmont’s business model is highly dependent on the prices of its commodities, and the company has limited ability to offset market prices. They have high sunk costs in operations, which can limit the benefits of a rising-price environment and harm them substantially during price downturns. However, the company does have diverse assets in multiple countries and they are committed to improve their cost structure and operate profitably even at lower prices.

Understandability: 2 / 5

The company’s operations are easy to understand on a high level but can become complicated very quickly, due to the wide array of geographic locations and extraction process methods used for different metals. The company’s financials are also complex and difficult to understand because of the nonoperating aspects of their businesses and the way they account for assets.

  • The company’s core business of producing gold is relatively easy to grasp.
  • However, understanding the nuances of different markets, cost structures, and various financial metrics requires deeper knowledge of the industry.
    • Valuing different businesses in different locations, with different regulations and access to resources, further adds to the complexity.
    • The complex financial statements include goodwill from previous acquisitions.
  • The financial derivatives and hedging strategies can also make the analysis more difficult for non-specialists.
The company is, therefore, not that easy to understand for a layman, hence the understandability rating of 2 / 5.

Balance Sheet Health: 4 / 5

While not a perfect balance sheet, Newmont has a reasonable set of assets and liabilities and is able to easily service its debts.

  • Liquidity: The company maintains a strong level of liquidity through cash and cash equivalents, and through other marketable assets.
  • Debt Levels: The company does have debt, but the debt to equity ratio is within the parameters for the industry and the risk is largely mitigated by hedging strategies.
  • Ability to meet obligations: Newmont can easily meet its short-term and medium-term obligations with cash on hand, or ability to tap the credit markets, although at a rate that depends on prevailing prices.

  • Asset Quality: Some of the assets, such as mineral rights and property, are not always liquid. However, the company has a good reserve that they can turn to cash when needed.

    The company’s balance sheet health is, therefore, solid and stable with low risk of value destruction, hence it gets a 4 / 5 rating.