Although both groups are active in Nevada — where they mine gold of outstanding purity — Barrick and Newmont own two different portfolios. Following the acquisition of Randgold, Barrick became very focused on Africa, whereas Newmont, which acquired Goldcorp, favors safer geographies in Australia and the Americas.
For the record, taken together, the two groups account for roughly 10% of global gold production. This feature gives them unmatched scale advantages versus peers of smaller size, in particular in terms of processing costs per ounce mined.
Readers will recall how, in the wake of the financial crisis, gold — at the time subject to a short-lived but feverish speculative bubble — was seen as the ultimate safe haven, as well as a fitting hedge against the ups and downs of the economy and the "accommodative" — i.e inflationary — monetary policies led by central banks.
Yet, despite successive "quantitative easings", inflation has remained desperately anemic. As a result, the price of gold languished, while repeated frauds among junior producers, failed acquisitions and outrageous compensation schemes have — until recently — kept investors at bay.
But the tide is turning and, after their lost decade, producers look determined to bank on the recovery that started a few months ago. Consolidation sits on top of the agenda, for the industry has remained surprisingly fragmented. This trend has been evidenced by Barrick's multiple attempts to buy Newmont.
Perceived as too risky by shareholders of both companies, the merger project was finally aborted. Barrick and Newmont will stick to a classic collaboration project in Nevada, where the former has the best deposits and the latter the best processing infrastructure.
Newmont, as mentioned above, now claims to favor returns of capital rather than growing production. Since 2015, despite the depressed price of gold, the group has returned $5bn to shareholders through $3.7bn in debt reduction and $1.3bn in dividends.
As it also divested around $1.5bn in assets over the period, we can assume that it generated roughly $3.5bn in cash from operations over four years, or $800mil per year with an average price per ounce of gold hovering around $1,200.
The integration of Goldcorp — coupled with the resulting "synergies" — and the partnership with Barrick in Nevada should enable the group to achieve an additional $100mil in annual savings. Management did not miss their chance to profit from these encouraging prospects and the recent spike of gold price to refinance at advantageous conditions, via 10-years notes with a 2.8% coupon.
In terms of financing standing, Newmont carries $12bn in long-term liabilities — of which $6bn will mature between now and 2023 — against $5bn in EBITDA and another $5bn in liquidity. Despite the leverage, it sports one of the cleanest balance sheet among peers of comparable size.
The group currently produces 6.3 million ounces of gold, and says it breaks even at $1,000 an ounce — a reasonable assumption in our view. Investments required to keep production steady ("maintenance capex") amount to $1bn per year, while $500mil are budgeted to develop the various assets within its portfolio. Total capital expenditures thus come out at $1.5bn.
As discussed above, with an ounce of gold at $1,200 — the average price over the past five years — Newmont generates approximately $2.3bn per year. All else being equal — realized prices and production volumes — the group would therefore be able to return $800 million per year to shareholders, or $1 per share since there are 823 million shares outstanding.
The good news is that the price of gold has finally picked up — despite inflation that remains as elusive as ever — and is now flirting with $1,500 per ounce. Management claims that for each $100 increase in the pricing of an ounce, Newmont can generate an additional $450 million in cash earnings ("free cash-flow") at the consolidated level.
As such, it is easy to model the impact of a prolonged increase of gold price on Newmont's earning power. If the ounce stays at $1,500, for example, the group will be able to return $2 billion to shareholders next year, or $2.4 per share — a multiple of 16x the stock price ($40) as of today.
With an ounce at $1,600, Newmont will be able to return $3 per share — a multiple of 13x the current stock price; at a price of $1,800, $4 per share — a multiple of 10x; at $2000 an ounce, $4.6 per share — a multiple of 8x; at $2,500, $ 6.4 per share — a multiple of 6x. Etc.
These scenarios, of course, assume that the torque model given by management is correct — it seems credible in light of recent results — and that production remains steady. The latter, however, is likely to increase if the price of gold keeps climbing, via the development of new deposits or the acquisition of third-party producers.
Hence an investment in Newmont's stock is — as one could assume — a direct bet on gold price, as anticipated by the analysts' consensus polled in real time by MarketScreener's quantitative systems. In terms of portfolio management, it also offers an attractive hedge against a potentially overheated stock market, or a sudden surge of inflation.
Newmont is a new position within the MarketScreener U.S. portfolio.