Despite rising 43% from five-year lows in February 2024, we think shares in no-moat Newmont (ASX: NEM) remain materially undervalued, trading at a 17% discount to our unchanged $78 per share fair value estimate. We think the market expects weak production performance and inflated unit costs to continue, affecting margins.

What are the market concerns?

Weak volumes and guidance cuts

Newmont has cut volume guidance each year since 2020. After acquiring Newcrest in November 2023, near-term guidance provided at its 2023 result was also weak.

Most of the disappointing performance is from its larger, generally lower-cost mines, which have a disproportionate drag on group profits. These include its Nevada Gold Mines and Pueblo Viejo joint ventures with Barrick, Penasquito, Ahafo in Ghana, and Boddington in Australia.

Since merging with Goldcorp in 2019, sales volumes have declined, even if excluding mines subsequently sold. Attributable gold sales volumes of around 5.6 million ounces in 2023 were 13% below the 6.4 million ounces sold in . rom Newmont’s core mines—those it intends to retain—volumes fell 8% in 2023 to 4.4 million ounces, compared with 2022.

Disappointing Unit Costs

Unit costs have risen by more than gold prices, crimping margins.

The two main drivers are:

  • Widespread industry inflation, which is a headwind for all miners.
  • Newmont’s falling sales mean that the considerable fixed production costs need to be spread across smaller gold volumes, inflating unit costs.

Newmont, like most miners, has a high degree of fixed costs. These cannot be defrayed when production falls. abor costs are about half of Newmont’s o erating costs with materials, consumables and fuel much of the remainder.

We think the market expects weak production performance and inflated unit costs to continue. While a higher gold price boosted margins in the first quarter of 2024, unit costs remain elevated on stable sales.

Our investment thesis

Mined gold production has risen at a modest compound annual growth rate of about 1% for 10 years. Recycled gold is about 20% of supply and tends to rise and fall with gold prices.

The World Gold Council notes that jewelry is about half of gold demand, led by China and India, which combined make up about 60% of jewelry demand. Investment, including exchange-traded funds, or ETFs, and central bank purchases, accounts for much of the rest.

Gold prices tend to be negatively correlated to real interest rates. The lack of cash flow for investors from gold increases the opportunity cost to hold it as rates rise and vice versa. But this relationship recently broke down.

Demand from ETFs generally responds to gold prices but can also be a key price driver. ETF purchases and sales tend to accentuate price swings. Rising gold prices suggest ETF flows could turn positive to further support prices.

Production issues likely temporary

We are o timistic about the outloo for Newmont’s gold volumes for the next few years, with production issues at its mines likely to resolve. Excluding the planned sale of generally smaller, higher-cost mines, we forecast sales volumes to rise to about 6.8 million ounces in 2027, up from 4.4 million ounces in 2023.

Our forecast improvement is driven by its larger, generally lower-cost mines, including Penasquito and Ahafo. We expect both to return to full production after a strike and conveyor failure, respectively, in 2023. Additional sales are likely once Ahafo North comes online in 2025 or 2026.

Production at 40%-owned Pueblo Viejo is likely to increase on improving grades and as its plant expansion ramps up after delays. We also expect rising sales at 38.5%-owned Nevada Gold Mines after regulators finally approved operations at high-grade Goldrush late in 2023 and as temporary production issues are resolved.

The addition of Newcrest’s generally lower-cost mines, including Cadia and Lihir, also contributes.

If production increases, as we expect, high fixed costs will be spread over higher sales volumes, lowering unit costs. We also expect industry inflation to moderate. However, if it remains elevated then Newmont’s rising roduction means it will also likely be less affected by inflation compared with competitors such as Agnico Eagle and Kinross Gold. Here, we forecast relatively stable and modestly lower production, respectively, in coming years.

We also ex ect the addition of Newcrest’s generally lower-cost mines, including Cadia and Lihir, and the likely sale of up to six generally smaller, higher-cost mines to improve the grou ’s relative cost osition. ur forecast average all-in sustaining cost in 2024 for the mines to be sold – Telfer, Akyem, CC&V, Porcupine, Eleonore, and Musselwhite – is about 35% higher than the average for those core mines that Newmont intends to keep. 

Around USD 500 million per year in synergies and cost-cutting from the Newcrest purchase is also likely to contribute to improved unit costs.

Improving cost curve position

With the planned sale of higher-cost mines and improved production and lower unit costs at the core mines, we forecast a meaningful im rovement in Newmont’s relative cost osition into the second quartile of the industry cost curve by 2026.

Stronger balance sheet bodes well for additional shareholder returns

Newmont’s balance sheet is sound with ro forma net debt to trailing -month EBITDA of 1.2 as at the end of March 2024. However, we think it will materially improve. The planned sale of six generally smaller, higher-cost mines is likely to generate at least USD 2 billion in proceeds, assisted by the high gold price, provided it persists. After initially reducing debt, surplus funds are likely be allocated to additional shareholder returns, including buybacks, which we think are modestly value-accretive at current prices.

Significant reserves support long-life operations

Mines are depleting assets, so miners need to continually replenish their reserves, either through exploration or mergers and ac uisitions. el ed by the urchase of Newcrest’s generally long-life assets, Newmont has the largest gold reserves and resources inclusive of reserves of its senior gold miner peers. It also has the second-largest gold equivalent reserves and resources.

Generally larger mines with more upside

Large gold de osits are rare and Newmont owns sta es in five of the world’s ten largest gold mines by roduction. While a small, high-grade mine with a short life can generate high returns on invested capital, larger, longer-life mines provide more opportunity to benefit from economies of scale while also generally having more geological upside from life extensions and expansion.

Substantial copper reserves and resources

We forecast Newmont to produce around 150,000 metric tons of copper in 2028. Along with other metals including silver, lead and zinc, these commodities account for about 15% of midcycle revenue and provide some diversification.

At our base-case assumed midcycle copper price of around USD 3.65 per pound, copper accounts for about 8% of midcycle revenue or a unit cost credit of about USD 150 per ounce of gold produced.

Higher copper prices would reduce gold unit costs, thanks to the byproduct credit from copper. To illustrate, at our bull-case assumed midcycle copper price of about USD 4.40 per pound, copper revenue increases to represent a credit of about USD 180 per ounce of gold. Using spot copper prices at May 24, 2024 of around USD 4.80 per pound, midcycle copper credits amount to about USD 200 per ounce of gold.

Unlike many of its senior gold miner peers, Newmont also has several attractive copper-focused development opportunities that we think are overlooked, including the Nueva Union, Wafi-Golpu and Galore Creek copper and gold projects. While these projects are unlikely to enter production until well beyond our five-year forecast period, additional co er roduction is also li ely to im rove Newmont’s cost osition relative to gold miner peers.