What Went Wrong With Newmont?

This story features NEWMONT CORPORATION REGISTERED. For more info SHARE ANALYSIS: NEM

Australian-listed Newmont shares have crashed some -20% since the release of the company’s September quarter update, which included multi-year downgrades. Brokers assess the damage.

-Newmont downgrades production guidance and increases costs
-Gold producer’s five-year outlook slashed
-Share buyback offers some respite
-Result now likely priced in, but caution advised

By Greg Peel

US-based global gold mining leader Newmont Corp ((NEM)), which a year ago acquired Australia’s largest gold producer Newcrest, provided a September quarter result last week along with updated guidance for 2025 and beyond.

“The severity of the multi-year downgrade is a large negative shock,” said Barrenjoey.

Newmont produced 1.67moz of gold in the quarter which was in line with consensus, but costs were 11% higher than anticipated. Management guided to 2025 gold production of 5.6moz which is -0.6moz or -10% below the outlook provided in February.

A longer term gold production goal of 6.0moz is a -0.6mtpa or -9% downgrade from the February five-year plan. Management suggested all-in sustaining costs (AISC) will be “broadly consistent” year on year into 2025. Macquarie notes Newmont’s five-year outlook flagged AISC falling -4% from 2024 to 2025.

At least 2025 (and beyond) guidance risk is now reduced, in Macquarie’s view. Earnings guidance for 2025 has been downgraded by -9%.

Bad Move?

The severe share price reaction in both the US and Australian markets is reflective of a large negative downgrade to near- and longer-term business performance, Barrenjoey notes. A large part of the downgrade is down to the newly acquired Newcrest assets of Lihir and Brucejack. This raises questions for Barrenjoey about the merits of the acquisition. The deal maths, in the broker’s view, does not appear synergistic.

A 6.0mozpa business (Newmont) merged with a 2.0mozpa business (Newcrest) and non-core assets of around 1.5mozpa are being sold, which should leave around a 6.5mozpa streamlined business.

Newmont was not explicit regarding the Nevada joint venture with Barrick Gold’s role in the rebase to a 6moz business, but it has to play a large part for the maths to work, Barrenjoey suggests. It appears both the Newmont and Newcrest business outlooks were worse than the market realised.

The merits of the Newcrest acquisition are now also questioned by Ord Minnett. The Nevade JV equally plays a significant role in the downgrade.

UBS has limited conviction in Newmont’s ability to hit guidance and restore market confidence. Factoring in guidance from September results drives material downgrades to this broker’s medium-term production and free cash flow forecasts, impacting Newmont’s ability to offer superior and sustainable cash returns versus peers.

Offsetting this is the expectation Newmont announces further asset sales that will support near-term cash returns, along with UBS’s positive outlook on gold.

Any Good News?

Newmont announced its US$1bn share buyback program currently underway will be tripled to US$3bn to be delivered at the board’s discretion over two years. Macquarie expects US$2bn will be delivered over the next one-and-a-half years.

The buyback provides some, albeit limited, offset to broker earnings forecasts that have otherwise been slashed post-result.

Despite the downgrades, Newmont retains a high-quality portfolio of long-life assets in favourable jurisdictions, notes Ord Minnett. The gold price remains at record highs, presenting opportunities to sell non-core assets and potentially increase cash returns through buybacks.

However, concerns remain about ongoing issues at Lihir and the Nevada JV, which may lead to further downgrades. Ord Minnett warns investors should be cautious, especially with an upcoming strategy day hosted by Barrick Gold, the manager of the Nevada JV, on November 18.

The attributes that made Newmont Barrenjoey’s top pick in gold remain. The company has a high-quality portfolio of long-life assets, the broker points out, located in favourable jurisdictions. The gold price is at record highs, and it is a good time to sell non-core assets, with upside risk to proceeds.

Newmont still stands to benefit from a period of cash harvest, which means upside risk to cash returns through buybacks. But there is still downside risk, in Barrenjoey’s view, to the business momentum. The broker doesn’t think Newmont has a firm handle yet on rectifications at Lihir. Clarity is lacking on the magnitude and longevity of issues at the Nevada JV, which Barrenjoey believes is a major implicit driver of Newmont’s multi-year downgrade.

Barrenjoey thinks investors should prepare for a downgrade when Barrick hosts its strategy day. The manner in which this significant downgrade to Newmont’s outlook was delivered via a conference call — and the lack of delivery to operational guidance in recent years also have to feature in market debate about earnings multiples.

Priced In?

It is of little consolation for existing Newmont shareholders, but Barrenjoey suggests it may be that the share price decline of some -20% in recent days has priced that in. Barrenjoey has downgraded its rating to Neutral from Overweight and cut its target to $80 from $90.

Ord Minnett has stuck with its Hold rating.

The September results were a significant negative surprise to UBS with management implying no improvement in core production and costs in 2025 on top of a lack of visibility on the medium-term outlook, undermining the broker’s Buy thesis. UBS thus downgrades to Neutral from Buy, cutting its target to US$54 from US$67.

While Newmont’s update is certainly negative, Macquarie agrees, this broker views the subsequent sell-off as a little overdone. Newmont remains the go-to name for global gold leverage in Macquarie’s view. Hence the broker’s Outperform rating is retained, with a target price cut of -11% to $80.

An equally disappointed Citi has stuck with its Buy rating alongside a price target of US$66. While acknowledging the short term challenges, Citi analysts are keeping the faith in the ongoing potential for longer-term value creation.

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