Why Newmont Mining Is Not A Buy - Seeking Alpha

Newmont Mining (NEM) delivered a blowout performance this year but I believe it might underperform in 2018 as its growth story gets a bit murky.

Back in late 2016, I wrote that Newmont Mining stock will likely outperform this year, and that’s exactly what we’ve seen this year. The company’s shares have risen 5.2% on a year-to-date basis, easily outperforming its closest peers Barrick Gold (ABX) and Goldcorp Inc. (GG) which fell 15.2% and 11.2% in the same period. Newmont Mining also outperformed the broader gold mining sector, as measured by VanEck Vectors Gold Miners ETF (GDX), which gained 3.7% in the same period.

That outperformance came on the back of strong earnings growth. Some gold miners have found it difficult to meaningfully grow earnings this year, thanks in part to weakness in gold prices. The spot price for the yellow metal averaged $1,251 per ounce in the first nine months of this year, down from $1,260 an ounce in the corresponding period last year. In this backdrop, Barrick Gold posted a 1.5% drop in adjusted EBITDA to $2.93 billion. But Newmont Mining has grown its adjusted EBITDA by 9.4% to $1.92 billion. In fact, the company has put one of the strongest levels of earnings growth this year among gold mining majors. That’s a big deal, particularly for a company that’s as large as Newmont Mining.

This solid performance was driven in large part by production growth. Unlike other miners such as Barrick Gold and Goldcorp which have posted lower levels of production, Newmont Mining has grown its volumes by 8.6% to 3.86 million ounces of gold in the first nine months of this year. Thanks to this growth, Newmont Mining almost caught up with Barrick Gold, which is the world’s largest gold miner, which saw output drop by 0.4% in the same period to 3.98 million ounces in the first nine months of this year. In fact, on a quarterly basis, Newmont Mining already surpassed Barrick Gold. The former’s third quarter production of 1.21 million ounces exceeded Barrick Gold’s output by roughly 69,000 ounces.

However, this is where Newmont Mining’s growth story becomes a bit more complicated. I believe the strong, almost double digit, growth in production and earnings that we’ve seen this year will likely slow down in the future. That may have a negative impact on Newmont Mining stock.

This year, Newmont Mining benefited from the 12% increase in production from North America to 1.65 million ounces (9M-2017) and 90% increase in production from South America to 472,000 ounces. That growth is driven in large part by the startup of two mines – Long Canyon in Nevada and Merian in Suriname, South America. Newmont Mining also reported higher volumes from the Cripple Creek & Victor mine in Colorado which the company acquired in mid-2015 from AngloGold Ashanti (AU). However, two of these projects will hit peak production this year and will no longer contribute to meaningful growth in 2018.

At Long Canyon, the attributable gold production will surge from just 22,000 ounces in 2016 to the range of 130,000-170,000 ounces in 2017 but will remain flat in 2018. Volumes from Merian are expected to increase slightly from 350,000-390,000 ounces in 2017 to 365,000-405,000 ounces in 2018, which depicts a gain of 4.1% at the mid point. But the positive impact will be offset by lower volumes from CC&V where gold production will drop by almost 17% at the mid-point from 420,000-470,000 ounces in 2017 to 345,000-395,000 ounces in 2018. Unlike what we’ve seen in 2017, the company doesn’t have any major gold mine coming online in 2018 which can fuel meaningful headline growth. As a result, Newmont Mining’s total production will remain largely flat in 2018 as compared to this year.

As per Newmont Mining’s forecast, it will produce around 5-5.4 million ounces of gold this year and around 4.9-5.4 million ounces in 2018. The mid-point of the guidance implies a slight, 1% decline in production (though it will be the world’s top gold producer since Barrick Gold expects to produce 4.8mn-5.3mn ounces of gold in 2018). In this backdrop, Newmont Mining will find it difficult to continue growing earnings, assuming flat gold prices.

The fact that Newmont Mining is expecting a temporary uptick in gold AISC in 2018 will make earnings growth all the more difficult. As per the company’s forecast, its gold AISC will increase from the range of $90-$950 per ounce in 2017 to $965-$1,025 per ounce in 2018 before settling at $870-$970 per ounce level in the subsequent years.

In this backdrop, I believe Newmont Mining stock will underperform, particularly when compared to some of the other gold miners which are targeting higher levels of production and lower levels of AISC. Goldcorp, for instance, will start delivering on the so-called “20/20/20” plan through which it aims to increase its reserves and production by 20% each while reducing the AISC by 20% between this year and 2021.

Moving forward, if gold prices, which averaged around $1,250 per ounce in 2017, improve to $1,300 or higher in 2018, then that will fuel Newmont Mining’s earnings growth. However, that's also true for all other gold miners. In this case, however, miners like Goldcorp which also are growing production will post superior levels of earnings growth than Newmont Mining.

On top of this, Newmont Mining is not looking attractive in terms of valuation. The company’s shares are priced at 7.41x in terms of EV/EBITDA (2018e.) multiple. This makes it more expensive than Barrick Gold and Goldcorp, which are priced 4.78x and 7.09x respectively.

For these reasons, I believe Newmont Mining is not a buy and shareholders, who had a great time in 2017, should brace for a relatively difficult 2018. However, I believe long-term oriented investors should continue to hold this stock. Although it may not turn out to be the best gold stock of 2018, it can still generate decent returns and it does come with upside potential.

Remember, Newmont Mining has a great pipeline of potential projects, as shown below. The company is currently working on just four growth projects - the two Ahafo expansion projects (Ahafo Mill Expansion and Subika Underground) located in Africa, Twin Underground in North America and Quecher Main in South America. In addition to this, Newmont Mining is working on two sustaining projects. Together, these projects will help Newmont Mining in keeping the production flat.

However, Newmont Mining also has a large portfolio of greenfield exploration and other projects that can fuel its growth. The company hasn’t made any financial commitments regarding these projects, which is why they are not a part of its future outlook. But if it does, then they can fuel meaningful production growth. If the company makes an investment decision regarding these projects and improves its production outlook, then that may act as a catalyst for upside.

Also, Newmont Mining will be returning excess cash flows to shareholders by hiking dividends. The company has said that it will increase dividends by “at least 50%” in 2018, thanks to the solid performance of its assets and improvement in the balance sheet. The company will likely provide additional details on the new dividend and the payout policy in February. On an annualized basis, the company has been paying a dividend of $0.30 per share which translates into a yield of just 0.84%. But a 50% increase could push the yield to a more respectable 1.25%. By comparison, most of the major gold miners pay a dividend of roughly 1% or lower. I think an above average yield should help Newmont Mining in luring some investors which may have a positive impact on the stock.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.