The stock market has rebounded significantly since the lows in March and many high quality companies have seen massive price gains in their stocks. In this environment, it makes finding reasonably priced stocks more difficult. For example, I own shares of PayPal (PYPL), which is a high quality company with a strong growth profile. Prior to Covid-19, PayPal was trading around $120 and then during the crash in March, the stock fell to $85 and has since roared back to over $170 earlier this week, so a double in 3 months time. While I am very happy with the performance, when I try to find or investors try to find quality companies to invest in at a reasonable price, it is difficult to find companies that have not had a meteoric rise. After doing some screens for high quality companies that have pulled back from their highs, one name stuck out that I am going to cover in this article: Newmont (NEM). Shares of Newmont closed at a record high of $67.90 on May 15 th, but since then, shares pulled back to around $54 and have since started rising again. Even at the current price of $59.34, that is 15% below the closing high just a month ago.

In the last couple of years, there was consolidation in the gold mining industry. Barrick (GOLD) bought Randgold, Newmont bought Goldcorp and Barrick tried to buy Newmont, but decided on a JV for their Nevada operations instead. Those deals have worked out for both companies because of the large rise in gold prices to their highest level in the eight years. The following weekly chart for the SPDR Gold Trust ETF (GLD) shows the large move gold is having in 2020 after having a strong year in 2019.

ThinkOrSwim

Cash Flow

With the large increase in gold prices over the last year, the amount of cash flow that Newmont generated has significantly increased as has the future potential cash flow generation if prices stay where they are or continue increasing. The following chart shows the free cash flow projections for the following five years at various gold prices. For example, in 2019 the average price of gold was $1393, so rounding to $1400 and based on their projections if gold were to stay at around $1400 over the next five years they would generate $9 billion in free cash flow. That equates to an average of $1.8 billion/year or $450 million/quarter.

Looking to 2020, in Q1 the average price of gold in was approximately $1586, so rounding up to $1600, and looking at the below chart, the projected total free cash flow over the next five years would be $13 billion or equal to $2.6billion/year, $650 million/quarter. That is close to what the actual results were, with Q1 free cash flow coming in at $611 million. As of the time of writing this article, in Q2 the average price of gold has been $1720. Referring to the chart once again and looking at the $1700 data, free cash flow for Q2 should be around $850 million, if not higher. If Newmont were to achieve $850 million in free cash flow, that would be a 39% increase over the free cash flow they generated in Q1. With rising gold prices and the continued realization of synergies from the Goldcorp deal and the Barrick JV, I expect Newmont to be able to generate substantial cash flow, which will help them increase shareholder returns and pay down debt.

Newmont Q1 2020 earnings presentation

Dividend

In a world where many companies are suspending their dividends or cutting their dividends, Newmont recently increased their dividend by 79%. Yes, you read that correctly, not a typo, Newmont increased their dividend from $0.14/quarter to $0.25/quarter. When looking at all the large gold miners or streamers, with the dividend increase, Newmont has the highest dividend yield in the group.

Dividend Yield

NEM

Newmont

1.69%

(AEM)

Agnico Eagle Mines

1.30%

(KL)

Kirkland Lake Gold

1.29%

(WPM)

Wheaton Previous Metals

0.95%

GOLD

Barrick Gold

0.89%

(FNV)

Franco-Nevada

0.74%

(AU)

AngloGold Ashanti

0.33%

I put together the following table showing the dividend payout ratio for my preferred method using cash flow from operations (CFFO) as well as free cash flow. I included a stressed column to stress test the dividend by estimating cash flows based on a gold price of $1400. As you can see, even with the 79% dividend increase and the cash flow projections for Q2, the payout ratio for Newmont is still very low. For my stressed column, you can see the ratio is obviously higher, but it is clear the dividend is very safe even under that scenario.

Q1 2020

Q2 2020 (est)

Stressed

CFFO

$936,000,000

$1,300,000,000

$700,000,000

Dividends

$112,000,000

$202,250,000

$202,250,000

Dividends/CFFO

11.97%

15.56%

28.89%

Q1 2020

Q2 2020 (est)

Stressed

FCF

$608,000,000

$850,000,000

$450,000,000

Dividends

$112,000,000

$202,250,000

$202,250,000

Dividends/CFFO

18.42%

23.79%

44.94%

Risks

The two main risks for Newmont are declining gold prices and Covid-19 shutting down mines. Gold prices have performed very well because of uncertainty around the globe associated with Covid-19 along with the seemingly QE infinity and the implementation of stimulus measures around the globe to stabilize economies. Later this year or sometime in 2021, when/if a vaccine or effective treatment is approved, that would take away some of the uncertainty and there is the possibly gold could see a move lower because of that. The other risk for Newmont is if Covid-19 cases continue to rise and Newmont has to shut down mines, which would have an impact on cash flows. In the middle of May, Newmont provided an update on their guidance for 2020 and detailed that some mines were shut, but were restarting. Newmont also noted an expectation for the second quarter to have the lowest production and the highest costs for the year. If some of those locations or others have to shut down because of Covid-19, which would have an impact on production and thus on financial results for Newmont.

The revised 2020 outlook includes the production and cost impacts from our five operations temporarily placed into care and maintenance for an average of 45 days. The second quarter is expected to be the lowest production and highest cost quarter of 2020 as the sites ramp up from care and maintenance. ~May 2020 guidance update

Closing Thoughts

In closing, I believe Newmont is worthy of consideration because shares have pulled back from their highs even as the price of gold has continued higher. This view is supported by the substantial cash flow the business should generate along with the continued synergy realization from the Goldcorp deal and JV with Barrick. Add on the potential for strong shareholder returns as evidenced by the recent 79% increase of the dividend and the $300 million in share repurchases that occurred in the first quarter. You might be thinking if Newmont is this attractive, why do I not own the stock? The answer: I already have exposure to gold/gold miners because I own shares of streamer Franco-Nevada and have owned since the beginning of 2014. If I did not already have existing exposure to the industry, Newmont would be on my shopping list.

Disclaimer

Disclosure: I am/we are long FNV, PYPL. 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.

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2020-06-29