Newmont Corp’s stock (NYSE: NEM) managed to more than double its shareholder wealth in the last 3 years, with its stock price rising from $32 at the end of 2016 to $66 as on 20th May 2020. Newmont achieved this with a revenue growth of 45%, less than half compared to the stock price growth. Our interactive dashboard Why Is There A Mismatch In The Rate At Which Newmont’s Revenues And Stock Price Have Changed? provides a detailed analysis of how stock and revenue moved for NEM over recent years.
But how was this sharp rise in stock price achieved when Newmont’s revenues increased at a lower rate, going up $3 billion, or 45%, between 2016 and 2019? Well, here’s the other factor that drove this rise – it’s earnings: profits earned after all the expenses and taxes and better growth expectations. Newmont’s earnings margins (profits as a % of revenue) increased sharply from -14.1% in 2016 to 29.6% in 2019. How did Newmont manage such a spectacular turnaround from losses to healthy profit margins in just about 3 years? Dive into our interactive dashboard on Newmont expenses for the answer.
It was a two-fold effect: expansion through acquisition and new partnerships; and rising gold prices. Newmont completed the acquisition of the Canadian gold mining giant Goldcorp Inc. in April 2019. This gave Newmont access to Goldcorp’s high-grade assets in Canada, Mexico, and Argentina which led to a rise in NEM’s proven and probable gold reserves from 65.4 million ounces in 2018 to 100.2 million ounces in 2019, reflecting a growth of 53%, while gold production and volume sold increased by 17% each, in 2019. Additionally, NEM also entered into a joint venture with Barrick Gold for their Nevada operations, in which NEM holds a 38.5% share. This JV diversifies NEM’s footprint in Nevada and allows it to benefit from additional efficiencies through integrated mine planning and processing, while also benefiting from the combination of Barrick’s superior assets in Nevada and Newmont’s superior processing infrastructure. Newmont recorded a gain of $2.4 billion on the conclusion of the Nevada deal in 2019, leading to a sharp rise in profits for the year. However, Newmont’s margins are expected to remain high at about 10.5% in 2020, higher than its historical average.
Revenues rising by 45% and margins increasing from -14.1% in 2016 to 29.6% in 2019 meant that the earnings per share shot up from -$1.19 in 2016 to $3.82 in 2019.
Additionally, the rise in gold prices has also led to improvement in the outlook for the company. With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current COVID-19 crisis which has led to an increase in gold’s value as a hedging instrument. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to almost $1,700/ounce in May 2020. With gold contributing 93%-94% of NEM’s revenues and the combination of Newmont expanding its gold base and a rise in global gold prices has led to a rise in the company’s P/E multiple compared to 2016.
As per Newmont Valuation by Trefis, we have a price estimate of $65 per share for Newmont’s stock, marginally lower than the current market price of $66 per share.
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