Newmont Clears More Than $2,800 an Ounce, and the Market Sells It With Gold

The sell-off in gold miners punishes the metal price, not the business model. On 22 October, Newmont reported an average realized price of $4,317 an ounce for the third quarter, against an all-in sustaining cost (AISC, net of by-products) of $1,454, down 10% on the quarter 1. The gap exceeds $2,800 an ounce. Yet the stock lost 8.2% in October despite beating estimates, in the wake of gold, down 6.6% over the month 2. The 16 gold producers in the MINING.COM ranking gave up $55 billion, or 9.9% 2. We think the market is selling the metal without distinguishing producers whose cash engine is running at full speed.

Cash generation intact

Newmont generated $1.9 billion of free cash flow in the quarter 1. It has bought back $1.6 billion of its own shares since 23 July and retains $2.8 billion of authorization under a $6 billion program 1. Net cash stood at $3.2 billion at the end of September 1.

The group also improved its full-year all-in sustaining cost guidance, now $1,520 an ounce 1. Annual production of 5.3 million ounces is confirmed 1.

A Modest Valuation

As of 26 October, Newmont traded at 8.8 times trailing operating cash flow and 11.4 times free cash flow, with a free cash flow yield of 8.8% 4. A cash flow multiple below 9 is, in our view, still modest for a producer that buys back its shares.

The objection: peak margin is behind us

Newmont expects an all-in sustaining cost of $1,900 an ounce in the fourth quarter, driven by heavier sustaining capital 1. A $1.95 billion payment to Barrick, due in the same quarter, will reduce net cash 1. Gold futures traded at $4,129 an ounce in New York on 9 November, below the quarter's realized price 3.

The objection concerns the level, not the trend. With gold at $4,129 and costs at $1,900, the margin still exceeds $2,200 an ounce. The Barrick payment is known and one-off. We think it does not dent the capacity to return cash.

The bottom line

The miners' pullback has opened a gap between share prices and the profitability of the mines. In our view, net-cash producers with controlled costs turn that gap into accretive buybacks.

What to watch: the all-in sustaining cost actually reported for the fourth quarter against the $1,900 guided, the pace of buybacks in November and December, and whether gold holds above $4,000.