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Morningstar | Newmont Ends 2018 on Strong Note; Goldcorp Acquisition Remains on Track

Newmont produced 5.1 million attributable gold ounces in 2018, falling on the better half of its guidance of 4.9 million to 5.2 million ounces. All-in sustaining costs, or AISC, of $909 per ounce beat guidance of $950 to $990 per ounce, as AISC dropped 9% in the fourth quarter. In all, the company reported a strong finish to the year.

Newmont provided 2019 guidance that forecasts attributable production of 5.2 million ounces at AISC of roughly $935 per ounce. Longer term, production will fall to 4.9 million ounces before settling between 4.4 million and 4.9 million ounces through 2023. AISC should rise in 2020 to $975 per ounce, and fall between $875 to $975 per ounce through 2023. Guidance does not yet include the acquisition of Goldcorp, which is expected to close in the second quarter of 2019. We think this timeline is likely, as the merger is unlikely to face any regulatory challenges given the fragmented nature of the gold mining industry.

We’ve updated our model for the latest guidance. Changes were minor, though some lower costs than we had previously anticipated lead to a slight increase in the fair value estimate to $38 per share from $36. Newmont retains its no-moat rating. With shares trading at nearly $36 per share, we see limited risk-adjusted upside at this time.

As we stated in our Jan. 14 note, we think Newmont shareholders were the winners in the pending acquisition, as the offer price came below both our fair value estimate and the median consensus price target for Goldcorp. Nevertheless, we do expect the merger to close under a new company name of Newmont Goldcorp. It will be up to legacy Newmont management to extract more from the legacy Goldcorp assets than its prior management could.

In December 2018, the Fed again raised the federal-funds target rate by 25 basis points to a range of 2.25% to 2.50%. This was the fourth rate hike of the year. However, the Federal Open Market Committee, or FOMC, appears to be taking a more cautious approach to future rate hikes. The dot plot has reflected a meaningful change in expectations. The December dot plot implied two rate hikes in 2019 versus the three hikes that had been implied back in September. Additionally, language in the FOMC statement now takes a softer tone, indicating a more cautious approach to further rate hikes.

The market has taken a bearish view on the FOMC’s more dovish tone. Current interest rate option prices imply a more-than 90% chance that there will be no rate hikes by the end of 2019. Additionally, they reflect a higher probability for a rate cut than a rate hike by the end of the year.

All else equal, a slower rate hike path reduces the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.