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Morningstar | Few Surprises in Last Quarter Before Transformative Deals Create Newmont Goldcorp

Newmont’s last quarter before consummating the acquisition of Goldcorp had few surprises. The company produced roughly 1.2 million ounces of gold during the quarter, which is in line with last year’s first quarter. All-in sustaining costs of $907 per ounce were about 4% lower year over year. The company maintained its full-year guidance of 5.2 million attributable gold ounces at all-in sustaining costs of $935 per ounce, which do not include the impact of the Goldcorp acquisition or the Nevada joint venture with Barrick Gold. The company’s first quarter puts it well within reach of its full-year guidance. With few surprises and no major changes to our outlook, we maintain our $40 per share fair value estimate for no-moat Newmont.

The acquisition of Goldcorp was completed on April 18, creating Newmont Goldcorp, the largest gold miner in the world. Meanwhile, the company expects the Nevada joint venture with Barrick to close in the “coming months.” These two deals create a vastly different company than just a year ago. The company expects to produce roughly 7.5 million ounces through 2025, with its developing projects replacing declining production at aging mines.

At this time, shares look slightly undervalued on a risk-adjusted basis. We think this is an attractive entry point as Newmont Goldcorp looks to extract better performance out of acquired assets and the Barrick joint venture unlocks significant synergies in Nevada.

After last raising the interest rate in December 2018, the Fed has paused its increases, leaving the federal-funds target rate at a range of 2.25% to 2.50%. Amid signs of a slowing economy including slowing consumer spending and business investment, the Federal Open Market Committee, or FOMC, now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest rate options not only imply no chance of a rate hike but more than 55% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate hike path has reduced 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.