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Morningstar | Newmont Continues to See Some Challenges in 3Q; Shares Look Fairly Valued

Newmont Mining's near-term results reflected operational challenges in some parts of its portfolio, as attributable gold production fell 3% to 1.27 million ounces. Combined with a 6% lower gold price, revenue fell 8% during the third quarter. Partially offsetting lower revenue, a 1% decline in all-in sustaining costs helped EBITDA fall just 3% to $636 million.

Newmont revised its full-year guidance, lowering the top end of its production range to 4.9 million-5.2 million ounces from 4.9 million-5.4 million ounces. The reduction was largely due to lower throughput at Carlin’s mill amid some geological challenges. The company narrowed its AISC guidance for the year to $950-$990 per ounce from $965-$1,025. After updating our model, we’ve trimmed our fair value estimate to $34 per share from $36 for no-moat Newmont.

Development efforts continued as expected, with key projects like Subika Underground, the Ahafo mill expansion, Quecher Main, and the Tanami power project progressing well. These developments should help the company maintain stable production and costs over the next few years. However, with the shares trading in 3-star territory, we don’t see an attractive entry point at this time.

In September, the U.S. Federal Reserve once again raised the federal-funds rate by 25 basis points, to 2.25% from 2%. This was the third rate hike of the year. Most central bank officials expect one additional rate hike in 2018 and three in 2019. The market appears to be largely in line with this view, as current interest-rate option prices imply a more than 70% chance that there will be at least one more hike by the end of 2018.

All else equal, the prospect of higher inflation adds to gold's investment appeal, which is one reason exchange-traded fund gold holdings rose through most of 2018 and spot prices remained above $1,300. However, as we had anticipated, higher inflation has emboldened the Fed to pursue rate hikes at a quicker pace, which lifts the real interest rate and, in doing so, increases the opportunity cost of holding gold.

Historically, we've observed a strong inverse relationship between the real interest rate and the price of gold. When the former rises, the latter tends to fall. We thought it was only a matter of time before gold investment adjusts to the higher opportunity cost, not only leading to slowing investment demand, but also outflow of gold from ETFs back into the gold market. Our prediction has proved true, as ETFs have seen net outflows since June through September.

On the back of weak investment demand, gold prices have fallen to nearly $1,200 per ounce. Nevertheless, we still believe gold has a promising future, and we forecast a nominal gold price of $1,300 per ounce by 2020. We expect that in the long term, Chinese and Indian jewelry demand will fill the gap left by waning investor demand.