Newmont Mining Corp. (NYSE: NEM) just received a favorable upgrade from none other than Credit Suisse.
The brokerage firm upgraded Newmont to an Outperform rating from Neutral, with a price target of $30. The catalyst for this upgrade was the resolution of Indonesia Contract of Work negotiations, Tanami expansion and Ahafo Mill expansion approval decisions.
The $30 price target is based on an even weight of Credit Suisse’s $32 net asset value (NAV). The brokerage firm increased its NAV multiple to 1.60 times, up from 1.55 times, based on Newmont’s operational consistency and improved balance sheet. Also, Credit Suisse is revising its earnings per share (EPS) estimates up to $1.52 from $1.28 in the 2015 fiscal year, up to $1.21 from $1.20 in the 2016 fiscal year, and down to $1.23 from $1.25 in the 2017 fiscal year.
The company operates in the mining industry. It primarily acquires, develops, explores for and produces gold, copper and silver deposits.
Overall Credit Suisse believes that Newmont has delivered on its strategy since its new chief executive officer took charge in 2013. The strategy focused on improving the underlying business through cost reductions with the company’s full potential program, as well as strengthening the portfolio by investing in internal opportunities.
The brokerage firm is making this upgrade for a few different reasons:
- Operational consistency, which the company expects to continue
- Lower costs than the current market perception due to the use of co-product accounting
- Longer than average reserve life not reflected in the current cash flow multiple
- Attractive internal opportunities to add NAV vs. current CS expectations
- Balance sheet, which has strengthened significantly
- Attractive valuation versus peers on P/NAV, P/OpCFa and P/E
In addition, according to Sterne Agee, Newmont delivered a strong start to 2015 on significant cost improvements. Management has been ahead of many peers on portfolio adjustments, capital discipline and attacking cost performance. The firm lowered its gold price deck, but also lowered 2015 cost expectations. Newmont’s management continues to deliver value and margin, which is expected to generate further outperformance.
Newmont maintained its long-term guidance, calling for gold production to increase from 4.6 to 4.9 Moz in 2015 to 4.7 to 5.1 Moz by 2017. Management maintained its 2015 CAS expectation at $660 to $710 per oz. Sterne Agee believes management’s cost expectation is conservative and expects management to reset expectations in the second half of 2015.
The company ended the first quarter with almost $6 billion in liquidity, and it has de-levered its balance sheet by roughly $300 million since last November. At Sterne Agee’s $1,250 gold price target for 2015, it expects Newmont to generate more than $150 million free cash and another $650 million free cash in 2016 at the $1,350 gold price.
As a result, Sterne Agee lowered its 2015 average gold price forecast to $1,250 per oz. from $1,400 per oz. and 2016 estimate from $1,450 per oz. to $1,350 per oz. The firm also lowered its 2015-16 gold CAS forecast for Newmont to levels below the lower end of management guidance. Sterne Agee lowered its 2015 EPS estimate to $1.45 from $1.85 and the 2016 estimate was moved to $1.85 from $2.25.
Sterne Agee described its investment strategy as:
While gold prices react to relative global currency and macro stock market dynamics, Newmont’s shares underestimate where gold prices may trade, in our view. As longer-term plans emerge supportive to margins and returns, we believe Newmont’s valuation should regain support. Our $35 price target is based on 8.0x our 2016 forecast CFPS of $4.35.
Note that the highest price target from analysts is $35, which implies an upside of 37% from current prices.
Monday morning, shares of Newmont Mining were up about 3.9% at $25.95. The 52-week trading range is $17.60 to $27.40, and the consensus analyst price target is $26.34.