Newmont's Problem is Great News for Junior Miners

Newmont, the world’s biggest gold miner, just reported a year-over-year doubling of its Q3 earnings — and its stock price fell by 5%.

That’s confusing to investors who generally view triple-digit earnings growth with a P/E ratio of 12 as a buy signal.

It is a buy signal — but for the junior miners.

Here’s an explanation from commodities analyst Tavi Costa:

It’s fascinating how Newmont is taking a hit today after disappointing the market with its production guidance.

The consensus narrative out there: How can Newmont’s stock be down after reporting such strong earnings — more than 20% above its EPS estimates and 111% higher than the same quarter last year?

Here’s how I see it: The market is starting to realize that most of the major miners are running into growth constraints. These large companies have been depleting reserves for years while keeping exploration budgets minimal and doing little to acquire new deposits that could come online anytime soon. No kidding, Newmont is now reportedly planning to acquire Barrick’s Nevada gold assets.

So what happens next? Management teams will start feeling real pressure to find growth and expand their resource base. The simplest way to do that is through acquisitions, in my view. Exploration is slow and risky — but buying growth is faster.

This is a pivotal moment for earlier-stage mining companies with quality projects to step up their game. Economically viable, large-scale deposits are about to come under serious demand from the majors, in my view.

My two cents on how this is likely to develop: Buckle up for a major M&A cycle — this time led by big miners acquiring smaller companies, not just merging with other giants.

To reiterate, this is the cheapest and quickest way to add growth. This is how a true mining cycle unfolds: capital first flows to the majors, then trickles down to the earlier-stage miners. Game on.

Here’s a different but also interesting take from Goldstockdata’s Don Durrett:

Newmont Corp: Q3 results:

1.4M oz at $1550 ASIC. $1.6B FCF [free cash flow]. Paid down $2B in debt. Current cash at $5.6B. Current debt at $5.6B. Current FCF runrate at $2.5B per Qtr. Current FCF multiple at 9. Paid back $823M to shareholders in Q3 using buybacks and dividends.

My reaction: Wall Street has no interest in gold miners, and continues to ignore the gold price. Newmont prints as a $300 stock at $5K gold, and Wall Street doesn’t care. That won’t prevent Newmont from reaching $300.

My reaction #2: Newmont paid down $2B in debt, leaving $5.6B. This is a good sign. They need to eliminate their debt to get their FCF multiple to rise from 9 to 20, and perhaps 25. I expect that outcome.

And here’s an expansion of the “Newmont buys Barrick” thesis from CEOTechnition:

Important to understand that the sell-off in Newmont today wasn’t due to bad earnings. It was due to hedge funds in the know getting ahead of the offer that Newmont is about to make for Barrick.

$NEM cannot realistically support a US$100 billion market cap with its current asset portfolio, even at $4,000 gold. They need growth, they need more scale, and the only truly meaningful growth is in Barrick’s Nevada assets. They HAVE TO HAVE this deal. Newmont + Barrick’s entire US project portfolio + Barrick’s 60% interest in Pueblo Viejo = US$150 billion MC company.

The largest mining company in the world is born, larger than BHP. The rest of the Barrick assets either get sold individually or spun-out into a separate company.

Conclusion

The market seems to have decided that Newmont must do something dramatic if it wants its earnings to merit a double-digit multiple. And the same cold equation applies to the other big miners. So expect (among other things) an acquisition binge that sends our Portfolio’s smaller miners and explorers much higher.