University Of Northern Colorado Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. 1 Ticker: NEM Recommendation: Sell Price: 64.04(as of January 12) Price Target: $59.41 Earnings/Share Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Year P/E Ratio 2009A $0.44 $0.43 $0.79 $1.14 $2.79 22.47 2010A 0.83 0.77 1.08 1.16 3.85 18.88 2011 1.03 0.90 1.29 1.16E 4.38E 14.62 2012E 1.12 1.10 1.12 1.01 4.35 14.72 Newmont Mining Highlights Newmont Price to Earnings, Price to Cash Flow, Price to Book are all greater than their industry and peer groups Newmont has high environmental risk, which can lead to an increase in costs Overtime, as commodity prices are expected to increase costs will also increase Political risks are high given Newmont’s operations are primarily abroad where mining regulations can quickly change Return on Equity for Newmont is lower than its industry and its peer groups Newmont has unsustainable production cost because Newmont’s cost increased from quarter 3 2010 to quarter 3 2011 2011 Stock Prices Figure 1.1 Source: From Capital IQ Investment Summary Newmont Mining Corporation is a sell at their current share price. By using discounted cash flow models and relative analysis, their stock price is determined to be at fair market value. There are superior substitutes than investing in Newmont. Mutual funds, Exchange Traded Funds, or buying the actual commodity all have less risk comparatively. The Futures Market forecasts gold prices to continually rise. However, Newmont’s labor and materials costs are expected to grow more rapidly. They unveiled new projects, but potential returns could be delayed and are never guaranteed. Currently, extreme market volatility, political risks, and the environmental costs are all associated with rising gold prices, but could damper the company’s ability to increase margins. Gold presents a higher expected return, with substantially less risk involved. Newmont Mining Mining Industry January 13, 2012 Table of Contents Investment Summary Pg. 1 Business Overview Pg. 2 Industry Overview& Competitive Positioning Pg. 2 Valuation Pg. 3 Financial Analysis Pg. 3 Press Releases Pg.4 Investment Risks Pg. 4 Appendix Pg. 7
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the CFA Institute Research Challenge Newmont …Newmont Mining Corporation is a sell at their current share price. By using discounted cash flow By using discounted cash flow models
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University Of Northern Colorado
Student Research This report is published for educational purposes only by students competing in
the CFA Institute Research Challenge.
1
Ticker: NEM Recommendation: Sell
Price: 64.04(as of January 12) Price Target: $59.41
Earnings/Share
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Year P/E Ratio
2009A $0.44 $0.43 $0.79 $1.14 $2.79 22.47
2010A 0.83 0.77 1.08 1.16 3.85 18.88
2011 1.03 0.90 1.29 1.16E 4.38E 14.62
2012E 1.12 1.10 1.12 1.01 4.35 14.72
Newmont Mining Highlights
Newmont Price to Earnings, Price to Cash Flow, Price to Book are all greater than their
industry and peer groups
Newmont has high environmental risk, which can lead to an increase in costs
Overtime, as commodity prices are expected to increase costs will also increase
Political risks are high given Newmont’s operations are primarily abroad where mining
regulations can quickly change
Return on Equity for Newmont is lower than its industry and its peer groups
Newmont has unsustainable production cost because Newmont’s cost increased from quarter
3 2010 to quarter 3 2011
2011 Stock Prices Figure 1.1
Source: From Capital IQ
Investment Summary Newmont Mining Corporation is a sell at their current share price. By using discounted cash flow
models and relative analysis, their stock price is determined to be at fair market value. There are superior
substitutes than investing in Newmont. Mutual funds, Exchange Traded Funds, or buying the actual
commodity all have less risk comparatively. The Futures Market forecasts gold prices to continually rise.
However, Newmont’s labor and materials costs are expected to grow more rapidly. They unveiled new
projects, but potential returns could be delayed and are never guaranteed. Currently, extreme market
volatility, political risks, and the environmental costs are all associated with rising gold prices, but could
damper the company’s ability to increase margins. Gold presents a higher expected return, with substantially
less risk involved.
Newmont Mining
Mining Industry
January 13, 2012
Table of Contents Investment Summary
Pg. 1
Business Overview
Pg. 2
Industry Overview&
Competitive
Positioning
Pg. 2
Valuation
Pg. 3
Financial Analysis
Pg. 3
Press Releases
Pg.4
Investment Risks
Pg. 4
Appendix
Pg. 7
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
2
Business Overview The power of buyers plays a hefty role in the success of Newmont Mining and the entire gold
industry. Currently, gold is considered a “safe haven.” Political turmoil, high market volatility, and
increased world demand for gold will cause increases in the price of gold over the next five years. Buyers
such as banks, governments, and institutional investors are Newmont’s largest customers. In times of
economic distress, Newmont’s profits could be negatively affected because of governmental restrictions and
stringent banking regulations. 50% of Newmont’s sales revenue is derived from Indonesia, Australia, and
New Zealand. Any changes in the environmental constraints or political regulations would impact
Newmont’s sales (Porter).
Figure 1.2
Source: Newmont Mining 2010 Annual Report
Industry Overview & Competitive Positioning Gold has sustained high levels of returns over the past few years. Since 2006, gold prices have
experienced an average of 1.8% monthly growth. The primary drivers for growth in the gold price is linked to
worldwide economic conditions. As a result, gold is considered the preeminent “flight to safety” investment
during economic crisis. According to the commodity futures market, Gold prices are expected to reach
$1,800.00 per ounce by 2017 (Table 1.3).
Figure 1.3
Source: Chicago Mercantile Exchange
The performance of the gold mining industry relies heavily on the price of gold. Gross profit is
calculated from subtracting the cost of extraction and refinement from the market price of gold. Since 2006,
profit margins have increased due to gold prices rising higher relative to Newmont’s costs. However, the
performances of Newmont mining failed to present comparable returns. This anomaly is accounted for by
investors preferring to invest directly into a gold, mutual fund, or ETF’s.
Competitive Positioning: Newmont Mining Corporation will experience negative pressures within the immediate future.
Rising production costs are a primary concern for Newmont as mines move closer to depletion. As mines
move into later phases, extraction cost increase as mineral count decreases. Newmont has two advanced-
staged mines in its pipeline to offset depletion; although, expected extraction is not expected to commence
until 2014. Political protest continues to threaten development and production operations in Peru. Locations
in Conga face increasing public concern about the countries water supply. Labor and royalty fees are
expected to increase on par or above inflation.
Currently, Newmont is the second largest gold mining company in the world--with probable
reserves in excess of 93.5 million ounces. Globally, Newmont has mining operations in four continents,
achieving diversification through managing the mine’s product life cycle. NEM is financially stable,
experiencing increases to revenues and cash flow over the past 5 years. They have delivered an increasing
gross margin for the 11th straight quarter following the Q3-2011 results. We believe this impressive run is in
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
3
jeopardy due to Newmont operating in more expensive regions. Earlier this year they introduced the gold-
price-linked dividend, a first for the industry, creates a connection between gold prices and gold miners. This
will allow shareholders to receive and increasing portion of operating cash flows as gold prices increase. This
is attainable due to the highest gold production per share outstanding, while still investing to continuously
allow the company to grow organically. On an annualized basis Newmont’s dividend yield stands
approximately at 2.1%, higher than the S&P 500 average and nearly doubles their peers. We do not believe
this will be enough to persuade investors from gold and ETF’s. Figure 1.4 shows Newmont relative
positioning within the industry. Return on Equity consistently falls short of the industry average and
significantly below their majors competitors.
Figure 1.4
Newmont Barrick Gold AngloGold Industry
Market Cap 30.6B 45.7B 15.7B
P/E 14.62 10 7.37 9.59
P/CF 6.98 10.14 5.72 6.94
P/B 1.89 2.18 2.19 1.6
ROA % 7.36 11.18 11.29 3.12
ROE % 14.31 22.04 36.68 12.04
PEG 3.68 N/A 0.08 1.15 Source: Figures from Bloomberg
Valuation The calculated intrinsic value of Newmont is $59.41 per share. This price is derived using three
models: discounted cash flow, relative valuation, and total company value from expected reserves. The
weights for each model are 40%, 40% and 20% respectively. The total company value from expected
reserves is weighted lower because it ignores expenses, taxes, and potential increases to reserves. The pro
forma statements are generated to estimate the inputs for the three models.
The discounted cash flow model is preferred over the dividend growth model because of the
Newmont Mining Corporation. (2011, December 8). Newmont Provides Details on Conga’s Environmental Impact
Assessment . PRNewswire . Retrieved from http://www.newmont.com/investors/releases//
Pinto, J. E., CFA., Henery, E., CFA., Robinson, T. R., CFA., & Stowe, J. D., CFA. (2010). Equity Asset Valuation (2nd ed.).
Hoboken, New Jersey: John Wiley & Sons, Inc.
Porter, M. E. (2008). The Five Competitive Forces That Shape Strategy [Chapter 1 ]. In On Competition Updated and
Expanded Edition (pp. 3-35). Boston,MA United States: Harvard Business School Publishing Corporation.
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
16
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater
over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.
A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.
Investment Research Challenge and Global Investment Research Challenge Acknowledgement:
CFA Society of Colorado Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the Investment Research Challenge originally developed by the New York Society of Security Analysts.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used
as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of
an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Colorado,
CFA Institute or the Global Investment Research Challenge with regard to this company’s stock.