Newmont vs Evolution: Which is the superior gold miner?

Bringing high-quality gold assets into production and ramping up operations demands significant capital – And that’s weighing on Evolution Mining (ASX: EVN) and Newmont’s (ASX: NEM) ability to generate strong cash flows and pay a competitive dividend.

Evolution is integrating the recently acquired Northparkes Operations (purchase an 80% stake for US$475 million in December 2023) and progressing key developments at its Cowal, Ernest Henry, Red Lake and Mungari projects. The company’s stock is down 25% year-to-date and trading near 12-month lows.

Newmont successfully acquired Newcrest in November 2023 to create the world’s leading gold company with robust copper optionality. But as far as financials are concerned, the Group reported steep impairment charges, write-downs and integration costs for the 2023 calendar year. The stock is down 20% since listing on the ASX on 27 October 2023.

There’s supposed to be a light at the end of the tunnel – once the projects are up and running, and the companies have worked their way through the heavy capex cycle. But how far along are these gold heavyweights?

In this wire, Tim Riordan – portfolio manager at Blackwattle Investment Partners – runs the ruler on the companies' latest financial results and outlines why they're struggling and what to expect of the short-to-medium term.

Evolution 1H24 results

• Gold production of 319,377 ounces at an all-in sustaining cost of US$1,054 an ounce
• Underlying EBITDA up 28% to $573 million, a small beat on the $543 million consensus
• Underlying net profit after tax up 53% to $158 million, in line with consensus
• Operating mine cash flow up 30% to $618 million
• Interim dividend of 2 cents per share, ahead of 1.7 cents per share consensus
• Maintained FY24 guidance of 789,000 ounces.

Newmont full-year 2023 results

• Completed the acquisition of Newcrest Mining on 6 November, 2023
• Gold production of 5.5 million ounces, in line with revised guidance range
• All-in sustaining costs of US$1,444 an ounce, in line with revised guidance
• Net loss of US$2.5 billion as a result of – US$1.9 billion in impairment charges, US$1.5 billion in reclamation charges and US$464 million in Newcrest transaction and integration costs
• Adjusted EBITDA of $1.38 billion, ahead of the $1.31 billion consensus
• Cash outflow of $304 million vs. consensus expectations of $348.5 million inflows
• For more financial data on the two companies, head to Market Index

1. What was the key takeaway from these results?

Evolution: The result itself was mostly pre-announced. The quarterly from January highlighted some of the downside in terms of their production results for the second quarter of FY24. One of their major mines is performing a bit slower than expected, which puts pressure on the full-year guidance.

Newmont: The result feels like a bit of a kitchen sink. Investors are reacting to a couple of things – A hangover from poor production outcomes in the calendar year 2023, the integration of Newcrest following the merger late last year, higher costs and lacklustre guidance for 2024..

2. Were there any major surprises in these results that you think investors should be aware of?

Evolution: The fact that they’ve retained guidance is an interesting one because it implies 35% production growth in the second half versus the first half. The main miss in the first half was from Red Lake (acquired from Newmont in 2019) and that’s the main project that’s struggling. Evolution has pointed to a decent performance in January and is in the process of ramping up production of the Cowal mine.

Newmont: There’s a handful of things going on here which are quite interesting. Production guidance for 2024 was slightly weak and below market expectations. When you take Newcrest's 2023 production plus Newmont's 2023 production, you haven't quite got one plus one equals two. I think investors are a little bit worried about that.

On a slightly longer-term perspective, the result contained some positive surprises. Newcrest reiterated synergies of $500 million and added another $500 million in today’s result. This was glossed over in the conference call this morning and there weren’t any questions about it. But that’s something we’ll be digging into.

We find this interesting because Newmont has a strong track record of extracting synergies from mergers. They acquired Goldcorp in 2019 and increased the synergies target by 3-4 times over the duration of integrating the assets. That’s probably one of the most interesting points we’ve picked up from the result.

From an asset sale perspective, we expected Newmont to undertake a review of Newcrest assets and think about what fits in the overall portfolio. What they’ve highlighted today is that there are six assets they don’t think classify as tier one status and slated those for sale. These guys move very quickly.

They’ve separately mentioned a $2 billion cash inflow from portfolio optimisation. It’s hard to link whether that’s the actual target from what they’d like to sell these assets for. But all the same, it gives you a sense of the scale of cash coming back to them, which they've said they'll return to shareholders. Newmont has highlighted they’ll ideally do that over the next 12 months.

3. Would you buy, hold or sell these stocks on the back of this result? If you could only buy one of these stocks, which would it be and why?

Rating: SELL on Evolution and BUY on Newcrest

There’s some value there for Evolution but it’s the relative sell of the two. We’ve gone from feeling like we want to hold Newmont to buying. There’s some optionality in Evolution. It isn’t a poor asset but the opportunity set for Newmont is quite rich. In terms of realising benefits from mergers – They’ve done this before. To deliver on those benefits is the reason why we’d rate it as a buy.

From a global gold perspective, Newmont has underperformed the likes of Barrick Gold (NYSE: GOLD) by about 20% over the last year. It’s also underperformed Evolution since the merger by about 5%.

From our perspective and the way we run the portfolio at Blackwattle, we’re looking for high quality companies and the high grading of the Newmont portfolio through the merger with Newcrest, and the subsequent asset sale they’ve announced is really quite attractive to us. A high-quality asset is likely to surprise positively over time.

4. What’s your outlook for the sector over the year ahead?

Gold and macro can be tricky. The macro from a gold perspective will be influenced by rates and inflation, economic conditions, jewellery demand as well as geopolitics. There’s a heightened level of volatility with a number of those factors at the moment.

It does feel as though there’s a reasonable claim on gold having a place in portfolios. We’ve often referred to gold as an insurance or a hedge within a portfolio of equities. The optionality at the moment is quite attractive.

For Newmont, there’s a quirk in Australia right now. Newmont is the largest gold miner in the world but it’s considered a mid-cap in Australia because of the way its CDIs are balanced and how the Index works. In the upcoming S&P Index rebalance, Newmont likely ends up as a mid-cap. It’s an interesting optionality for portfolios to own that collection of tier one assets, effectively 10 of the largest 15 tier-one assets in the world.

Are there any risks to these companies and the sector that investors should be aware of?

Both companies have diversified production across several mines. But Evolution is not quite as diversified Newmont. You can see the impact of one mine challenging their guidance. Both companies also run a debt balance, with gearing around 30% range. You do need to factor that, as gold prices and operational performance move around. The key risk is being aware of these sensitivities.

From a cash perspective, Evolution has struggled to produce free cash flow over the last several quarters. Newmont didn’t fare any better in 2023, producing a paltry $88 million in free cash flow, having produced $1.1 billion in free cash flow the year before. So you can see that the potential within the Newmont portfolio is enormous. But it’s that sensitivity to production levels and the gold price that can have a dramatic effect on free cash flows. That’s our key focus for these guys.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 2

The market has rebounded from the weakness last year. But we feel like from an optionality perspective, particularly via our focus on mid-caps and high-quality companies, there’s quite a lot going on in our space at the moment. There’s been a handful of companies that we’ve been spending most of our time researching at the moment, where they’ve got internal levers available to them to grow.

Whilst the outlook might be a little bit concerning to some people (i.e. hard landing vs. soft landing), we see that the opportunity for these companies to grow, to earn solid margins and good returns, is quite attractive. Irrespective of the environment, they should be able to deliver on guidance and stated targets. 

• Read Announcement - NEM Q4 and FY 2023 results
• Read Announcement - EVN FY24 half-year financial results and interim dividend
• View Presentation - EVN FY24 half-year financial results presentation