the CFA Institute Research Challenge Newmont …Newmont Mining Corporation is a sell at their...
Transcript of the CFA Institute Research Challenge Newmont …Newmont Mining Corporation is a sell at their...
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
uncertainty associated with NEM’s dividend growth rate. Newmont recently introduced gold-price-linked
dividend. Dividends will grow at different rates when gold prices fluctuate. Also, growth rates are difficult to
anticipate due to the uncertainty in future gold prices. In addition, Newmont will need additional capital to
fund its growth. Their weighted average cost of capital is calculated assuming that $4 billion dollar in debt
will need to be issued. Appendix (Figure H) shows the calculations used to determine the market value of
$45.82.
Their relative valuation prices Newmont with respect to its peers and industry. The model allows a
comparison of the company to its industry and sector. Price to earnings and price to cash flow were used to
estimate the firm’s fair value. Then, an equally weighted average is taken to get a price of $53.23 per share.
Figure G
The last model estimates the market value of Newmont based on the firm’s margins on gold and
copper. Inflation is assumed to remain at 4%-- on par with price and costs. Again, this model ignores
numerous factors, which warrants a lower weighting. Figure F in the Appendix shows Newmont’s proven
reserves and yields a fair market price of $98.92 per share.
Financial statements show that Newmont will start facing upward pressures from production and
cost issues due to mine depletion. Their pro forma statements suggest a slight decrease in production for the
next two years (Figure A, B, C). Newmont will have approximately 1.1 million ounces of gold from non-
controlling interest every year. Total production for 2011 will be at 5.2 million ounces. However, production
begins to increase in 2014. Cost applicable to sale (CAS) will increase at a rate of 5% annually.
Financial analysis
Profitability & Efficiency
Revenue for Newmont has grown 17.6% over the last 5 years, while COGS sold decreased by
nearly 14% over the last 2 years. This has led to an increase to Gross profit of 27.4% over the last 5 years.
SG&A has remained steady over the last three years. There were several large spike in SG&A during 2005,
but a stable outlook is assumed moving forward. R&D has hit record numbers, increasing almost 60% over
the last year, and 23.1% over the last 5 years. There were double digit increases to all major expense lines of
the Income Statement, yet Newmont’s increased revenue and lower COGS helped alleviate these pressures
allowing Net Income to grow by 23.55% over the last 5 years. As the firm moves into leasing options, as
described by recent conference calls, operating leverage will decrease, adversely affecting gross margins.
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
4
The rise in gold prices help keep Newmont’s gross profits will remain steady over the next five
years; although, large increases to debt levels will lower net margins drastically starting in 2013. Doubling
the firm’s debt load should lower their weighted average cost of capital (WACC_ considerably; however,
because of the vast amount of debentures warranted, rising costs to equity and debt leave Newmont’s WACC
nearly identical to their pre-debt issuing capital structure. Bondholders will require higher returns due to
increasing risks. Re-levering the firm’s Beta using the Hamada equation increases it drastically—feeding
directly into a higher cost of equity using the Capital Asset Pricing Model. Return on Equity is Newmont’s
strongest profitability ratio, and management often interprets this as an indicator for strong investment
potential. Return on Equity (ROE) will continue to increase through 2017; unfortunately, DuPont analysis
indicates this is due to increased financial leverage. Assuming the stock price remains in close proximity of
the intrinsic value, NEM’s dividend yield should increase to over 3.1%, above its major competitors, and a
full percentage over the S&P 500’s historical average. The firm’s cash conversion cycle has nearly tripled
over the four years from increases to inventory conversion rates, and will remain well above 110 days
through 2017—exceeding management’s predictions from 2007.
Liquidity & Solvency
Net working capital decreases has directly affected Newmont’s Current (1.42) and Quick Ratios
(.63); they have fallen to well below the Industry average, and are major concerns to their short-term
liquidity. In the last year the CR and QR have both fallen 46.3% and 54.3%, respectively. As previously
stated the 200% increase to short-term debt countered the large increase to short-term investments;
investments that should decrease in the near future as early as 2013. Liquidity will remain problematic for
NMC; portions of principles due and interest payments will increase directly with financial leverage—further
depressing Newmont’s NWC.
Newmont’s working capital has remained relatively strong through leasing options and a vast
assortment of low-wage labor. As NEM’s financial leverage increases, current portions of long term debt
will grow—placing downward pressure on quick and current ratios. Sustainable growth for the firm NEM
hovers close to 16%, nearly half of the firm’s projected growth. Management holds a strong bias for debt,
and will nearly double its debt load in hopes of achieving their projected growth of 30%. Debt to Equity will
have a near 1-to-1 relationship—substantially increasing bankruptcy risks. NEM’s has repaid debt in recent
years; however, management has failed to capture current rates, and should face higher rates after the 2012
election. Newmont’s Altman Z has remained below two since the institution of management in 2007, and
will continue to experience downward pressure due to lower working capital and significantly higher long-
term liabilities.
Press Releases
Newmont Suspends Construction at the Conga Project in Agreement with the Government of Peru
On November 30, 2011 Newmont Mining Corporation released the information that they were
going to suspend the construction on the Conga project in Peru in agreement with the Peruvian Government.
The suspension of the project was for the safety of workers and the surrounding communities. On-and-off
work stoppages coupled with ongoing protests. In 2010, after extensive review by the government of Peru,
the Conga Environmental Impact Assessment was approved.
This information about the Operations at the Conga Mine in Peru being suspended affects our
results because this has an impacted on the quantity of gold we expect to be mined, which also affects how
much gold is going to be produced. (Newmont Mining Corporation Press Release 2011)
Newmont Provides Details on Conga’s Environmental Assessment
On December 8, 2011 Newmont released more information about the Conga mine operations and
the details of the Environmental Impact Assessment that took place in October 2010. The Environmental
Impact Assessment was reviewed by 12 agencies before it was approved by the Ministry of Energy and
Mines in Peru. Also these operations were approved by approximately 13,000 people from surrounding
neighborhoods communities of the mine as well as the Cajamarca region and other surrounding areas, as a
part of the public engagement process. Congas water protection plan included;
Four water storage reservoirs that would replace four lakes that were impacted on the Conga
property
Water reservoirs had the capacity to store more than double the water used in the lakes
Water would be available downstream to users year around
The water storage reservoirs that would replace the four lakes on the conga property would provide
year around supply of water to famers who currently face unknown water supplies.
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
5
The plan for the Conga’s Environmental management includes the protection of water quality during the
construction and operation of the mine. This affects our Newmont because it will increase the cost for
operations for the Conga Mine. (Newmont Mining Corporation Press Release 2011)
Investment Risk Numerous diverse and complex factors can and may affect the firm’s success as a going concern.
The following describes the most prevalent risks that may be detrimental to Newmont’s financial position and
future growth.
Gold Risk
Newmont’s future success is heavily dependent on the price of gold. A substantial amount of
decline in the gold or copper prices would hurt Newmont’s profit margin. The price of gold is also at risk to
speculative short positions. The strength of the U.S. dollar also plays an important role in gold price. Gold
prices are exposed to the expectations of the future rate of inflation, and interest rates. Economic factors also
play into the risk of gold. If demand for gold decreases for the industrial sector, jewelry or investments the
price of gold will also suffer. Contrary, if demand decrease price of gold will decrease (Newmont Mining).
These price risks can potentially harm Newmont. A significant decline from the price in gold would
delay the development of new projects and decrease the funds available for exploration. If this is the case
Newmont will be unable to replace the gold and copper reserves as they become depleted (Newmont
Mining). Gold has an intrinsic value that cannot be accurately forecasted with certainty using basic economic
principles. The price of gold is the willingness to pay by investors. Therefore, gold is safer and is less risky
than the mining industry. Once the additional business and financial risks associated with mining are added,
the potential downside is greater than is with gold its self.
Depleting Reserves Newmont Mining projects that within the next five years they will have depleted 1.6 million ounces
of gold that will need to be replaced if they are going to sustain their current position. There is several ways
in which Newmont can expand their reserves including: expanding their current mining projects, locating
new deposits, or acquiring interests in reserves from a third party. Expanding their current mining positions
can increase the cost per ounce of gold mined. However, in the long term this does not save them from
depleting reserves. Exploration is highly speculative and involves many risks. It is frequently unproductive,
and their future exploration projects may not result in mining operations (Newmont Mining). Acquisitions of
proven reserves typically has demonstrated to be highly competitive. This results in many uncertain factors
that can have an impact on Newmont’s current and future financial statements.
Increases in Operating Costs:
A portion of Newmont’s operating cost is subject to the price of the input commodities. Therefore
these increases in costs can have an effect on their operating cash flow and profitability. Estimates relating to
new development projects are uncertain and we may incur higher costs and lower economic returns than
estimated (Newmont Mining). Mining projects require several years to develop before actual extraction is
possible. The shear logistics of developing mining projects often experience unexpected problems, delays,
and costs that can negatively affect Newmont’s current operation forecasts. Specific factors that could
negatively affect the forecasted profitability of Newmont’s projects: changes in tonnage, grades,
metallurgical characters of the ore being mined; higher input commodity and labor costs; the quality of the
data on engineering assumptions; adverse geological conditions; availability of an adequate labor force
and supply and cost of water and power; fluctuations in inflation and exchange rates; availability of
financing; delays in obtaining environmental or other government permits or changes in laws and
regulations related to those permits; weather or severe climate impacts; and potential delays relating to
social and community issues (Newmont Mining). Any type of shortage in the future will result in increasing
input costs.
Newmont Mining may experience increased costs or losses resulting from the hazards and
uncertainties associated with mining (Newmont Mining). Exploration of natural resources is extremely
uncertain because of the risks and hazards, and resides out of the control of management. Environmental
hazards that increase the uncertainty of Newmont’s operations include; discharge of metals, pollutants and or
hazardous chemicals (Newmont Mining). Also detrimental industrial accidents such as: underground fires
and floods; ground water conditions; personal injuries and death to employees and to third parties from
mining operations increase the risk of uncertainty for Newmont (Newmont Mining, 2011).
Newmont Mining requires substantial capital investment. Future projects needing additional funds
will are the Akyem project in Ghana, the Conga project in Peru, Hope Bay project in Canada, and other
exploration projects. Newmont’s currently plans on issuing $4 billion in debt in order to finance future
growth, and places additional risks of a credit down grade from BBB+ increases.
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
6
Environmental Risks
The environmental risks Newmont operations have similar environmental risks when compared to
other mining competitors. The gold mining companies are required to prove that the marginal benefits to the
locals outweigh the marginal costs in which they operate (which are heavily considered when requesting
permits). Marginal costs include such factors as; mine closures and remediation cost for environmental
liabilities may exceed the provisions Newmont has made. Regulations and pending legislation governing
issues involving climate change could result in increased operating costs which could have a material
adverse effect on Newmont’s business (Newmont Mining, 2011).
Political Risks
Newmont is exposed to an array of political risks: changes in taxes, royalties, and claims; the
expropriation or nationalization of properties; foreign exchange controls; import and export regulations;
civil strife’s, acts of war, and terrorism (Newmont Mining, 2011). There are political risks that pertain to
specific mining operations in Batu Hijau and Peru. Since 1997 Indonesia has undergone significant changes
in their financial positioning with financial crises taking pace and the devaluation of their currency,
outbreaks of political and religious violence and acts of terrorism. In 2009, Indonesia also had
parliamentary elections which now have a more negative prospect on mining, and have heightened these
risks (Newmont Mining, 2011).
Risks of Selling Newmont
Unanticipated factors that positively affect Newmont’s revenue could present a risk of selling
Newmont. Unexpected increases or findings in gold reserves will increase Newmont’s levels. The probability
of Newmont’s cost applicable to sells significantly decreasing is considerably low. New technology,
improved mining techniques, or a cheaper labor force could all lead to better margins and a higher intrinsic
value. There are no dividends paid for investing directly into gold, and investors will lose opportunity for a
small gain during a period were the price is flat.
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
7
Appendix Figure A: Income Statement
Note: Figures from Capital IQ
2011 2012 2013 2014 2015 2016 2017
Revenue 10,111.3 8,133.5 9,429.4 9,547.5 11,215.6 12,674.5 14,629.8
Income from Gold 7432.9 8601.4 8728.0 10225.7 11550.3 13369.4
Income from Copper 700.6 827.9 819.5 989.9 1124.2 1260.4
COGS 4,064.5 3,689.9 4,277.7 4,331.3 5,088.1 5,749.9 6,637.0
Reclamation and Remediation 57.0 - - - - - -
Cost Applicable to sales 3,767.5 3,689.9 4,277.7 4,331.3 5,088.1 5,749.9 6,637.0
Gross Profit 6,046.9 4,443.6 5,151.6 5,216.2 6,127.5 6,924.5 7,992.8
SGA 203.2 187.8 217.8 220.5 259.0 292.7 337.9
Cost of Drilling/Exploration 331.9 248.4 288.0 291.6 342.6 387.2 446.9
R&D 300.9 174.2 202.0 204.5 240.3 271.5 313.4
Depreciation Amortization
Amortization of intangibles 1,054.1 989.4 1,694.2 1,113.7 1,253.5 1,410.8 1,587.9
Oil, Mineral Impairment
Other 276.8 309.4 358.7 363.2 426.7 482.2 556.5
Total Other 2,166.9 1,909.4 2,760.7 2,193.6 2,522.1 2,844.4 3,242.6
Operating Income 3,879.9 2,534.3 2,390.9 3,022.6 3,605.4 4,080.2 4,750.2
Net Interest Expense (244.0) (288.5) (433.0) (518.6) (518.6) (518.6) (275.0)
Including Unusual Items (other) (12.63) 35.45 33.44 42.28 50.43 57.07 66.45
EBT 3,623.3 2,281.3 1,991.4 2,546.2 3,137.3 3,618.6 4,541.7
Tax 1,079.88 655.07 571.82 731.15 900.87 1,039.09 1,304.14
NOPAT 2,543.4 1,626.2 1,419.6 1,815.1 2,236.4 2,579.5 3,237.5
Discontinued Operations (136.0) - - - - - -
Income for minority (675.0) (501.13) (437.44) (559.33) (689.16) (794.90) (997.66)
Net Income 1,732.4 1,125.1 944.5 1,255.8 1,547.2 1,784.6 2,239.9
Shares Outstanding 488.21 488.21 488.21 488.21 488.21 488.21 488.2
Dividend Per Share 1.4 1.4 1.7 1.7 1.7 2 2
Total Dividend -683.5 -683.5 -830.0 -830.0 -830.0 -976.4 -976.4
Retained Earnings 1,048.9 441.6 114.5 425.8 717.3 808.2 1,263.5
Income Statement (Millions of Dollars)
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
8
Appendix Figure B: Balance Sheet
Note: Figures from Capital IQ
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
9
Appendix Figure C: Statement of Cash Flows
Note: Figures from Capital IQ
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Net Income 791.0 (1,895.0) 831.0 1,297.0 2,277.0 2,114.3 2,125.4 1,937.6 2,066.5 2,368.1 2,412.6 2,662.2
Depreciation and Amortization 619.0 720.0 880.0 865.0 1,010.0 1,035.0 1,022.6 995.1 1,115.8 1,310.2 1,385.0 1,500.0
Non-Operating Activities 493.0 1,351.0 125.0 79.0 - 51.4 51.7 47.1 50.3 57.6 58.7 64.8
Other Operating Activities (331.0) 1,218.0 84.0 933.0 634.0 913.4 918.2 837.1 892.7 1,023.1 1,042.3 1,150.1
Non-cash Accounts (347.0) (729.0) (627.0) (227.0) (754.0) (536.8) (574.8) (543.9) (527.3) (587.4) (554.0) (557.5)
Cash from Operations 1,225.0 665.0 1,293.0 2,947.0 3,167.0 3,577.4 3,543.2 3,273.0 3,598.0 4,171.6 4,344.6 4,819.6
Capital Expenditures (1,537.0) (1,669.0) (1,870.0) (1,769.0) (1,402.0) (2,800.0) (1,841.2) (1,891.9) (1,929.0) (1,938.8) (1,967.1) (2,061.3)
Cash Acquisitions (196.0) (953.0) (325.0) (1,007.0) (4.0) (2,295.0) (196.0) (196.0) (196.0) (196.0) (196.0) (196.0)
Other Investing Activities 929.0 1,509.0 38.0 (5.0) (13.0) (13.0) (13.0) (13.0) (13.0) (13.0) (13.0) (13.0)
Cash From Investing (804.0) (1,113.0) (2,157.0) (2,781.0) (1,419.0) (5,108.0) (2,050.2) (2,100.9) (2,138.0) (2,147.8) (2,176.1) (2,270.3)
Total Debt Issued 198.0 3,001.0 5,078.0 4,299.0 - 775.0 1,500.0 2,500.0
Total Debt Repaid (111.0) (2,036.0) (4,483.0) (2,731.0) (430.0) (1,140.0) (518.0) (575.0) (575.0)
Issuance of Common Stock 78.0 51.0 29.0 1,278.0 60.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0
Common Dividends Paid (180.0) (181.0) (182.0) (196.0) (246.0) (683.5) (683.5) (830.0) (830.0) (830.0) (976.4) (976.4)
Other Financing Activities (325.0) (370.0) (319.0) (80.0) (299.0) (456.4) (472.3) (589.9) (578.6) (635.1) (680.9) (668.3)
Cash From Financing (340.0) 465.0 123.0 2,570.0 (915.0) (1,466.9) (135.8) 1,118.1 (1,945.5) (1,427.0) (1,619.3) (2,181.7)
Net Change in Cash 81.0 17.0 (741.0) 2,736.0 833.0 (2,997.4) 1,357.3 2,290.3 (485.6) 596.7 549.1 367.5
Statement of Cash Flows
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
10
Appendix Figure D: Assumptions in Income Statement
Figure E: Assumptions for Quantity Mined
5-yr Average
Cost Applicble to Sale 5%
Selling and General Admin Expenses/Revenue 2%
Cost of Drilling & Exploration/Revenue 3%
Research and Developement/Revenue 2%
Taxes/Earning Before Taxes 29%
Depreciation & Amortization (% of FA) 6%
Other/Revenue 4%
Unusual items/ Operating income 2%
Income for Minority (% of NOPAT) 31%
Assumptions
2011 2010 2009
Gold/Ounce 580 485 411
Copper/Pound 1.38 0.80 0.64
2010-11 2009-10
CAS of Gold 20% 18%
CAS of Copper 73% 25%
Increase as Percent
Costs Applicable to Sale
Gold Price (1/11/12) 1600.00 1647.34 1662.70 1683.28 1712.57 1746.56 1793.61
Copper Price (1/11/12) 4.00 3.56 3.57 3.54 3.47 3.42 3.39
Gold 6.30 6.10 5.78 6.47 7.45 7.68 8.08
Copper 210.00 210.00 247.00 247.00 304.00 351.00 395.00
CAS Per Ounce of Gold 580.00 609.00 639.45 671.42 704.99 740.24 777.26
CAS Per Pound of Copper 1.38 1.45 1.52 1.60 1.68 1.76 1.85
Estimated Quantity Mined Per Year
Quantity Mined
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
11
Appendix
Figure F: Assumptions for Market Value
Total Reserve 2011 2012 2013 2014 2015 2016 2017
Gold (Ounce) 93,500,000.00 6,300,000.00 6,095,302.00 5,783,193.44 6,474,714.00 7,454,876.00 7,680,000.00 8,075,756.00
Copper (Pound) 9,400,000,000.00 210,000,000.00 210,000,000.00 247,000,000.00 247,000,000.00 304,000,000.00 351,000,000.00 395,000,000.00
Company Value 6,888,000,000.00 6,721,549,871.76 6,407,324,472.66 6,924,924,503.85 7,926,060,168.96 8,198,000,806.80 8,667,081,081.81
2018 2019 2020 2021 2022 2023 2024
Gold (Ounce) 8,075,756.00 8,075,756.00 8,075,756.00 8,075,756.00 8,075,756.00 5,257,378.57
Copper (Pound) 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00
Company Value 8,829,494,667.61 9,182,674,454.31 9,549,981,432.48 9,931,980,689.78 10,329,259,917.37 7,254,437,201.99 777,881,464.64
2025 2026 2027 2028 2029 2030 2031
Gold (Ounce)
Copper (Pound) 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00
Company Value 808,996,723.23 841,356,592.16 875,010,855.84 910,011,290.08 946,411,741.68 984,268,211.35 1,023,638,939.80
2032 2033 2034 2035 2036
Gold (Ounce)
Copper (Pound) 395,000,000.00 395,000,000.00 395,000,000.00 395,000,000.00 326,000,000.00
Company Value 1,064,584,497.39 1,107,167,877.29 1,151,454,592.38 1,197,512,776.08 1,027,860,080.00
Market Value Based on Reserves
Inflation 4%
WACC 8.80%
Shares outstanding 488,210,000.00
Assumptions
Net present value $62,247,849,102.65
Liabilities 13,953,922,682.29$
Price/Share 98.92039577
Calculations
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
12
Appendix
Figure G: Relative Valuation
P/E
P/E Current 14.06 P/E Current 14.27
5yr P/E Average 44.74 5yr P/E Average 38.98
Ticker Ticker
5yr P/E Average 13.38 5yr P/E Average 13.38
Estimated EPS 4.35 Estimated EPS 6.11
Market Relative 0.30 Market Relative 0.34
(P/E)est 4.20 (P/E)est 4.90
Relative Value 18.31 Relative Value 29.93
Standard Deviation 8.22
Average Relative 24.12
P/CF
P/CF Current 10.28 P/CF Current 10.47
5yr P/CF Average 43.74 5yr P/CF Average 13.37
Ticker Ticker
5yr P/CF Average 17.64 5yr P/CF Average 17.64
Estimated CFPS 9.17 Estimated CFPS 9.17
Market Relative 0.40 Market Relative 1.32
(P/CF)est 4.15 (P/CF)est 13.81
Relative Value 38.02 Relative Value 126.67
Standard Deviation 62.69
Average Relative 82.35
Average Value of FCF and Relative Valuation
53.23
Industry Sector
Industry Sector
NEM
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
13
Appendix
Figure H: Free Cash Flow Valuation
2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal
Net Income 2114.3 2125.4 1937.6 2066.5 2368.1 2412.6 2662.2
Add: Dep. / Amorization 1035.0 1022.6 995.1 1115.8 1310.2 1385.0 1500.0
Add: Interest(1-Tax rate) 173.9 205.6 308.6 369.7 369.7 369.7 196.0
Less: Capital Expenditures 2800.0 1841.2 1891.9 1929.0 1938.8 1967.1 2061.3
Less: Changes in Working Capital (68.6) (41.0) (77.0) 212.8 349.9 115.1 193.5
Free Cash Flow to the Firm 591.9 1553.5 1426.5 1410.1 1759.3 2085.0 2103.3 37336.89751
39440.2
WACC 8.80%
Sustainable Growth 3% Expected Value $28,231.61
Shares Outstanding 488.21 Debt 5861.00
Price $45.82 Equity $22,370.61
CAPM 9.49%
rRF = 1.96%
β = 0.828
rM = 11%
Bu 0.762
BL 0.828
Tax rate 29%
Market value of equity 30015
Long Term Debt 3659
Relevered Beta
Bu 0.762
Long-term Debt 7659
Taxes 29%
Stock Price (1/09/12) 61.48
Shares Outstanding 488.21
Market value of equity 30015
Brelevered 0.900370002
CAPM 10.14%
WACC 8.80%
Long-term Debt 7659
Market value of equity 30015
Tax rate 29%
Cost of Debt 5%
Cost of Equity 10.14%
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
14
Appendix
Figure I: Ratio Analysis
Price Per Share Weights
FCFF 45.82$ 0.4
Relative Valuation 53.23$ 0.4
Total Reserves 98.92$ 0.2
Target Price 59.41$
Fair Value Estimation for NEM
CFA Society of Colorado Investment Research Challenge January 13, 2012
Student Research
15
References
Newmont Mining Corporation. (2011, November 30). Newmont Suspends Construction at the Conga Project in Agreement
with the Government of Peru. PRNewswire via COMTEX. Retrieved from http://www.newmont.com/our-
investors/releases//
Newmont Mining Corporation. (n.d.). Newmont Mining Corporation 2010 Annual Report .
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.