Newmont Mining Corp's Priorities Mean Less Cash Returned to Shareholders

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

When reporting its fourth-quarter results, Newmont Mining (NYSE: NEM  ) announced its strategic capital allocation priorities. The company plans to maintain financial flexibility, invest in top development projects, and return capital to shareholders. What's important is that those priorities were named in order of significance. Returning capital to shareholders is in last place, and Newmont's dividend policy highlights this fact.

Dividend should decrease with current gold prices
The dividend policy links the distribution to gold prices. The company starts paying a $0.10 per-share dividend at a $1,200 per-ounce gold price and raises it to $0.20 per share at $1,300-$1,400 per ounce of gold. Going further, every $100 upside in the gold price increases the dividend by $0.20 per share.

For all of January and half of February, gold prices were below $1,200 per ounce. If there's no major price upside ahead, chances are that the average gold price for the quarter will remain below $1,300. This would lead to a $0.10 per-share dividend, a hefty 50% cut from the $0.20 per-share dividend that shareholders received last time.

Will Newmont be able to reduce its debt?
When Newmont states that it wants to maintain financial flexibility, it is primarily talking about reducing its $6.1 billion in debt. This is a significant sum to deal with. In its latest effort to push the debt maturities further into the future, Newmont secured a five-year term loan of $575 million. This loan refinances existing debt that comes due in July.

Newmont's operational cash flow in 2013 was $1.6 billion. If we look into 2014, it's hard to predict that this figure will increase substantially. Yes, Newmont has recently become more cost effective, but gold prices for the most part of 2013 were higher than they are now.

Newmont stated that it did not believe that using equity to pay off debt was a sound business practice and added that it had no intention of doing so. In comparison, Barrick Gold (NYSE: ABX  ) diluted its shares by 16% in November to reduce its debt load. Barrick Gold reduced the value of maturities for the next four years to $1 billion, but the overall debt remains high at $12.9 billion. The offering did not progress at a fast pace, but Barrick was finally able to sell its shares.

As Newmont wants to reduce its debt level but doesn't want to issue equity, it will have to do so with the help of its free cash flow. Capital expenditures this year are estimated between $1.3 billion and $1.4 billion. They will decline to $1 billion-$1.1 billion in 2015 and to $900 million-$1 billion in 2016. Does the company have enough free cash to reduce its debt and fund growth projects after we subtract capital spending from operational cash flow? Only if gold prices rise above current levels.

Problems in Indonesia continue
Another irritating fact is that Indonesia tax negotiations seem to lead nowhere. The country has imposed a progressive tax on copper-concentrate exports. This tax turns into a complete ban in 2017. Newmont has argued that this tax violates its existing contract of work, but to no avail.

As a result, Newmont must deliver its production to the country's only smelter at Gresik. Newmont stated that this smelter resumed operation after a maintenance shutdown, and that it expects to ship its concentrate to Gresik as soon as possible. Currently, half of production from Newmont's Batu Hijau mine could be placed at Gresik.

Several companies managed to receive the right to export concentrates from Indonesia, but neither Newmont nor Freeport-McMoRan Copper & Gold (NYSE: FCX  ) were among them. For Freeport-McMoRan, which operates a huge Grasberg mine deposit in the country, Indonesian operations are very important. Just like Newmont, Freeport plans to negotiate its way through the crisis, but it has had no success on this front so far.

Bottom line
Newmont's shareholders will receive less cash if current gold prices do not improve. What's more, the company's aim to reduce debt and fund several development projects does not combine well with returning cash to shareholders in the current environment. If you are an income-oriented investor, Newmont is probably not your choice.

Newmont may not be right for income investors, but these might be
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor’s portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2850398, ~/Articles/ArticleHandler.aspx, 9/3/2015 5:39:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

Today's Market

updated Moments ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:01 PM
ABX $6.48 Down -0.21 -3.14%
Barrick Gold Corp. CAPS Rating: ***
FCX $10.13 Up +0.23 +2.32%
Freeport-McMoRan C… CAPS Rating: ****
NEM $16.19 Down -0.02 -0.12%
Newmont Mining Cor… CAPS Rating: ***