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

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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


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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.


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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.


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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.


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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.


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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)


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Appendix Figure B: Balance Sheet



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Appendix Figure C: Statement of Cash Flows


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


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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


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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


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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


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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


Brelevered 0.900370002

CAPM 10.14%

WACC 8.80%

Long-term Debt 7659


Tax rate 29%

Cost of Debt 5%

Cost of Equity 10.14%


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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


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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.


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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.

the cfa institute research challenge newmont …newmont mining corporation is a sell at their...

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