Newmont's Variable Payout Still Supported at Current Gold Prices Despite Rising Mining Costs

Although historically viewed as an inflation hedge, gold prices are essentially flat compared to last year despite many inflationary metrics sitting near four-decade highs. 

As a result, shares of the world's largest gold producer, Newmont, have dropped nearly 50% from highs set in April as profits have been squeezed by rising mining costs, up around 25% this year, as the company is unable to pass cost inflation along to customers.

Instead, the precious metals miner is at the mercy of the commodities market to set gold prices. Until gold prices rise or mining costs go down, Newmont's earnings will continue to get squeezed.

That said, Newmont's all-in sustaining costs (AISC), a mining metric similar to breakeven price, is $1,150 per ounce, or around 35% below current gold prices. This metric suggests Newmont has a healthy margin of safety to remain profitable in the current environment, even if margins face additional pressure.

Over the past decade, gold prices have dropped below the firm's current AISC just a few times and only briefly.

Source: Goldprice.orgWhile Newmont cannot control gold prices, as the world's biggest gold producer, the miner is better positioned than most to manage expenses in this challenging environment. 

In fact, S&P recently upgraded Newmont's credit rating to BBB+ despite cost headwinds, citing the firm's healthy balance sheet, financial discipline, operational efficiency, and diversified mining footprint in lower-risk countries.

Although Newmont's size positions it better than most to expand production and manage costs, the fact that the miner's profits depend entirely on a single commodity whose price is dictated by external forces makes the firm a less predictable investment.

And while gold has been deemed a store of value for thousands of years, periodic bouts of volatility have caused many smaller gold miners to go bankrupt.

To better manage the inevitable periods of disruption, Newmont maintains low debt levels and has adopted a variable-rate dividend policy tied to the price of gold.

Currently, Newmont pays a base quarterly dividend of $0.25 per share plus a variable component, presently $0.30 per share, that seeks to distribute between 40% to 60% of incremental cash flow generated from gold prices above $1,200 per ounce.

This 40% to 60% range gives management some discretion with the payout, but overall, investors can expect the dividend to trend in line with gold prices over longer periods. Assuming the price of gold remains near its current level of $1,800 per ounce, we expect Newmont to maintain but not grow its current payout.

Given the dividend's close relationship to gold prices, which will inevitably fluctuate over time, we are reaffirming Newmont's Borderline Safe Dividend Safety Score.

Investors comfortable with this volatility and wanting exposure to gold while generating income may find Newmont an interesting option. While the firm operates in a speculative market, the miner's size and financial conservatism can provide more stability than most operators in the space.

We will continue to monitor Newmont's operating environment and provide updates if needed.