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Can Newmont’s Free Cash Flow Lead to a Doubled Dividend?

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Free cash flow

The generation of FCF (free cash flow) is important for gold mining companies (RING) (GDX) because it helps them invest in projects that can drive long-term value, optimize their financial leverage, and provide shareholder returns. Gold mining companies are constantly trying to reduce their costs and capital expenditures in order to generate FCF. Let’s examine how Newmont Mining (NEM) was able to generate cash in this market environment in 2Q16.

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Significant FCF generation

Newmont generated positive free cash flow of $486 million in 2Q16. This represents a four-fold increase as compared to the same period last year. At the beginning of 2016, the company expected the first two quarters of the year to be FCF-neutral to cash consuming, but higher gold prices and Newmont’s high leverage to prices led to FCF growth.

Its FCF in 2Q16 also benefitted from $111 million in corporate tax refunds and a ~$100-million reduction in accounts receivable.

Dividend upside

Newmont Mining’s management also stated during its 2Q16 conference call that the increase in FCF should allow it to self-fund its best projects, pay dividends, and pay down debt. The company said that while it is maintaining its gold price-linked dividend of $0.025 per quarter, if gold prices remain at current levels, its dividends could double in the third quarter of 2016. The company plans to reassess its dividend payout later in the year.

Meanwhile, Kinross Gold (KGC) has also been generating decent FCFs as of 2015, but its ability to generate free cash flow is expected to come under pressure going forward due to limited growth options. Yamana Gold’s (AUY) cash flow generation is expected to accelerate going forward as production starts in high-grade areas.

In the next part, we’ll look at what analysts are estimating for Newmont Mining following the company’s 2Q16 results.

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