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Newmont Revises Dividend Policy on Higher Gold Prices, Strong Free Cash Flow

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Nov. 20 2020, Updated 2:10 p.m. ET

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.

Now let’s examine how Newmont Mining (NEM) was able to generate cash in this market environment in 3Q16.

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Significant FCF generation

Newmont generated positive free cash flow of $240 million in 3Q16, which represents a rise of 51% 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.

Newmont’s FCF in 2Q16 was $486 million, but it 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 3Q16 earnings that it is revising its gold-price-linked dividend policy. The new policy could potentially double the payout levels starting in the first quarter of 2017. The company also doubled its dividend for the fourth quarter from $0.025 to $0.05. During the 3Q16 call, the management attributed this change to higher gold prices.

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. Barrick Gold (ABX) is generating significant FCF due to its lower costs.

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