When I last wrote on Newmont Mining (NEM, Financial), I was of the opinion that investors should wait for the Fed meeting outcome before considering exposure to the stock. The Fed increased interest rates (contrary to my expectation), and the markets reacted calmly to this largely discounted news. With the rate hike news discounted, the potential impact on individual stocks (and other asset classes) has also been largely discounted, and this explains why gold did not react very negatively to the news.
As gold trades at depressed levels, this is a good opportunity for long-term investors to consider exposure to gold and gold mining stocks. I still remain bullish on gold for the long term, and my view is backed by the following factors:
- The real interest rate still remains negative in the U.S. Further, euro area rates are likely to remain negative. With sluggish global growth, expansionary monetary policies are likely to continue in some way or the other. This is positive for gold in the long term.
- Rising geopolitical tensions are major concerns, and gold has done well in times of conflicts. More investors probably will buy gold as a store of value in uncertain times and this is likely to prop up demand.
- While gold demand has fallen from ETSs, central bankers globally continue to add gold as a part of their reserves diversification. The biggest demand is likely to come from Russia, China and India. With gold holdings by China still significantly low as percentage of total reserves, demand is likely to continue.
- In times of expansionary monetary policies, inflation always follows with a lag. Since the world is still emerging from one of the worst crises in decades, inflation is low. However, significantly higher inflation is to be expected in the next five to 10 years.
Considering these factors, gold is likely to remain an attractive investment for the long term. Once the precious metal starts trending higher, gold mining stocks will also benefit.
Among gold mining stocks, I like Newmont Mining, and the stock can outperform peers once gold trends higher. The key factors that make me bullish on Newmont Mining are as follows:
- For the next three to five years, Newmont Mining expects all-in-sustaining-cost to be in the range of $900 to $1,000 per ounce. This is among the attractive AISC in the industry, and the real benefit for investors will be visible when gold starts trending higher.
- The company’s debt to EBITDA has declined to 2.3 as of 3Q15 as compared to 3.3 as of FY14. During the same period, the company’s EBIT interest coverage has increased to 4.7 from 2.2. With non-core asset sales, cost control, reduced investment and continued decline in AISC, Newmont Mining has been successful in improving the company’s financial health even when industry sentiments remain weak.
- As compared to Barrick Gold (ABX, Financial), a majority of the company’s assets are in producing stage as compared to Brownfield or Greenfield expansion. I am also positive on Barrick Gold, but a higher percentage of producing assets would imply lower capital expenditure when gold prices are low. When gold trends higher, Newmont Mining has enough financial flexibility for Greenfield expansion or inorganic growth.
Considering these key factors and a stable outlook for 2016, Newmont Mining is attractive at current levels. It is also important to mention here that Newmont Mining is currently trading at TTM EV/EBITDA of 3.85 and price-to-book valuation of 0.98. It is important to understand that Newmont Mining might not surge soon, but these valuations will not be available once gold starts trending higher. It therefore makes sense to gradually accumulate the stock at current levels or on any correction.
Disclosure: No positions in the stocks
