The depression in gold prices in 2015 resulted in gold mining stocks declining and remaining largely sideways at lower levels.
However, the outlook has completely changed in 2016 with gold trending higher and gold mining companies surging. Newmont Mining (NEM, Financial) has always been my preferred stock among gold mining companies, and the stock has surged by 35% for YTD16. I expect further upside for the stock.
Here are some factors that point to gold trending higher through 2016. If gold trends higher, sentiments for Newmont Mining will remain bullish considering the point that the company is strong from a fundamental perspective and from an asset quality perspective.
The reasons to be bullish on gold are:
- Janet Yellen commented Wednesday that future rate decisions will depend on the market turmoil and level of economic activity. With equities remaining weak and with the global economy facing the danger of recession, the Federal Reserve System is unlikely to increase rates through 2016. The Fed could cut rates in the second half of 2016 if the economic scenario shows no improvement. Considering this outlook, the dollar is likely to weaken in the coming months, and this will be positive for gold.
- Central banks have been accumulating gold, and there has been an increasing currency diversification of reserves in emerging Asia. Gold is one of the honest currencies, and China’s gold as a percentage of total reserves is still low. I expect increased central bank buying of gold through 2016 to be positive for the precious metal. Even for retail investors, I expect the demand for physical gold and ETF to increase. Uncertainty related to the economic condition is favorable for gold.
- Geopolitical tensions have escalated in the Middle East, and tensions are likely to increase. Saudi Arabia and allies are considering troops on the ground in Syria, and this is just one factor that can further escalate tensions. A high level of geopolitical tensions is positive for gold as investors seek refuge in safe assets.
Considering these factors and considering that gold has traded sideways for a prolonged period, a bottom is in place for the precious metal and the current upside is likely to sustain. While I don’t expect gold to retest all-time highs in 2016, gold can be meaningfully higher from current levels.
Coming to Newmont Mining, even after a 35% increase in YTD16, the stock still trades at TTM EV/EBITDA valuation of 4.8. Therefore, the stock valuation is the first factor to consider exposure to Newmont Mining. It is important to note that gold mining stocks were depressed in 2015 and a 35% upside in YTD16 might seem significant but is not significant from a valuation upside potential perspective.
Specific to Newmont Mining assets, the point that I like is that the company expects all-in-sustaining cost of $900 million to $960 million for 2016 and $850 million to $950 million for 2017. With gold above $1,200 per ounce and likely to trend higher in the coming months, I expect strong results (robust cash flows) and dividend distribution to follow. The stock has been discounting this factor and, considering the valuations, will continue to discount the potential EBITDA margin expansion and dividend increase.
The company’s free cash flow is another point that will continue to trigger stock upside in the foreseeable future. For the first nine months of 2015, Newmont Mining generated $941 million in free cash flow, and I expect the company to remain FCF positive in 2016. This will allow the company to reduce debt besides investments related to sustaining and growth.
In conclusion, Newmont Mining has done well in challenging times from cost control perspective along with efficient liquidity and debt management through sale of noncore assets. With gold trending higher, the company is well positioned to benefit, and further gains are expected for shareholders in 2016.
Disclosure: No positions in the stock.
