Is Newmont (NEM) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Unraveling the Complexity of Newmont's Valuation and Potential Risks

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Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Newmont Corp (NEM, Financial). The stock, which is currently priced at $38.74, recorded a loss of 1.69% in a day and a 3-month decrease of 6.88%. The stock's fair valuation is $67.41, as indicated by its GF Value.

Understanding GF Value

The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.


Investment Risks: The Value Trap

However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Newmont should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.46. These indicators suggest that Newmont, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.

Decoding the Altman Z-Score

Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.

Company Snapshot: Newmont Corp (NEM, Financial)

As the world's largest gold miner, Newmont produced about 6 million attributable ounces of gold in 2022, accounting for about 5% of global mined output. The company also produced 1.3 million attributable gold equivalent ounces from the sale of byproducts, including copper, silver, zinc, and lead in 2022. It had about two decades of gold reserves along with significant byproduct reserves at the end of 2022. After buying Goldcorp in 2019 and combining its Nevada mines in a joint venture with competitor Barrick later that year, Newmont's portfolio includes 12 wholly owned mines and interests in two joint ventures in the Americas, Africa, and Australia.


Newmont's Low Altman Z-Score: A Breakdown of Key Drivers

A dissection of Newmont's Altman Z-score reveals Newmont's financial health may be weak, suggesting possible financial distress:

The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Newmont's historical data, 2021: 0.10; 2022: 0.08; 2023: 0.02, we observe a declining trend in this ratio. This downward movement indicates Newmont's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.

The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Newmont's EBIT to Total Assets ratio from historical data (2021: 0.09; 2022: 0.02; 2023: 0.00) indicates a descending trend. This reduction suggests that Newmont might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.

Conclusion: Navigating the Value Trap

In conclusion, despite Newmont's seemingly attractive valuation, the company's low Altman Z-Score and declining financial ratios suggest potential financial distress. This indicates that Newmont may be a value trap, underlining the importance of thorough due diligence in investment decision-making.

GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .


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