Gold prices have shot up recently. On the final Tuesday of November, the yellow metal enjoyed one of its best sessions in months while the widely followed VanEck Vectors Gold Miners ETF (GDX, Financial) put in its best single-day performance since July. In my technical eyes, a key move was made on the chart, too. Notice in the chart below that the exchange-traded fund rose through the $30 level, triggering an upside target to nearly $35.
The largest weight in the ETF is Newmont Corp. (NEM, Financial). It is important to pay attention to technical moves in gold as well as the macro landscape with commodities. But let's dig into the fundamentals of the company and why I see it as a reasonable risk-reward idea today.
Gold mining ETF breaks out as gold tops $2,000
Source: Stockcharts.com
Company description
According to Bank of America Global Research, Newmont is the world's largest gold producer, and it is one of the leading miners of copper. It also produces silver, zinc and lead with mining operations in the U.S., Canada, Mexico, Dominican Republic, Peru, Suriname, Argentina, Chile, Australia and Ghana.
Bank of America sees 2024 production of 8.1 million ounces of gold with an all-in sustaining cost of $1,232 per ounce. Currently, the management team is focused on managing its free cash flow and returning value to shareholders. This more disciplined approach compared to previous cycles should be viewed as a positive sign for prospective investors.
Key data
Based in Denver, the $44 billion market cap gold industry company within the naterials sector trades at an elevated 24.2 forward 12-month non-GAAP price-earnings ratio and pays a high 4% forward dividend yield as of Nov. 28. With earnings not due out until February, implied volatility on shares is moderate at 30% and short interest on the stock is material at 2.7%.
Earnings review and key risks
Back in October, Newmont reported a somewhat soft quarter. Third-quarter adjusted earnings of 36 cents per share were below the Bloomberg consensus estimate of 38 cents, while adjusted Ebitda of $933 million was under what Bank of America had expected. The weak performance was the result of higher unit costs, and the management team went on to reduce its 2023 gold production guidance due to problems with its Ahafo operations.
Still, free cash flow trends appear strong, and rising gold prices lately should help the company hit its targets over the coming quarters. Lower interest rates and stabilizing labor costs are also macro tailwinds investors should consider. What was encouraging was the stock actually rallied in the wake of the earnings per share miss and full-year production guidance slash.
The completion of the gold miner's acquisition of Newcrest Mining may have been seen as a boon when looking ahead to 2024. Another positive catalyst may have been the company trimming its net debt position and $399 million of reported free cash flow was impressive. Key risks for Newmont and the industry writ large include rising real interest rates, a stronger U.S. dollar, higher labor costs and uncertain capital expenditure outcomes.
Valuation
On valuation, analysts at Bank of America see earnings rebounding sharply in 2024 after a protracted period of falling earnings per share trends from 2022 through the current fiscal year. Per-share profits are expected to approach $3 in 2024 and perhaps $4 by 2025, though the current consensus estimates are a bit lower compared with Bank of America's sanguine outlook. Consider, however, that gold prices are up significantly from the second and third quarters, so I would not be surprised to see other sell-side shops increase their earnings targets for Newmont ahead of its fourth-quarter report early next year - that could make for positive headline risks over the coming weeks. Dividends, meanwhile, are expected to hold at the current $1.60 per year run rate before perhaps increasing in 2025.
If we assume $2.50 of fiscal year 2024 earnings and apply the stock's five-year average non-GAAP forward earnings multiple of 23, then the stock should trade near $58. Even if we discount that valuation with a margin of safety of about 15%, the stock is still about 20% undervalued today. What's more, higher real yields now compared to the five-year average suggests a lower price-earnings ratio of 20 is likely about right.
Newmont: Earnings, Valuation, Dividend Yield, and Free Cash Flow Forecasts
Source: BofA Global Research
Event outlook
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed fourth-quarter 2023 earnings date of Thursday, Feb. 22. Before that, the stock pays its 40-cent quarterly dividend on Friday, Dec. 22. No other volatility catalysts are seen on the calendar.
Source: Wall Street Horizon
The technical take
Newmont, like the ETF, made a bullish move in recent days. The bid to gold, taking it above $2,040 as of this writing, helped to lift Newmont above a key technical resistance point. Notice in the chart below that a bullish falling wedge pattern was in play for several months. The stock undercut its November 2022 low just under $38 early in the fourth quarter, which had the hallmarks of bear market price action. But with a series of lower highs and lower lows, but within a consolidating triangle pattern, a coil was being compressed. Then, in late November, a high-volume breakout took place, sending Newmont through the $40 mark. The move implies the stock should now rise into the low $50s based on the height of the falling wedge pattern at its onset, added on top of the breakout point. The low $50s zone is also about where I see intrinsic value of shares today.
Also take a look at the lows from 2021 in the low to mid-$50s – the $53 to $55 range could be a challenging mark for the bulls if we see an extended rally in Newmont. I also see potential near-term trouble at the stock's long-term 200-day moving average, which is negatively sloped. Still, the relative strength index momentum indicator at the top of the chart shows the current price strength is the best since just after the Silicon Valley Bank banking crisis, when real yields were much lower.
Overall, I see more tailwinds than headwinds for Newmont here, and $50 could be in play over the coming months.
Shares break out from a bullish falling wedge, target to the low $50s
Source: Stockcharts.com
The bottom line
I see conditions right for a continued bounce in Newmont Mining. More favorable macro conditions, a decent valuation and positive technicals should set up well heading into 2024.
