This year has been remarkable for gold mining companies from the perspective of improving fundamentals as well as from a stock upside perspective.
Just as an example, Newmont Mining (NEM, Financial) was trading at $17.99 at the end of 2015 and the stock touched a high of $45.86 on Aug. 2. After a big rally of 155%, Newmont Mining has been on correction mode with the stock currently lower by 25% at $35.23. This correction is a good opportunity to accumulate Newmont Mining for the medium to long term.
Newmont Mining has been moving in sync with gold prices, and the recent correction has been largely due to correction in the precious metal (besides profit booking after a big rally). While company specific fundamentals have supported the rally, I will first discuss why I expect gold to trend higher again. The second part of the discussion will focus on fundamentals that will deliver growth and stock upside.
Gold touched 2016 highs of $1,357 an ounce on July 10 and has subsequently declined by 7% to current levels of $1,259 an ounce. The key factor for correction in gold has been a stronger dollar as the markets are anticipating another interest rate hike relatively soon.
However, there will be no rate hike in 2016 and when there is more clarity on this point, the dollar will weaken and gold is likely to surge. The key points to support this are:
- The GDPNow model from the Federal Reserve Bank of Atlanta is predicting GDP growth for the third quarter at 1.9%. The GDP growth expectation coming from the model has been on a decline and is indicative of the point that economic activity remains uncertain.
- U.S. consumer sentiment has been muted to declining recently. With consumer spending being the key to economic growth, I expect the Fed to adopt a wait-and-watch approach.
Further, in a recent economic conference, Janet Yellen sounded cautious with no strong indications of a rate hike coming any time soon.
With these factors in consideration, gold will again trend higher, and Newmont Mining looks good for further upside in the coming quarters.
Coming to Newmont Mining, robust financials is the first reason to be bullish on the stock with gold likely to trend higher. As of June 30 Newmont Mining had $2.9 billion in cash and equivalents along with a net debt to EBITDA of 1.0x. These are important numbers as they underscore the point that Newmont Mining has ample financial muscles for accelerated investments once gold trends higher and sustains at higher levels.
While all gold mining companies have worked toward lowering the all-in-sustaining-cost, Newmont Mining is relatively attractive considering the point that the company is working toward an ambitious vision of becoming the world’s largest gold producer. Year to date, Newmont Mining had an AISC of $852 an ounce and as gold trends higher, investors can expect further improvement in the company’s free cash flow.
I must add here that Newmont Mining has several projects lined up for first production in 2016 and 2017. All these projects come with an equally attractive AISC, and the company’s AISC is likely to decline further in the coming years.
Another point from a shareholder value creation perspective is that Newmont Mining has been consistently reporting robust free cash flow numbers. If gold trends higher in line with expectations, higher dividends are coming along with potential value creation through share repurchase.
Overall, Newmont Mining navigated the challenging times well with noncore asset sales and reduction in leverage. With strong financial muscles, the company is well positioned to capitalize on potentially higher gold prices.
Disclosure: No positions in the stock.
Start a free seven-day trial of Premium Membership to GuruFocus.
