Investment overview
Gold has been volatile in the last few months, which has been reflected in the stock price of all mining stocks. In bullish and bearish times for gold, there are two mining stocks that I have consistently recommended – Newmont Mining Corp. (NEM, Financial) and Barrick Gold Corp. (ABX, Financial).
Newmont Mining surged from $24 in early February 2016 to $46 by Aug. 2, 2016. Subsequently, profit booking coupled with a sharp decline in gold prices took the stock lower to $31 by Dec. 15, 2016. With gold surging again, Newmont Mining is higher by 23% from December lows and is currently trading at $37.9.
I will discuss the reasons to be bullish on gold through 2017, which will form the basis for Newmont Mining's case as an investment. The stock is attractive at current levels even after the decent rally from December lows.
Gold will continue to move higher
It is important to understand why gold has moved higher in the recent past as these factors will determine the trend for fiscal 2017. In my opinion, the following factors have contributed to gold moving higher:
- With Donald Trump assuming the presidency, his focus is “Made in America.” A strong dollar is certainly not going to help with that. Therefore, three interest rate hikes in 2017 are unlikely and the focus of policymakers will be to see a relatively weaker dollar to boost exports. This will support gold on the upside.
- Even though tensions in the Middle East have declined relatively, Iran recently tested missiles. That did not go over well with U.S. authorities. Geopolitical tensions will remain at elevated levels, which will ensure investors seek refuge in gold. Besides the Middle East, there are several key elections in Europe (Netherlands, France and Germany) that can potentially create some anxiety among investors. This is likely to keep gold strong.
- Central banks have been aggressive buyers of gold in 2016, even when prices were depressed. I expect the central banks of China, Russia and even India to continue accumulating gold. This is likely to create incremental demand for the precious metal and keep the price in place.
- Globally, equities have been trending higher and I believe valuations are stretched for several risky asset classes. As a result, I see relative decline in risk-on trade, which will create incremental demand for gold as a medium-term investment in 2017.
Why Newmont Mining remains attractive
One of the key reasons to like the company is its attractive all-in sustaining cost (AISC). As the chart below shows, Newmont Mining has done well on a sustained basis to reduce the AISC.
With my expectation of gold trending higher, tight cost control and focusing on a few core assets will further enable Newmont to reduce costs, thereby boosting the EBITDA margin and cash margin per ounce of gold.
Newmont’s strong balance sheet is another positive. As of September 2016, the company had $3 billion in cash (pro-forma for proceeds from the sale of its PT Newmont Nus Tenggara interests). The current cash buffer coupled with operating cash flows will ensure the company is fully funded for the next 24 months.
In addition, the company’s balance sheet has been strengthened by reducing debt throughout 2016 ($1.6 billion in debt reduction through non-core asset sales). As of December 2016, the company had $575 million in debt maturity coming in 2017 and $626 million in debt maturity in 2019. The next debt maturity will be in 2022, indicating there is no immediate debt refinancing pressure.
I am focusing on the company’s liquidity as gold can potentially surge higher in the next 12 to 18 months. Newmont has the financial muscle to significantly expand investments if the EBITDA margin expansion outlook is robust.
From an asset perspective, Newmont Mining started commercial production at Long Canyon in November 2016. Long Canyon is an extremely large oxide deposit and the only significant discovery in Nevada in the last decade. Between 2013 and 2015, the asset witnessed a 50% increase in reserves and resources. The key point to note here is the asset has an AISC of less than $700 an ounce. Once production growth accelerates, it will help the overall AISC to trend lower.
Production at the Merian project commenced in October 2016. The asset has an AISC of $650 to $750 per ounce. With strong reserves and resource base, I expect this asset to deliver strong EBITDA and returns in the medium to long term.
By selling non-core assets, the company has ensured its assets that have low AISCs will get enough liquidity for accelerated development. If gold continues to move higher, the EBITDA margin will be robust and dividends are likely to surge.
Conclusion
Newmont Mining has seen a volatile 2016. I believe 2017 is likely to be a year of consolidation at higher levels and steady upside. I am bullish on gold for 2017 and beyond. Since the precious metal has witnessed a renewed rally, Newmont Mining stands to benefit.
After the recent rally, Newmont Mining is worth considering. If gold sustains at higher levels, an increase in dividends will provide further re-rating and upside for the stock. Investors with a long-term horizon of three to five years can certainly consider Newmont Mining for their portfolios.
Disclosure: No positions in the stocks discussed.
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