Investment overview
As broad markets remain stretched in terms of valuations, my focus has been on industries and stocks that have faced near-term headwinds but have immense value creation potential in the long term.
One of the sectors I am bullish on for the long term is the gold mining sector. In sync with gold prices, the stocks in this sector have witnessed high volatility and sideways movement so far this year.
I will discuss why I remain bullish on gold and why Newmont Mining Corp. (NEM, Financial) is an attractive investment option for investors considering a time horizon of two to three years.
Newmont Mining is currently trading at $33.2, the same level it was trading at on March 13. With four months of sideways movement, I see this as a strong consolidation zone and once gold moves higher, Newmont Mining is also likely to surge.
Gold has upside
Gold prices have seen a significant amount of volatility. Gold currently trades at the same level as it did on Feb. 2. One of the key factors that has impacted gold prices in 2017 is the stance of the Federal Reserve. The central bank has increased interest rates and a stronger dollar is negative for gold.
Regardless, gold has remained resilient for several reasons. They are:
- While interest rates have moved higher, real interest rates remain negative. As long as real rates are negative, the policy is accommodative rather than restrictive.
- Global liquidity glut remains high as central banks around the world have pursued balance sheet expansion. Amidst loss in value of fiat currencies, gold stands to gain.
- Geopolitical tensions have remained at escalated levels with the Middle East remaining in focus besides heightened tensions in relation to North Korea. Even in the Indian subcontinent, geopolitical tensions are escalating, which is positive for gold.
- Central banks have continued to buy gold. I believe aggressive gold purchases will continue from the central banks of China and Russia in order to diversify their currency holdings, which will support gold prices.
- It is still too early to say whether the global economy is on a sustained growth path. Any signs of renewed economic weakness can potentially trigger further monetary easing, which will support gold on the upside.
Considering these factors, I am bullish on gold. Investors who are willing to hold gold mining stocks patiently for the next two to three years should consider Newmont Mining due to its stellar returns.
The bull case for Newmont Mining
If I had to choose one gold miner, Newmont Mining would be it. I find the company relatively attractive as compared to Barrick Gold Corp. (ABX, Financial).Â
Newmont Mining has made strong progress in improving its balance sheet fundamentals over the last several years. From net debt of $4.8 billion in fiscal 2013, the company’s net debt has declined to $1.7 billion in first-quarter 2017. A net debt to adjusted EBITDA ratio of 0.7 implies a comfortable leverage position and strong financial flexibility to pursue growth in core assets.
Even as gold remained range bound in the first quarter, the company reported operating cash flow of $373 million and free cash flow of $199 million. With an attractive all-in sustaining cost (AISC), the company is likely to remain free cash flow positive throughout the year even as gold remains in the range of $1,200 to $1,250 an ounce. This will further strengthen the company’s balance sheet.
For fiscal 2017, the company’s AISC is likely to range between $940 and $1,000 an ounce. The company’s first-quarter AISC, however, was below guidance at $900 an ounce. At the same time, Newmont Mining is on track to report mid-single-digit growth in gold production in 2017 as compared to 2016. These metrics will ensure decent numbers for the year and take the stock higher.
Newmont has strong prospects from its assets in Africa beginning in 2019. I believe this factor will be discounted in the stock price in the next 12 to 18 months. As the chart below shows, gold production is likely to surge from Ahafo in fiscal 2019 and the AISC is likely to be attractive in the zone of $680 to $780 an ounce.
In addition to Ahafo, Subika Underground will see its first production in the second half of this year and commercial production in second-half 2018. As these assets begin producing, the company’s cash flows will swell. The Subika Underground mine has the potential to produce 1.8 million ounces of gold over an 11-year mine life.
Conclusion
Newmont Mining has sold non-core assets over the last several years. With a liquidity buffer of $5.8 billion, the company is well positioned to invest in core assets that can translate into production upside and swelling cash flows in the next two to three years.
While gold has remained largely sideways over the last few months, I remain bullish on its long-term outlook. Investors should use this sideways movement as an opportunity to accumulate quality gold miners.
Newmont Mining appears attractive with an AISC below $1,000 an ounce and assets that will deliver gold production at well below that figure in the near future.
Disclosure: No positions in the stocks discussed.
