With gold uptrending on the London bullion market and expected to break $1,325 per troy ounce, one of the best opportunities for investors to gain exposure to changes in the yellow metal is through investments in gold mining companies.
But what is the best gold mining stock to choose for the second half of fiscal 2017?
If gold stays above $1,325 per troy ounce long enough, for at least the time needed to have a positive impact on results for the third and fourth quarters, one of the best gold stocks to bet on is Newmont Mining Corp. (NEM, Financial).
Compared to its most direct peers, which include Barrick Gold Corp. (ABX, Financial), Goldcorp Inc. (GG, Financial), Kinross Gold Corp. (KGC, Financial) and Agnico Eagle Mines Ltd. (AEM, Financial), the biggest gold producer in the U.S. has proven it can ride the wave of rising gold prices. Between July 3 and Aug. 25, gold gained 4.6%, from $1,229.25 per troy ounce to $1,285.30 per troy ounce. While the gold price soared, Newmont beat its most direct peers by approximately 7.4% to 13.7%.
Chart 1
Source: Google Finance
Newmont's performace compared to gold over the last two months is measured by its gold beta, which assesses the exposure of the company’s return on the market to changes in the price of the metal.
A key factor that influences the gold beta is the market’s preference for a specific gold mining stock.
What has improved Newmont's appeal is the board's decision to increase the dividend. The stock soared a few days after the board of directors announced July 19 it was increasing the quarterly dividend to 7.5 cents per share from the previous 2.65 cents per share.
The dividend increase was not due solely to rising gold prices. Newmont's management is also shareholder-oriented and has been building a high-quality asset base.Ă‚
In terms of full-year 2017 expected gold production, approximately 41% of it will come from its North American operations, which are shielded from a possible weakening of the U.S. dollar versus local currencies, 31% from Australia and 13% from South America. Thus, 85% of Newmont’s total annual gold volumes are produced in friendly mining jurisdictions while only 13% of the total production originates from its African operations.
The current projects the company is advancing at Twin, Tanami, Subika and Ahafo Mill are projected to produce 4.7 million to 5.4 million ounces of gold over the next two years, one of the highest in the industry at an average gold grade of 1.2 grams per ton of ore mined.
The miner has 68.5 million ounces of gold in proven and probable reserves. The operating life of these reserves is 11.8 years versus a competitor average of 9.9 years.
Even though a 30% production costs cut has not lowered the all-in sustaining costs(AISC), which at $925 per ounce remain higher than the industry average, a disciplined allocation of financial resources has enabled the company to increase margins and to achieve a nearly 70% reduction in the net debt over the last four years.
The company's total debt amounts to $4 billion, which is characterized by a comfortable repayment schedule. Its debt is lower than Barrick, which has $7.3 billion in debt, and Newmont has the most levered free cash flow (see chart 2 below).
After meeting its financial obligations, Newmont can spend approximately $1.4 billion on investment activities every year and pay dividends when gold averages between $1,255 and $1,260 per troy ounce. The company's trailing 12 months levered free cash flow is well above the average of $0.7 billion, as shown in the chart below.
Chart 2
Source of data: Yahoo Finance
Will Newmont Mining’s quarterly dividend also be a catalyst for the fourth quarter? This depends on the price of bullion. If gold breaks $1,325 per ounce and trades at that level long enough for the quarterly average price to be above $1,300 per troy ounce, the board could announce another dividend increase with another significant impact on the stock's market value. This outcome is possible.
Disclosure: I have no positions in Newmont Mining Corp.
