I have written few articles on quality names in the gold mining sector in the last few months. I was of the opinion that gold had an impending rally and once gold moved higher, gold mining stocks would surge. Most recently, I discussed Kirkland Lake Gold (KL, Financial), which has been surging higher and is likely to be a long-term value creator.
With gold near $1,340 an ounce, Newmont Mining (NEM, Financial) is still interesting as a medium-term and long-term investment. It is worth noting here that Newmont Mining was trading at $31.9 on July 3. In two months, the stock has surged by 21% and trades at $38.7. The rally is certainly far from over.
Before talking about the company’s positive triggers, I would mention at the onset that geopolitical tensions are likely to be the single biggest upside trigger for gold in the foreseeable future. While I am bullish on gold as a currency for the next five to 10 years, issues related to North Korea are likely to keep gold prices firm.
Dividend growth trigger
Looking specifically at factors that can trigger stock upside, higher dividends in the coming quarters will take the stock higher.
It is important to note that for gold mining stocks, the dividend policy is linked to gold prices and for the second quarter Newmont Mining announced dividends of 7.5 cents, which tripled from the prior year quarter.
As gold continues to move higher, Newmont Mining is likely to announce higher dividends in the coming quarters that will translate into stock re-rating.
Another important point that backs my view on potentially higher dividends is the company’s free cash flow growth in the first half of the year, which was $545 million compared to $262 million for first-half 2016.
As gold trends higher in the second half of the year, the company’s free cash flow is likely to swell, and this provides buffer for higher dividends and potential deleveraging.
Overall, Newmont Mining is well positioned from a fundamental perspective to pay higher dividends and with net debt to adjusted EBITDA of 0.6; the company’s strong credit health supports dividend growth.
Stable production profile
It is important to note here that Newmont Mining has a very stable production profile and I see this as a positive as gold trends higher. For fiscal 2017, the company’s gold production is likely to be in the range of 5.0 to 5.4Moz. Further, for 2018 to 2021, the company expects production to be in the range of 4.7 to 5.2Moz.
As gold price trends higher, the following are the positive implications:
- In the same range of gold production, the company’s free cash flow is likely to increase as gold trends higher. As sustaining capital remains in the range of $600 million to $700 million, the company’s fundamentals are likely to improve.
- The company’s AISC is likely to be in the range of $950 to $1,050 per ounce for fiscal 2018. For fiscal 2019 to 2021, the company’s AISC is expected to decline to $870 to $970 an ounce. Therefore, EBITDA margin will expand on higher gold prices coupled with lower AISC.
- In challenging times, Newmont Mining resorted to asset divestment to build cash buffer and focus on core assets. As a result, the company had $3.1 billion in cash as of June in addition to $3.0 billion in revolving credit facility. If gold continues to move higher, Newmont Mining is likely to pursue inorganic growth from the strong cash buffer and that can potentially trigger stock upside. With a stable production profile not demanding higher investments, the cash buffer currently remains unutilized.
Long-term reserves profile
In the near term, higher gold price, prospects of increasing dividends and swelling free cash flow is likely to take the stock higher. Considering a long-term horizon, the company’s operating reserve life of 11.8 years ensures that momentum for the stock sustains as long as gold is trading higher.
It is also important to note here that 72% of the company’s reserves are in the U.S., Canada, Australia and Western Europe. With exposure to countries that are politically and geopolitically less volatile, Newmont Mining holds an advantage.
The above point also underscores the effectiveness of the company’s divestment plans that were implemented in the last few years. It is worth noting that divested assets had AISC in the range of $800 to $900 an ounce with reinvested assets having AISC of below $700 an ounce.
Clearly, the company’s strategy is positive from a long-term perspective. The current assets hold higher cash flow potential and have lower technical and social risk.
Conclusion
Gold has seen strong upside momentum and after a prolonged period of sideways movement and consolidation, the precious metal is likely to sustain at higher levels.
This is good news for gold mining stocks, and Newmont Mining has already seen considerable upside in the last two months. The company’s stock upside potential still remains significant as cash flows swell and prospects of higher dividends increase.
Investors can consider fresh exposure at current levels and investors with a medium to long-term time horizon can potentially see higher levels.
Disclosure: No positions in the stocks discussed.
