A processing plant at the Merian gold mine in Suriname, owned and operated by Newmont. The company’s stock may be the safest way to bet on a gold revival.
Ranu Abhelakh/Reuters/Alamy
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Gold has lost its shine of late, but gold producer
Newmont
might be a diamond in the rough.
It certainly hasn’t been easy being a gold miner lately. As a commodity producer, you’re worth as much as what you sell, and the price of gold has been sliding since it topped $2,000 an ounce in early March as Russia’s invasion of Ukraine spooked markets. Then, the Federal Reserve started raising interest rates, sending the U.S. dollar higher, and it has been all downhill since then, with gold tumbling 19%, to $1,665.
Gold’s slide has hit Newmont (ticker: NEM) hard, with the stock down more than 50% from its April high to $42.40, its lowest price since March 2020, when gold was $1,500 an ounce.
The company has also been hurt by the same inflationary pressures affecting practically every business this year. A pair of worse-than-expected quarterly results contributed to the sharp decline in Newmont stock since April. In the second quarter, reported in July, management cited higher prices for labor, diesel fuel and other energy, and raw materials used for mining and processing gold. The company raised its all-in sustaining costs to $1,150 per ounce, from $1,050. That was a larger increase than many of Newmont’s competitors at the time. Shares dropped 13% after the report.
Still, it may be time to buy Newmont stock. The dollar, up 14% in 2022, is unlikely to rise forever, and owning gold would provide a hedge in the case of mean reversion, or potential geopolitical and economic tremors. Newmont continues to increase its production of the precious metal, and its stock looks cheap. It also carries a 5.2% dividend yield, which means that investors can get paid to wait.
“Recent underperformance marks an attractive entry point for a low-risk gold producer delivering volume growth,” writes Goldman Sachs analyst Emily Chieng.
Of course, everything starts with the price of gold—and lately the metal has been under considerable pressure. Higher interest rates tend to make gold, an asset that doesn’t offer any yield, less attractive. It’s also priced in dollars, so as the dollar rises, gold is worth fewer dollars. But a reversal in either of those two trends could send gold prices shooting higher.
“Gold has exceptional medium-term fundamentals,” says Thomas Kertsos, manager of the First Eagle Gold fund. “We have record global debt levels; an equal amount of geopolitical, economic, and financial uncertainty; and now an energy crisis and a potential food crisis on the horizon.”
Newmont may be the safest way to bet on a gold revival. It bulked up in 2019 via its acquisition of Goldcorp, gaining new mines, people, and other assets. Its industry-leading scale qualifies the company for the
S&P 500,
and it remains the only gold stock in the index. That makes it the default for generalist investors and gives it a boost from index-fund ownership, while a generous dividend makes it a target for income funds. It also operates in generally less risky regions than many other gold miners, with close to 70% of its assets in North America and Australia.
Its nearly 100 million ounces of reserves towers over all of its peers but one. Newmont produces some six million ounces of gold annually, and smaller quantities of other metals including silver, copper, lead, and zinc. Sales were $12.4 billion over the past four quarters, with net income of $1.9 billion and free cash flow of $1.8 billion.
“The assets are there, the management is good, and it’s by far the biggest gold company, so it’s what most people look at,” says Caesar Bryan, manager of the Gabelli Gold fund.
Those assets are on sale right now. The stock trades for 0.95 times its net asset value, according to Gabelli analyst Christopher Mancini, versus a typical premium of 30% to 50% for gold miners in general. He believes that shares should go for 1.2 times NAV, or $52. UBS analyst Cleve Rueckert calculates a $50 price target, based on a 7.5 times multiple of enterprise value to forward earnings before interest, taxes, depreciation, and amortization, or Ebitda—which would be close to the stock’s historical average. It currently trades at 5.8 times. Goldman’s Chieng uses a mix of both valuation multiples and calculates a $53 fair value.
All three targets represent roughly 20% upside before Newmont’s dividend yield of more than 5%.
The dividend has been a focus of investor worries lately, but Rueckert believes that the concerns are unfounded. The company’s dividend formula consists of a $1 per share base dividend annually, and a variable payment on top of that tied to 40% to 60% of free cash flow at a gold price above $1,200 an ounce. That’s currently an additional $1.20 per share annually, based on management’s estimate of a $1,800 gold price, with the company re-evaluating the payout whenever the price moves by $300 in either direction.
Rueckert models sufficient cash flow in the coming years for the company to maintain the current payout while investing in new projects and mines. He notes that the current $1.20 payout is much closer to 40% of free cash flow than 60%, while Newmont’s balance-sheet strength gives it additional flexibility. (Net debt to Ebitda was just 0.3 times at the end of the second quarter.) Its dividend yield above 5% should put a floor under the stock.
“All you really need for the stock to recover is for the gold price to stay flat,” Rueckert says.
With Newmont, investors get a solid option on a higher gold price in a high-quality company—with a steady stream of income in the meantime.
Write to Nicholas Jasinski at [email protected]
Source: https://www.barrons.com/articles/newmont-is-a-hedge-against-uncertainty-with-a-5-dividend-yield-51663308006?siteid=yhoof2&yptr=yahoo