Although gold offers an attractive hedge against macroeconomic uncertainty, analysts are reserved on a few producers. According to T1 Banker, Newmont (NEM) and Gold Fields (GFI) are both rated just around a "hold". However, based on my multiples analysis and review of the fundamentals, I find decent room for upside for both companies.
From a multiples perspective, both firms are fairly attractive. Newmont trades at a respective 13.5x and 11.7x past and forward earnings, while Gold Fields trades at a respective 21.8x and 7.2x past and forward earnings. To put this in greater context, consider that Newmont is only valued at nearly half of its 3 Digit MG Group PE multiple!
At its fourth-quarter earnings call, Gold Fields' management noted a strong year:
"Earnings went up 536% in 2011 compared to 2010. And we made just shy of $1 billion. $973 million of earnings was generated by Gold Fields for 2011. So it's been an outstanding year for us in terms of leveraging off the gold price, and it's also been an outstanding year for us in terms of pushing along our project portfolio.
And we continue to make progress on our growth, and we're in the process of developing an extensive pipeline of projects, which will bring us closer to our target of achieving 5 million ounces per annum either in production or in development by the end of 2015".
Fourth-quarter EPS of $0.46 was in-line with expectations, as was production. Gold Fields produced 3.5Moz at a cash cost of around $770/oz in 2011, and guided for 2012 production to be upwards of 3.7M at a cash cost of $860/oz. Free cash flow yield is trending upwards and may hit 15% by 2013, as net debt transforms into a net cash position of $3.1B. Moreover, ROE is estimated to expand by around 700 bps to 22% at the end of that period. For a company with such a large spread between its P/E and forward P/E multiple, these positive fundamentals will drive value creation. I believe the stock appreciation will be magnified by the Street's reserved outlook and how low it sets the bar.
Consensus estimates for Gold Fields' EPS forecast that it will grow by 119.4% to $1.58 in FY2011, grow by 35.4% in 2012, and then decline by 14% in 2013. Assuming the multiple plummets to 9x and FY2012 EPS of $2.09, the rough intrinsic value of the stock is $18.81, implying 18.2% upside.
Newmont too has room for expansion. I am attracted to how it is the largest global unhedged gold producer, enabling investors to optimally capitalize off inflationary fears. Attractive leverage to gold prices, coupled with additional discoveries, will push earnings even higher. Cost pressures can be mitigated through increases to scale by improving efficiency and spreading out fixed costs.
Consensus estimates for Newmont's EPS forecast that it will grow by 23.9% to $5.44 in 2012, grow by 8.3% in 2013, and then decline by 9.3% in 2014. Assuming a multiple of 13x and a conservative 2013 EPS of $5.73, the rough intrinsic value of the stock is $74.49, implying 16.8% upside.