Deutsche Bank analyst Jorge Beristain says: "The YTD commodity price rally has been driven by incrementally positive data from China but the trend is unlikely to continue, as supply cuts are needed across most commodities".
The analyst doesn't believe that this rally in the share price of gold mining stocks will last:
"We do not expect this trend to continue and still believe supply cuts across most commodities are required."
As I have already written several times, I got some insights from the way that some gold stocks are operating, that the rally in the price of gold that we are seeing from the beginning of the year won't continue. If what I perceive about future movements in the gold price is correct, gold stocks like Newmont, which is better positioned than others like Goldcorp, is moving towards an interesting direction.
Newmont Mining Corporation:
NEM is making the right moves: the company is mining at a higher average grade than some of its peers; therefore it is sustaining less operating costs. It will result in less operating costs, more cash to reinvest in the business and in reducing the debt situation.
The sale of Duketon gold project further strengthens Newmont's balance sheet and enhances the company's focus on its core business.
Even though I don't think that we will have significant jumps in the price of gold, I am confident about the forecasts of the company to add further free cash flow and improve the net debt to EBITDA ratio.
Let's put it in this way: because of its strong balance sheets and operations, suppose that Newmont will add $350M to its FCF anyway, even if the gold price will not reach the target "every $100/oz. gain in the price of gold bullion"; what might happen to the share price of this gold stock that will have more disposable FCF?
In my opinion the company is not well positioned because as I previously wrote, Goldcorp Inc. has a lower average grade of gold proven reserves (Au g/t), which involves more effort (more operating costs) to extract the metal. If the price of the precious metal will
not continue its rally, this may result in a further deterioration of the business of the company. Less cash from operating activities to be reinvested in the business and less cash to distribute to its "value investor" shareholders, who can now increase their investment in Goldcorp by receiving dividend payments in the form of common shares of the company.
With some changes in management, I would expect a change in the company's philosophy on for example how to guide production on a go forward basis. The company has operating issues and must work very hard in 2016 to catch up on lost time.
Recently Moody's has downgraded the miner to just one notch above junk status while assigning a negative outlook.
My point of view:
As I don't believe that the price of gold will continue its trend we are seeing since the beginning of the year, I would sell Goldcorp that really must pull its horns and invest in others like Eldorado Gold Corp that is operating well and has a tendency to keep costs lower than the industry average.
Newmont can defend margins through low cost because has stronger balance sheets and businesses than Goldcorp. I would hold this stock.
But I might also consider to reduce the gold exposure a bit through Newmont and increase it through Eldorado (NYSE:EGO).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.