Disclaimer: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. We are a consultant to a third-party representing Pershing Gold and have been contracted one hundred dollars for research. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often "forward-looking statements" as defined under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.
Newmont Mining (NYSE:NEM) may have begun 2012 with a bang, but (1) results have been largely been weak since then, (2) the consensus is a "hold", (3) and management turnover has been disappointing, to say the least. Over the last 4 quarters, Newmont has, on a net basis, underperformed expectations by an average of 2.9% with a major -10% miss in 2Q11. And yet the stock has only fallen by 4.2% over the last 12 months when Freeport (NYSE:FCX), which has beaten consensus by the double-digits, lost more than a quarter of its value. Much of the reason why the company's stock has held up is due to the optimism surrounding gold and copper production at Boddington.
The S&P expects Newmont's top-line to grow 13% in 2012, but much of this growth comes from a prediction that macro tail risks will drive the price of gold up. Fundamentally, volume trends are not expected to be as strong. This is particularly troubling in light of how the global economy is moving towards full employment and will subsequently reduce the "hyperinflation" chatter.
But, going forward, Newmont's main obstacle to value creation is the level of brain drain. With EPS figures normalizing quicker than many hoped, intellectual capital is heading to more high-growth E&D and value plays.
Former Newmont director of technology Fred Seymour left the firm some years back to join PrimeStar, a solar producer that went on to winning a $3M grant from the Department of Energy to develop a thin-film technology. All told, Seymour turned $6M worth of seed capital in Prime Star into north of $600M when General Electric (NYSE:GE) bought him out.
Former Senior Vice President Ken Brunk similarly headed for the exit and joined Midway Gold (NYSEMKT:MDW). Midway went on to starting a JV with Barrick Gold that resulted in the stock price more than doubling over the last two years as Newmont depreciated.
Last year, Newmont then had the opportunity to fill the void that Seymour and Brunk left when it bought out Fronteer Gold for CDN $2.3B. They likely attempted to recruit Fronteer's Steve Alfers, the former CEO of President & CEO of NewWest Gold that was acquired by Fronteer for CDN $186.9M. After all, Alfers turned a then-$50M company into a CDN $2.3B company. But instead of taking an executive role in Newmont like he did for Fronteer after being bought out, he opted to become the Chairman & CEO of Pershing Gold (OTCQB:PGLC) earlier this year. Alfers' role at Pershing is already paying dividends, as evidenced by today's announcement that major miner Coeur d'Alene (NYSE:CDE) made a private placement that grossed $4M in payments for the rising producer. Coeur found Pershing's value so compelling that they reportedly bought shares at current market value.
In light of executive turnover, it is distressing how much of Newmont's value is being locked up in gold. The CEO forecasted gold closing 2011 at $2,000 per oz -- a prediction that turned out being more than 20% too optimistic. The CEO went on to selling 13% of his holdings in Newmont around the current price. Capex was much too high at $2.8B in FY2011, and the problem appears to be only getting worse given costly disputes over its Peruvian Conga project. With 14 open-pit sites and 14 processing plants, operational delays will hold back value.
There are reasons, however, to be optimistic about Newmont. Assuming a multiple of 12x and a conservative 2013 EPS of $5.45, the stock would hit $65.40 for meaningful appreciation. The company is also fairly liquid at a current ratio of 2.4 that is reinforced by the reasonable 2.8% dividend yield. Copper momentum at Boddington is also compelling as a means of diversification.
But there are, in my view, more undervalued basic material investments right now. I find Freeport, for example, to have more than a 70% margin of safety despite labor problems. Earnings growth has been more consistent than what the market has appreciated, and analysts rate the stock a "buy" with a $53.05 price target. It trades at just 6.8x forward earnings forward earnings with a considerable 3.5% dividend yield. With top executives leaving Newmont, gold investors are recommended to consider the experts and go after the emerging and large undervalued players that are being driven not by volatile commodity predictions but by fundamentals.