I have been closely tracking precious metals, especially the gold market this year. I expect the market to perform better after three years of losses. We are now almost through the first month of this year, and, in my opinion, gold is already beginning to find its luster. Indeed, while the S&P 500 has shed almost 8% year-to-date and the Dow Jones is down more than 8%, the World's largest gold-backed ETF, the SPDR Gold Trust (NYSEARCA:GLD) is up more than6% in the same period.
In this article I would like to focus on, Newmont Mining Corp (NYSE:NEM), the gold miner, which according to me after a very bad year-the stock slumped more than 25% in 2015-looks set to post healthy gains.
My optimism is based on macroeconomic factors and the company's own position. Let me first discuss some macroeconomic factors, which should provide a good support to gold prices.
As I discussed earlier, the uncertainty sparked by a tumult in Chinese equities market has swooned global investors. This along with a sharp slowdown in the Chinese economy has sparked a panic sell-off worldwide. It should augur well for precious metals such as gold as investors will seek shield in safe-haven bets.
And then of course, dwindling oil prices will always force investors to keep a finger on sell-off button. Oil prices, which showed no signs of recovery last year amid a global supply glut caused by persistent production from OPEC countries and the U.S. fracking industry-has been lately under more pressure as another oil rich nation, Iran, enters the market, post sanctions. Sadly, the demand is subdued due to a slowdown in China and other emerging economies. All these factors will unnerve investors, which in turn, likely to create a demand for gold.
Secondly, we could also witness a sharp fall in physical gold supplies. Since gold prices has been clobbered in last three years, the gap between average realized price and average costs for miners has narrowed down considerably, which in turn, hurt the bottom-line. In a report on gold miners, the Financial Times recently reported that since the boom period in the commodity cycle has ended, the production might have well "peaked" with only few projects and miners in a position to carry on mining activities at given prices.
According to Thomson Reuter's metal research unit, GFMS, the global output for gold is expected to fall by 3% this year following seven years of increased production.
While all these external factors should provide some fillip to gold prices, I also expect Newmont to deliver better results.
The miner is scheduled to report its fourth-quarter results in the third week of February. In the third quarter ended September, the miner had performed reasonably well even under a challenging environment. For instance, in the quarter ended September 30, average realized price for gold and copper fell to $1,104 an ounce and $1.95 a pound respectively compared to year-earlier quarter price of $1,270 and $2.71 a pound. Still, the company's profit was up by 2.8% on account of higher sales and higher production.
It has also recently boosted its balance sheet. Earlier in October, the miner completed the sale of one its non-core assets, Newmont Waihi Gold Limited in New Zealand to Oceana Gold Corporation in a cash-deal worth $101 million.
Newmont has now generated $1.7 billion though selling non-core assets in the last two years. This was a very good move as a prolonged period of low price environment would have badly hurt its financials. With help of these funds, it not only paid down its debt but also channeled funds in more profitable projects.
Also, Newmont proposed plan to expand its Tanami operations in Australia will boost gold output by 80,000 ounces at a time when most miners are cutting down mining activities. Moreover, the capacity expansion would also bring down Tanami's cost by 5% to 10% in the first five years of production.
NEM shares have risen around 8% this year but still remain below the levels they had been in 2013. If global market conditions remain volatile and gold prices remain firm, NEM could see further upside.
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.