Newmont Mining: 'Sleep Well At Night' Exposure To Gold
Summary
- Newmont Mining is one of the rare gold stocks that is up year to date.
- There are a number of positive factors that favor Newmont Mining.
- The stock is a good "sleep well at night" way to get gold exposure. For outsized returns, search elsewhere.
Recently, I've been searching for opportunities in the gold space. The reason for this is the major difference in price dynamics between gold (GLD) and gold mining shares (GDX). If we measure performance by ETFs, gold represented by GLD is up 1% year to date, while gold miners represented by GDX are down 7%. In theory, gold miners offer investors a leverage to gold prices, and a small upside move in gold should translate into bigger improvements for gold miners, at least for those with healthy operations.
However, this is not the case now. In fact, when looking at gold miners' stock charts, I identified only two equities with an established upside trend: Kirkland Lake Gold (KL), which has the strongest chart in the whole gold mining space, and Newmont Mining (NYSE:NEM), which is preparing to return to the strong upside trend established in 2016 after a consolidation in 2017. (Note that Harmony Gold Mining (HMY) is also looking to establish an upside trend following a period of consolidation.)
Let's look at Newmont Mining in more detail. The company is one of the biggest gold miners by production volume, together with Barrick Gold (ABX), which has also been on my focus list recently. At first glance, the first thing that differentiates Newmont Mining from its peers is its pristine balance sheet. The company finished 2017 with $3.3 billion of cash on the balance sheet and $4.1 billion of debt. With only $800 million of net debt, Newmont Mining is almost debt-free for an operation of its size. The debt schedule is very easy, with the majority of debt coming after 2035:
The company has a geographically favorable production mix, with most production and reserves coming from the U.S. and Australia. Of course, a miner of Newmont's size has had its own problems on the political front, namely with its Conga project in Peru. Construction activities at Conga were suspended back in 2011. As per the latest annual report, Newmont Mining did not anticipate being able to develop Conga for at least the next five years. However, the company's problems at Conga don't come anywhere near the catastrophe that Barrick Gold experienced with Pasqua-Lama on the Argentina-Chile border and, most recently, with Acacia in Tanzania.
On the cost side, Newmont Mining delivered all-in sustaining costs of $924 per ounce in 2017. This is a decent result, since the industry is experiencing some cost pressure, judging by the miners' recent quarterly reports. Going forward, the company expects that costs will rise in 2018, but fall materially in 2019 and beyond:
Newmont's gold production came at 5.3 million ounces in 2017, so the midpoint of the company's guidance assumes a production decrease of 150,000 ounces. Currently, post-2019 expectations call for a continued production decrease. We've seen this trend in a number of gold miners' reports. I see several reasons for this. First, the "easiest" gold has already been mined, and it's hard to find suitable projects that will be economic at current prices. Second, miners became more responsible in their planning, sobered by the massive drop in gold price from 2011 to 2015. In my opinion, the newfound responsibility in financial planning among gold miners is a longer-term bullish factor for gold prices.
Among other positives for Newmont Mining, the company has recently raised a dividend to $0.14 per share, which equates to a yield of about 1.5% at current prices. However, given the size of the yield and the general market attitude toward gold miners, it's hard to believe that an investor would buy miners because of the yield they provide, when there are plenty of higher-yield opportunities elsewhere.
So, a combination of stable production, reasonable costs, a strong reserve base, safe geographical exposure and a solid pipeline of growth projects (see below) keep Newmont Mining's shares above most of their peers.
The above-mentioned factors are clearly favorable for the company and, in my opinion, have been accounted for by the market. At its current valuation, Newmont Mining is a "sleep well at night" exposure to gold. For "outsized returns" types of bets, the stock is not suitable at current levels. For these types of trades/investments, my watch list includes Eldorado Gold (EGO) (see here) and Barrick Gold (see here).
Longer term, I believe that Newmont Mining has a very solid position to profit from any upside in gold prices. Momentum-wise, I'd be looking at the company's shares above $40, or, in case gold price downside punishes Newmont's shares materially, near long-term support in the $32-34 range.
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This article was written by
Analyst’s Disclosure: I am/we are long EGO. 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.
I may trade any of the above-mentioned stocks.
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