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Is There Still a Re-Rating Potential for Newmont Mining?

What Drove Newmont Mining’s 1Q16 Beat: All You Need to Know

(Continued from Prior Part)

Valuation

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries. It helps investors to compare companies with differing capital structures.

Newmont’s valuation: More upside?

Newmont Mining (NEM) is trading at an EV-to-forward EBITDA multiple of 8.3x. It has significantly rerated since the start of 2016 when it was trading at a multiple of 6.5x.

A higher gold price leverage and NEM’s falling financial leverage have been the main drivers behind the rerating. It has not only delivered on its operational targets, but it has done it with consistency, restoring investor confidence.

After its recent non-core asset sales, Newmont has been left with high-quality assets and a longer mine life. This positions it well for the volatile metals price environment. It also provides further upside in the event that gold prices (GLD) (IAU) keep recovering sustainably.

Newmont’s sequenced project pipeline provides an upside to production as well as costs. At the same time, the pipeline gives the company the flexibility to develop projects according to its financial considerations and gold price outlook.

Peers’ valuation

Not every gold miner (GDX) in the industry has a project pipeline like Newmont’s. Barrick Gold’s (ABX) production profile was more or less flat after 4Q15, and Kinross Gold’s (KGC) profile might fall. On the other hand, Agnico-Eagle Mines (AEM) and Goldcorp (GG) both have growth projects with strong potential.

As compared to Newmont, Barrick is trading at a forward EV-to-EBITDA multiple of 8.1x, almost in line with its senior peers’ median multiple. Goldcorp is trading at considerably higher multiples than its peers. Currently, Goldcorp has a forward EV-to-EBITDA multiple of 11.4x. However, its valuation appears more or less full, factoring in all the positives.

Keep watching Market Realist’s Precious Metals Mining page for latest earnings update as other gold miners report their earnings in the coming few weeks.

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