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Credit Suisse Keeps Outperform Rating on Newmont Mining

- By Alberto Abaterusso

Credit Suisse keeps seeing Newmont Mining Corp. (NEM) outperforming on the stock market in the coming months but with a lower target price.

The Swiss global financial services company has reduced its target price for the largest gold producer in the U.S. by 7.84% from $51 per share to $47 per share "due to a 4% lower NAV to $24.27 per share from $25.39 per share and 13% lower 2017 operating cash flow to $2.58 per share from $2.96 per share," writes Ben Levisohn at Barron's.

The new target price per share represents an 18.7% upside from the average target price per share of $39.58, which is a mean of 19 analysts surveyed and a 38% upside from the price of $34.07 per share.

Source: Yahoo Finance

The analysts average target price ranges between a low estimate of $25.00 per share and a high estimate of $51.00 per share.

Despite a lower target price per share, the reasons why the Swiss firm keeps its outperform rating on Newmont Mining are "balance sheet of its peers and highlighted its organic project pipeline as its first capital allocation priority, returning cash to shareholders second and opportunistic M&A third," said Anita Soni and Robert Reynolds, analysts at Credit Swiss.

Let's have a look at Newmont Mining's balance sheet compared to its peers.

With reference to the current ratio, which measures the company's ability to pay short-term obligations with its current assets, Newmont Mining's ratio is 2.67 versus Barrick Gold Corp. (ABX) 2.68 and Goldcorp Inc. (GG) is 2.01.

Source of data: Google Finance and Reuters.com

This means that Newmont Mining, together with Barrick Gold, is better positioned than Goldcorp.

Newmont Mining is also better positioned than its peers concerning their indebtedness and the ability to pay interest expenses on the outstanding debt.

Goldcorp has less debt than Newmont, and it seems that the Canadian miner can benefit from a more comfortable debt repayment schedule than the largest gold producer in the U.S. with approximately 80% of the total long-term debt, or $2 billion, that will mature after 2021. However, Goldcorp has to refund a corporate loan of $500 million in March 2018; to be able to honor its obligation, the Canadian miner must work really hard because it can generate cash flow of only $80 million from its operations as of today and the liquidity in cash on hand and securities amounts to only $200 million.

Concerning the ability to pay interest expenses on the outstanding debt, Newmont Mining is the best with an interest coverage ratio (ttm) of 2.13 versus 1.73 of Barrick Gold and 0.47 of Goldcorp.

Newmont Mining can also rely on one of the best asset portfolios in the gold stock industry which the company is enhancing through several projects. Recently the U.S. gold mining company has successfully and timely brought into commercial production Cripple Creek & Victor in Colorado, Long Canyon in Nevada, Merian in Suriname and Tanami in Australia.

The company is also optimistic about the advancement of the Ahafo Mill Expansion and Subika underground, decisions about which are expected sometime in mid-2017. At the end of 2017, the U.S. miner will also reach a decision about the development of Quecher Main project with which Newmont aims to keep margins and to extend oxide mine life at Yanacocha over the coming years until 2026, following the ramping down of production at the Peruvian mine where the company is also trying to develop its extensive sulphide deposits.

Newmont is also looking for productive assets far from the U.S. The largest gold producer in the U.S. started a discussion with Barrick Gold about the 50% interest stake that the Canadian miner has in Kalgoorlie mine (Australia).

The negotiations are taking longer than expected because other gold mining companies have recently expressed their interest in the Australian mine. If Newmont will find an agreement with Barrick for Kalgoorlie, the American miner will add another arrow in aiming to increase the output and lower the overall costs over the coming years.

Newmont is on the right path to further increasing the NAV and creating value for its shareholders. Part of this created value is returned to the shareholders through the dividend that the American miner distributes. Today the miner pays 20 cents to the shareholders through quarterly payments of 5 cents for a dividend yield of 0.59%. That may be increased this year if the gold market will be able to duplicate 2016 patterns when the precious metal traded above $1,200 per troy ounce, which is the assumed price for the determination of Newmont Mining's proven and probable gold reserves. That is the minimum price of gold per ounce at which the miner can extract gold from its deposit at profit.

As of Monday, nine analysts out of a total of 19 recommend holding shares of Newmont Mining while seven analysts recommend buying the stock.

Source: Yahoo Finance

The recommendation rating is 2.4, in the middle of a hold and buy recommendation. The recommendation rating ranges between 1.0 (Strong Buy) and 5.0 (Sell).

At the moment, Newmont is selling at 1.67 times its book value and at 7.69 times its EBITDA.

Source of data: Yahoo Finance

Newmont looks more expensive than Goldcorp at the moment with reference to the price-book (P/B) ratio, but today $1 of Newmont's forecasted earnings costs 15.3% less than Goldcorp's forecasted earnings, and they bring the dividend catalyst to the U.S. gold stock's share price.

With a forward price-earnings (P/E) ratio of 21.63, an EV/EBITDA ratio of 6.4 and a price-sales (P/S) of 2.45, Barrick Gold seems more attractive than Newmont. However, Barrick Gold distributes a lower annual dividend, 12 cents, than Newmont, through quarterly payments of 3 cents, recently increased by 50% from 2 cents per share.

Disclosure: I have no position in any stock mentioned in this article.

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This article first appeared on GuruFocus.