Investing in Gold: Newmont Mining
- By Alberto Abaterusso
Despite macro factors such as rising geopolitical tensions between the U.S. and North Korea, gold bullion is falling on the London market and lost nearly $40 per troy ounce, or 3%, between Nov. 27 - when the yellow metal hit $1,294.90 (the monthly high) - and Dec. 7.
On Friday, the bullion was trading around $1,245.85 per troy ounce.
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The intrinsic value of NEM
Many analysts believe the recent tumble was impacted bythe U.S. Federal Reserve"s aggressive monetary policy for 2018.
As a result of lower gold prices, publicly traded miners are downtrending as well on the U.S. stock market.
As is illustrated in the chart below, the largest gold producers are downtrending and have lost between 2.4% and 7% over the past eight trading days.
Source: Yahoo Finance
Regardless, the current downtrend is also uncovering unbelievable opportunities in the gold stock industry as many of these producers become undervalued. Therefore, it is an ideal time to to take advantage of the opportunity to either increase your holding or establish a position.
One such opportunity is Newmont Mining Corp. (NEM).
The largest gold producer in the U.S. is trading around $35.92, which is near the midpoint of its 52-week range.
Year to date, Newmont Mining has gained a slim 5%. It is trading well below its 50-day simple moving average line and is only 2% above the 200-day SMA.
The company has a couple catalysts that could push the stock higher.Not only has it revised its production guidance for 2018 higher, but it also hopes to increase its dividend by 50%.
Newmont announced in a Dec. 6 press release it has increased its gold production guidance by 4%. The miner now expects to produce between 4.9 million and 5.4 million ounces of gold in fiscal 2018.
The company also announced its cost outlook for the year is lower. Guidance for gold costs applicable to sales decreased to $725 per ounce and all-in sustaining costs are projected to be $995 per ounce of gold sold.
Its capital expenditure forecast remained the same, ranging between $900 million and $1 billion.
The mining company expects further improvements in the cost structure and lower capital expenditures starting in 2019.
The revised guidance should cause analysts to review and update their estimates for Newmont"s 2018 earnings and revenue. Currently, the consensus estimate for 2018 EPS is $1.44, an increase of 27 cents year over year, on $7.32 billion in revenue, up 9.1% year over year.
Year to date, the stock has gained 3%.
The Relative Strength Indicator (RSI) is 41.38, I would not wait to take action on this gold stock. Newmont is currently one of the most appealing investment opportunities in its industry for several reasons.
First, gold is produced from mostly surface operations, which has a positive impact on costs. Currently, the miner only extracts gold through underground mining techniques at Tanami in Australia (9.4% of total production) and in Nevada (33.3% of total production). In Nevada, however, gold is also mined from open pits. In addition, its Nevada operations produce 35% of its total copper production. The other copper producing mine is Boddington in Australia.
Second, about 75% of Newmont"s total gold production comes from operations located in friendly mining jurisdictions. The North American region (Nevada and Cripple Creek & Victor) accounts for 41.3% of total production and the Australian region (Boddington, Kalgoorlie and Tanami) account for 33.5%. This is important because in times of a weaker U.S. dollar in relation to local currencies, effects on the company"s income statement will be smoother compared to the majority of its peers that mostly generate their earnings outside North America.
Except for its operations in South America (Yanacocha and Merian), the U.S. mining company is producing and selling the metal at an AISC that is considerably lower than the guided $995 per ounce. The company"s South American operations account for just 8.5% of the total attributable gold production, which also reduces the risk of interruptions at operations due to weather conditions.
As illustrated in the graph below, which is from Agnico Eagle Mines" (AEM) website, Newmont Mining"s mineral reserves have an above-average (1.08 g/t) gold grade (1.09 g/t) and operations can be run for at least five years without lowering the quality of the gold reserves:
The balance sheet is solid with approximately $3.04 billion in cash and securities.
With gold averaging $1,243.04 per troy ounce on the London Bullion Market from January 2016 through the end of the third quarter of 2017, Newmont Mining produced an operating cash flow (ttm) of $2.21 billion, which is nearly on par with Barrick Gold Corp. (ABX) ($2.19 billion), the largest gold producer in the world. The Canadian miner can also mine gold at a profit starting from a price of $1,000 to $1,100 per ounce.
Disclosure: I have no positions in Newmont Mining Corp.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with NEM. Click here to check it out.
The intrinsic value of NEM
