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Newmont Goldcorp Is Poised to Outperform

Investors have more than one reason to be worried about the U.S. economy, and are therefore looking for ways to protect the value of their assets.

The US economy continues to grow, but the pace has slowed. In the third quarter of 2019, there were reported increases in household consumption, federal government spending and exports, leading to 1.9% annualized growth in the U.S. gross domestic product, exceeding expectations of 1.6% but falling from 2% growth in the previous quarter.


In its Beige Book publication released last month on Oct. 16, the U.S. Federal Reserve said that numerous business contacts have lowered their perspectives on US economic growth for the next 52 weeks.

The above-listed reasons increase the chances of a market downturn causing losses, which investors may be able to limit limit their exposure to by buying gold and its publicly traded producers.

Thus, we can expect gold will keep on increasing over the current quarter. The metal hit $1,467.65 per troy ounce at close on Monday, bringing the cumulative average price up to $1,383.12 and reflecting a 7% rise from January earlier this year and a 9% rise from the cumulative average price of $1,268.49 for 2018.

As a result of gold moving higher, the share prices of U.S. mining stocks will likely go higher as well as their profits per ounce increase. Following the gold price rally, the VanEck Vectors Gold Miners Exchange-Traded Fund (GDX), which is a benchmark for the mining industry, has already gained 29.2% year to date and 40.3% in the past 12 months.

For the next 52 weeks, investors may want to consider increasing their exposure to the changes in the price of the precious metal by buying shares of Newmont Goldcorp Corp.(NYSE:NEM), which is suggested by many analysts in Wall Street. Shares of Newmont Goldcorp have received an overweight recommendation rating with an average target price of $47.48, which represents a 25% upside from the share price of $38.06 at close on Monday.

Newmont Goldcorp stock has gained 16% in the past 52 weeks through Nov. 18, but it is still affordable as its share price is below the 50- and 100-day simple moving average lines. Now the share price is only 7% over the middle of the 52-week range of $29.77 to $41.23.

The company's price-book ratio of 1.46 is almost in line with the industry median of 1.4 and the enterprise value earnings before interest, taxes, depreciation and amortization ratio of 6.96 is well underneath the industry median of 8.33. The second ratio is particularly meaningful, as mining is a capital-intensive activity.

Newmont Goldcorp targeted to supply the gold market with a total attributable production of 6.3 million ounces of gold equivalent in 2019 at a cost applicable to sales of $715 per ounce and an all-in sustained cost of $965 per ounce.

In the final quarter of 2019, Newmont should benefit from higher gold prices with attributable production of about 1.84 million ounces of gold equivalent. This expected level of output is going to be up 12.2% from the prior quarter, up 15.7% from the second quarter and up 49.6% from the first quarter of 2019. Output growth rates from the second quarter (to a minor extent) and the first quarter of 2018 were influenced by the acquisition of Goldcorp by Newmont for about $10 billion, which was completed in mid-May to form a combined company.

In the third quarter, the miner achieved a 28% year over year rise in attributable production to 1.64 million ounces of gold equivalent, which, thanks to a boost in the average realized gold price per ounce, generated a 57% revenue growth.

The free cash flow doubled to $365 million as a result of higher metal prices, improved grades of ore processed at the Ahafo mine in Ghana and additional throughputs from the assets of Goldcorp. Further, the adjusted earnings before interest, taxes, depreciation and amortization reported a 70% advancement to $1.08 billion and earnings per share of 36 cents marked a 9% jump from the prior-year quarter.

Even though the results were not good enough to beat forecasters, who were instead expecting adjusted earnings per share of 39 cents on $2.83 billion in revenue, they fueled the share price gain we are seeing since last week, rebounding from the Nov. 8 low of $36.61 per share.

Besides yellow metal prices, other catalysts to watch for the final quarter of 2019 include the mill expansion project at Ahafo in Ghana and the addition of a new underground deposit to the Porcupine complex in Northern Ontario.

Higher grades of mineral that will be processed at the Cerro Negro mine in Argentina, the Eleonore mine in Canada and at the Tanami mine in Australia will also help to increase output, as Newmont Goldcorp also mines silver, zinc, and lead from its assets.

The mining giant has mineral resources located in North America, South America, Africa, and Australia.

The stock has a market capitalization of $31.2 billion and is a member of the S&P 500 index, the only gold stock to make the benchmark.

Disclosure: I have no positions in any security mentioned.

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This article first appeared on GuruFocus.