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Why Newmont Can Outperform

Economic outlook as a catalyst to the gold price

The new coronavirus outbreak has undeniably pushed the price of gold higher this week, helping the precious metal break through the $1,600 per ounce price level.

This catalyst is, however, a short-term one. In the long term, the gold price will likely continue to be driven higher by U.S. economic growth slowdown as the government and companies alike begin to run out of ways to inject capital into businesses.


Many of you may argue that the U.S. economy is healthy simply because the stock market makes new record highs on almost a daily basis. However, this rally in the market valuation of U.S.-listed stocks is generated largely by stimuli that have little to do with core business growth.

One large stimulus for the increased valuation is prevailing shareholder optimism due to reactions to positive news from Apple, Facebook and other internet giants. On the other hand, consistent growth in the gross domestic product is showing a general downtrend in its quarterly rates over several trimesters already.

This is a reason for concern for many investors, who may think that this mature stage of the economic cycle could lead to more difficult times.

We can see the fears of this community of concerned investors through changes in the direction of important economic indicators. For example, the "Historical 10Y-1Y Spread on Treasury Yield" (0.06% as of Feb. 20) is again in free-fall following a few weeks of a very shy recovery last summer. The drop in the 10Y-1Y spread signals that investors perceive a riskier American public debt and, therefore, higher uncertainty about the economic conditions of the country.

Also, the 10-Year U.S. Treasury Notes Yield (1.52% as of Feb. 20) declined 121 basis points over the last 12 months and by 135 basis points over the last 24 months, indicating the perception of a less rosy outlook for the U.S. economy.

Thus, analysts see demand for gold increasing as a safe-haven asset, projecting prices to reach $1,650 to $1,700 within a year.

Newmont Corp

In order to profit from bullish sentiment on gold, you may want to consider purchasing shares of U.S. gold producer Newmont Corp. (NYSE:NEM).

Over the past couple of years, the gold bull market has driven Newmont's share price up 85%, thrashing the VanEck Vectors Gold Miners exchange-traded funds (GDX), the benchmark for the gold mining industry.

Higher bullion prices and production allowed the world's largest gold miner to increase the quarterly dividend by an impressive 460% from 2.5 cents in 2016 to the current 14 cents per common share that Newmont will send out for payment on March 19, 2020, to shareholders of record as of March 5.

Attributable gold production is expected to hit 6.4 million ounces for the year (up 1.7% from 6.291 million ounces in 2019) thanks to fresh output from the acquired Goldcorp mining activities. Improved gold grade and throughput as a result of the successful advancement of mineral projects in Ghana will also contribute to the production target.

Newmont will mine gold from 95.7 million ounces of mineral reserves grading about 1.2 grams of metal per ton of ore as of Dec. 31, 2019, paying gold costs applicable to sales (aka CAS) of $750 per ounce and all-in sustain costs (aka AISC) of $975 per ounce. The cost will still be one of the lowest in the industry, though a bit higher than in 2019 when Newmont Corp endured - in line with the guidance of the company for the full year - CAS of $721 per ounce and AISC of $966 per ounce.

The balance sheet had $2.5 billion in cash on hand and short-term investments and a net debt-adjusted Ebitda leverage ratio of 1.2 times (one of the best in the industry) as of Dec. 31, 2019.

In addition to gold, Newmont also mines other precious metals, copper, zinc and lead in North and Latin America, Africa and Australia. Newmont is the only gold mining company in the S&P 500 Index.

Currently, the quarterly distribution of free cash flow yields a 1.16% forward dividend, based on the share price of $48.10 at close on Thursday. The resulting market capitalization of $39.43 billion is not cheap. The stock trades significantly above the 200-, 100- and 50-day simple moving average lines. The share price is only 1.9% from the higher limit of the 52-week range of $29.77 to $48.99.

The price-book ratio is 1.58 versus the industry median of 1.49 and the enterprise value-adjusted Ebitda ratio is about 12.09 versus the median of the industry for the enterprise value-Ebitda ratio of 8.76. In 2019, Newmont posted Ebitda of $5.954 billion and adjusted Ebitda of $3.734 billion. Its enterprise value was $45.14 billion at close on Feb. 20.

The 14-day relative strength indicator of 77 indicates that the stock is not far from overbought levels.

Wall Street sell-side analysts have released an overweight recommendation rating for shares of Newmont.

Disclosure: I have no positions in any security mentioned.

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This article first appeared on GuruFocus.