Newmont's Proactivity Is Appreciated by the Market
- By Alberto Abaterusso
On Sept. 21, at the conclusion of a two-day meeting, the FOMC members preferred to stay "on the side of caution" and decided not to increase the bank's key interest rate. This decision is creating more pressure on the gold price. The precious metal jumped 1.3% in two days and gold mining stocks were boosted on the stock market.
Warning! GuruFocus has detected 3 Warning Signs with NEM. Click here to check it out.
The intrinsic value of NEM
On the same day of the Fed's decision, one gold stock in particular, Newmont Mining Corporation (NEM), jumped to $41.03 (+7.6%), outperformed the VanEck Vectors Gold Miners ETF (GDX), which raised 7.1% to $27.90, and was the best-performing stock in the S&P 500.
According to Anita Soni, an analyst at Credit Suisse (NYSE:DOIL), besides Newmont's three key points business strategy, what shareholders really appreciate about this Canadian gold miner is "defining growth based on free cash flow rather than production" (Barron's).
What enables Newmont to generate free cash flow during a period characterized by an increase in the price of gold, without basing the growth on production, is the operational efficiency achieved due to a high quality asset base that the miner was able to build through a disciplined allocation of financial resources.
It is true that when compared to its peers, Newmont has the highest AISC, but the miner focused the majority of its operations in safe or low risk countries.
As you can see from the picture above, approximately 33% and 41% of the attributable gold production comes from the North America and Asia Pacific segments.
Therefore, having the vast majority of gold production coming from safe or low risk countries, when the Fed's policy on interest rates is dovish, the US dollar's relative value decreases, moving in the opposite direction of gold and Newmont's operations don't convey a weaker US dollar against the local currencies as much.
As a matter of fact, when gold prices rallied in the first half of 2016, Newmont reported an increased gold production at operations in North America and Asia Pacific and lowered the production at operations in South America and Africa.
During the first half of 2016, gold prices increased 23% and during the first half of 2015, the gold price decreased with 0.8% in the London bullion market. The average gold price was approximately $1,220 per ounce in the first half 2016, and was approximately $1,206 per ounce in the first half of 2015.
Newmont's gold production increased in the North America and Asia Pacific segments by 19.3% and 4.5%, respectively. The production of gold decreased at operations in South America (Peru) and Africa (Ghana) by 27.3% and 1%, respectively.
Once Newmont has completed the sale of Batu Hijau in Indonesia - the only mineral deposit (copper) in an Asian country - and with the acquisition of Barrick's (ABX) 50% stake in Kalgoorlie in Australia, the Canadian miner will further strengthen and improve its portfolio value through transaction.
On Sept. 26, Newmont closed at $39.32 per share with 4.75 million shares traded on the NYSE and gained 118% YTD.
Since the beginning of 2016, NEM has outperformed GDX by 23%, surpassing its peers and signaling that shareholders like the ability of Newmont's management to anticipate Fed's decisions on interest rates and therefore moving accordingly.
Source: Google Finance
The analysts' recommendation is 2.5. The recommendation ranges between 1 (Strong buy) and 5 (Sell). The average price target of NEM is $46.98.
The enterprise value/EBITDA is 7.72 and the price/book (mrq) is 1.82.
Disclosure: I have no positions in Newmont Mining Corporation.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with NEM. Click here to check it out.
The intrinsic value of NEM
