Newmont Mining (NEM, Financial) is one of the leading gold producers in the world and has been in business since 1921. With gold prices substantially lower than their all time highs, Newmont Mining is an interesting stock to consider for long-term. This article discusses the reasons to be bullish on this gold mining major.
Why I am Bullish On Gold
To be bullish on Newmont mining implies that I am also bullish on gold for the long-term. The primary reason is continued low interest rates globally and expansionary monetary policies. As the chart below shows, US monetary base has surged in the last few years and this is indicative of accommodative monetary policies.
The same is the case with the Euro zone. More importantly, with no sustained recovery in sight, expansionary monetary policies will continue over the next few years.
Gold has corrected significantly from its all time highs as excess liquidity moves from one asset class to another. However, with low interest rates and ample liquidity in the system, gold will bounce back at some point of time. Another factor that will support the gold rally is increasing geo-political tensions globally. Buying Newmont, at current valuations makes sense as the stock is likely to surge once gold starts to rally again.
Positives Amidst Lower Gold Price
For 1Q14, Newmont Mining reported revenue of $1,764 million, a decline of 19% as compared to 1Q13 revenue of $2,188 million. The decline in revenue was due to a decline in average realized gold price to $1,293 in 1Q14 from $1,631 in 1Q13.
Amidst the decline in gold prices, there are certain positives. Newmont Mining reported positive cash from continuing operations of $183 million and also declared a quarterly dividend per share of $0.15.
Therefore, even at the current gold price, Newmont Mining is doing decently well on the operating side. The biggest positive in 1Q14 was a decline in all-in sustaining cost for gold to $1,034 per oz from $1,121 per oz in 1Q13. The decline has been driven by factors shown in the chart below.
For 2014, Newmont Mining expects the all-in sustaining cost to be in the range of $1,075-$1,175 per oz. This is likely to decline to $950-$1,050 by 2015. Therefore, even if gold prices remain around these levels, Newmont Mining will generate a higher EBITDA on cost cutting measures. The company expects cost cutting in the range of $600-$700 million over the next two years.
Stable Production Profile
Another positive factor is that Newmont Mining has an expected stable production profile even if gold prices sustain at current levels. This implies that the company’s current earnings and dividends sustain. I am personally bullish that gold prices will be significantly higher over the next 2-3 years. Should this happen, the company is likely to ramp-up production.
For now Newmont Mining expects production to be 4750koz for 2014, 5000koz for 2015 and 5000koz for 2016. The production estimates are in the mid-range of the guidance provided by the company. Therefore, with stable to increasing production and a declining cost, Newmont Mining is headed for better times.
It is interesting to note that 2012 was the best year for the company with a realized gold price of $1,663 per oz. For that year, Newmont Mining had a dividend payout of $.14 per share.
Gold is currently trading at $1,317. If gold prices do trend higher over the next few quarters, the dividend yield for Newmont Mining will also surge.
Valuation
Newmont Mining is currently trading at an EV/EBITDA valuation of 6.0. Peers such as Barrick Gold Corporation (ABX, Financial) and AngloGold Ashanti (AU, Financial) are trading at an EV/EBITDA valuation of 6.1 and 6.0 respectively. Therefore, an average EV/EBITDA of 6 is the valuation level existing in the industry.
I believe the valuation should trend higher on any indication of gold prices getting firm. During that time, Newmont Mining will be well positioned to grow in terms of revenue and also create shareholder value through stock appreciation and higher dividends.
I therefore believe that the current depressed levels are a good time to buy and hold Newmont Mining for long-term. The stock has a long track record of good execution and shareholder value creation and the record is likely to be maintained.
