Commodities & Metals

Newmont Will Remain the King of Gold Miners

Jon C. Ogg

Published: May 6, 2020 1:56 pm

Newmont Corp. (NYSE: NEM) has seen its shares surge since merging together Newmont and Goldcorp to create the world’s top gold-mining stock. With a market cap of $50 billion, the company should be loving the price of gold at nearly decade highs.

The initial reaction might seem like investors felt a bit let down by its earnings report. Newmont has a lot going for it, and high gold prices might be only one driver here that should keep gold investors interested in the stock for the long haul.

Newmont’s net income from operations came in at $837 million, versus $113 million a year ago. On an earnings per share basis, that’s $1.04 versus just $0.21 per share a year ago. Newmont’s adjusted earnings per share were $0.40, after backing out one-time items.

The higher revenues of $2.581 billion rose just over 43% from a year ago, reflecting higher prices and higher production. Newmont’s attributable gold production was up 20% to 1.5 million ounces, while its average realized gold price surged by 22% to $1,591 per ounce.

The company added $939 million in new cash from operations in the first calendar quarter of 2020, but it also previously withdrew its 2020 guidance due to production deferrals that could impact its costs. Its net cash position was $3.7 billion, and its long-term debt was just above $6 billion.

It should have been obvious that revenues would rise, but what many investors did not seem to factor in was that its costs applicable to sales rose nearly 22% to $1,140 per ounce of gold, and its key measurement of the all-in sustaining costs rose by 14% to $1,030 per ounce of gold.

One issue behind the costs is that there were higher capital spending and maintenance costs, some of which were tied to COVID-19. This was a time when some global mining outfits had entire projects closed down or on a skeleton crew due to travel restrictions and work conditions.

One additional issue, which investors should pay close attention to, is that gold companies have some common threads with other commodity-focused industries. When prices rise, production usually rises, workers tend to get higher wages or participation, equipment costs tend to be higher, with strong competition driving up the demand, and other costs tend to be higher. At the same time, most business executives tend to be more positive and may have a higher tolerance for projects that may be less viable at much lower prices.

It is hard to imagine how much the cost increases can be offset if gold prices remain high at a time when so much new money is being printed to stave off a global recession from turning into a depression. Newmont’s upside would be massively higher, if the $3,000 per ounce upside outlook from a top firm comes to fruition. Newmont has been also included in lists of COVID-19 stock winners more than once or twice.

Newmont had much higher production from North America in a post-merger basis, while gains in South America were offset by lower production in Australia and in Africa.

Where Newmont really shines is in its unrivaled mineral reserves of 95.7 million ounces of gold. The company even recently hiked its dividend, when so many other companies in the world are slashing and burning their dividends to conserve capital.

Analysts on Wall Street also hiked their price targets ahead of Newmont:

• BofA Securities reiterated its Buy rating and raised its price objective from $73 to $82.
• Deutsche Bank reiterated its Buy rating and raised its price target to $70 from $54.
• JPMorgan reiterated its Overweight rating and raised its price target to $73 from $70.
• Raymond James reiterated its Outperform rating and raised its price target from $68 to $73.
• TD Securities reiterated its Buy rating and raised its price target to $83 from $81.

It is very common for commodity producers not to reflect the underlying high commodity prices in some quarters. The reality is that they can have some disappointments along the way while the actual revenues and earnings will continue to grow. The pool of Refinitiv analysts is calling for earnings of $2.29 per share in 2020 and $3.13 per share in 2021, with revenues rising over 13% to $11 billion this year and $11.8 billion next year.

Newmont’s stock price was down 3.1% at $62.90 on Wednesday in afternoon trading, in a 52-week range of $29.77 to $65.05. Its consensus stock price target of $65.17 will be higher after the coming adjustments have been added into the mix.

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