Newmont Corporation (NEM) has been on a roll, with its shares rallying an impressive 24.8% in the past three months, outperforming the Zacks Mining – Gold industry’s rise of 12.4%. This surge can be attributed to a combination of positive factors, including forecast-topping earnings in the second quarter driven by higher selling prices and production, coupled with a surge in gold prices. While currently trading at a slight discount to its 52-week high, NEM remains strong, trading consistently above its 200-day simple moving average since April 2024. This positive trend, confirmed by the 50-day SMA crossing above the 200-day SMA in May, indicates a bullish outlook for the company.
But is now the right time to buy NEM shares? Let’s delve into the company’s fundamentals to uncover its potential.
Growth-Focused Strategies and Strategic Acquisition
Newmont is committed to growth and has several strategic projects underway. These include the Tanami Expansion 2 in Australia, the Ahafo North expansion in Ghana, and the Cadia Block Caves, also in Australia. These projects are designed to boost production capacity and extend mine life, ultimately driving revenue and profits.
The acquisition of Newcrest Mining Limited has further strengthened Newmont’s position. The merger creates an industry leader with a multi-decade gold and copper production profile in the most favorable mining jurisdictions globally. This combined entity is expected to deliver substantial value to shareholders, generating significant synergies with estimated annual pre-tax benefits of $500 million by the end of 2025.
Solid Financial Performance and Strong Cash Flow
Newmont boasts a robust financial position, characterized by strong liquidity and significant cash flow generation. As of the second quarter of 2024, the company had liquidity of $6.8 billion, including $2.6 billion in cash and cash equivalents. Its operating cash flow more than doubled year-over-year to reach $1.4 billion. In the same quarter, Newmont generated $594 million in free cash flow and returned a substantial $539 million to shareholders through dividends and share buybacks.
Benefiting from Record-Setting Gold Prices
As a leading gold producer, Newmont is strategically positioned to benefit from the record-high gold prices. The yellow metal has been one of the best-performing assets this year, soaring past the $2,500 per ounce mark for the first time on August 2, 2024. This surge is driven by a combination of factors, including easing inflation, expectations of a U.S. interest rate cut, increased tensions in the Middle East, and concerns over an economic slowdown. The record high of $2,531.70 per ounce reached on August 20, 2024, reflects the continued strength in gold demand.
Newmont also offers an attractive dividend yield of 2% at its current stock price. Its payout ratio of 47% (a good indicator of dividend sustainability) is complemented by a five-year annualized dividend growth rate of 15.5%. The company’s strong cash flow and sound financial health make its dividend appear reliable and secure.
The Challenge of Rising Production Costs
Despite these positive developments, Newmont faces a challenge: higher production costs. Its gold costs applicable to sales rose by approximately 13% year-over-year in 2023, and its all-in-sustaining costs, a key metric for miners, surged by 19%. Both cost metrics continued to increase in the second quarter of 2024, driven by rising direct operating costs, materials, labor, and contract services expenses. While these costs have shown signs of easing, they remain a concern for the company.
Positive Earnings Estimates and Valuation
Earnings estimates for NEM have been trending upwards over the past 60 days, reflecting analysts’ optimism about the company’s future performance. The Zacks Consensus Estimate for both 2024 and 2025 earnings has been revised upward. The 2024 earnings estimate is currently pegged at $2.82, representing an anticipated year-over-year growth of 75.2%. For 2025, earnings are projected to rise by approximately 20.6%. NEM’s long-term EPS growth rate of 48.5% is significantly higher than the industry average of 28.1%.
Newmont currently trades at a forward 12-month earnings multiple of 15.74X, representing a 4.9% premium to the industry average of 15X. This valuation appears reasonable, given the company’s positive earnings trajectory.
Outperforming the S&P 500
Thanks to the rally in gold prices, NEM’s shares have gained 22.6% year-to-date, exceeding the S&P 500’s 13.3% rise, although slightly trailing the industry’s 24% gain. Newmont’s gold mining peers, Barrick Gold Corporation (GOLD), Agnico Eagle Mines Limited (AEM), and Kinross Gold Corporation (KGC), have seen returns of 6.6%, 41.8%, and 40.8%, respectively, during the same period.
Investment Outlook: A Solid Choice with Cautious Considerations
Newmont presents a compelling investment opportunity, supported by a robust portfolio of growth projects, a solid financial foundation, and bullish technical indicators. Its growth trajectory, rising earnings estimates, and attractive dividend yield further enhance its appeal. The rally in gold prices is also poised to bolster NEM’s profitability and drive cash flow generation.
However, while the growth prospects are bright, investors should exercise caution due to the potential impact of high production costs. For investors already holding NEM shares, maintaining their position appears to be a prudent strategy.
