October 5, 2022

There’s No Reason Gold Stocks Should Be So Cheap – Newmont Mining On The Bargain Rack

Over the past five years, gold bullion has dramatically outperformed the average gold stock.  Reasons why bullion has outperformed gold stocks include an investor preference for physical gold and the inability of gold miners to produce earnings gains commensurate with the increase in the price of gold.

The end result of investor aversion to gold stocks has resulted in many quality gold stocks, such as Newmont Mining (NEM), winding up on the bargain rack.  Newmont Mining is one of the world’s largest gold producers that has positioned itself for profitable growth after restructuring its operations.  Newmont Mining management is forecasting a 35% increase in gold production to 7 million ounces annually over the next six years.

Revenue growth at Newmont has grown by 10% annually over the past 10 years.  Earnings per share increased from $.45 per share in 2002 to $4.68 per share in 2010.  For the year ending December 31, 2010, gross margins hit a record 61%, cash holdings increased to $4.1 billion and revenues climbed by 23% to $9.5 billion.  Newmont Mining has a dividend yield of 2.3% with a very low payout ratio of 18% and is committed to increasing the dividend in line with the increase in the price of gold.  Newmont’s total proven and probably gold reserves of 93.5 million ounces are valued at only $285 per share.

Newmont Mining - courtesy yahoo finance

 

In this week’s Barron’s Roundtable, analyst Fred Hickey talks about Newmont Mining and why he is bullish on gold.

Hickey: Newmont Mining [NEM], which I recommended last year, outperformed. [The stock rose 5.5% through Dec. 30.] The driver is gross margin expansion. Gold prices are up by a factor of six through this bull market, yet costs have roughly doubled. The company has had tremendous cash flow, leading to dividend increases. Newmont has tied its dividend policy to the gold price. If the price rises, you are guaranteed more dividends. The money won’t be wasted on bad acquisitions. In 2008 Newmont earned under $2 a share. It could earn $4.82 for 2011, and $5.96 in 2012. There’s no reason these stocks should be so cheap.

As Felix has said, owning physical gold is important. In addition, you can own gold through exchange-traded funds, such as the GLD [ SPDR Gold Shares]. They are audited. The U.S. government’s gold holdings haven’t been independently audited in decades. The GLD charges fees of 0.40% of assets. The IAU, or iShares Gold Trust, charges only 0.25% of assets. It trades for about a hundredth of the price of gold, so it is selling for $15.76 a share. It has been around since 2005 and has $9 billion in assets and 171 tons of gold. It stores its gold in vaults around the world. Last year I recommended stocks. This year I like the GDX, or Market Vectors Gold Miners ETF. It gives you diversification with 31 names, including a few silver stocks. Barrick Gold [ABX], Newmont and Goldcorp [GG] account for 41% of assets. At some point gold stocks will outperform bullion.

Newmont is currently selling at a steep discount to the underlying value of its gold reserves.  As the price of gold continues to rise, the stock will eventually reflect the fundamentals and could easily double from current levels.

Comments

  1. As speculated, gold has continued to be dependable and solid throughout the euro zone debt crisis, the Middle East conflicts, bank bailouts and the U.S. economic situation that seems more focused on politics rather than financial.
    I still believe the price of gold will continue to be driven by the fears and uncertainty overseas, the solvency of the banking system and the threat of global recession, which means gold, will remain an attractive option. I’ve heard over and over again to buy physical gold – bars not paper.
    With the possibility of a US and global recession getting closer and the impetus in early 2012 for people to search for safe havens, gold just might be the one that suits the most. Gold jumped nearly 5 per cent last week, its fourth consecutive weekly gain, after the US Federal Reserve pledged to keep interest rates near zero until at least late 2014, which could put pressure on the US dollar.

    Over the last five years, gold prices have risen from US $650 /troy Oz. to $1,743.40 an ounce early this morning. It did touch $1,744.80 – its highest since mid-December and up some 11.2 percent on the month to date. That’s a steady gain of over 250% and it doesn’t seem to be losing strength anytime soon.
    During the last major gold bull market, which ran from early 1970 to early 1980, gold prices rose from US $35 an ounce to US $850 – a 24 fold multiple – and while it may seem unlikely to reach this in the near future, gold will continue to remain an attractive option.
    Halfway through the 2011 euro zone crisis a “mini boom” hit the gold market as everyone went to it as the safe haven that was needed at the time. Prices reached up to US $1900 before the correction swept away some of its luster.
    There were some fresh developments coming out of the European Union debt crisis overnight. Reports said Greece private sector and government talks on debt restructuring have made some progress but still have not come to a complete resolution. The Greek prime minister said he looks for an agreement to be sealed this week. Monday’s EU leaders’ summit meeting was also deemed successful, as the group pledged closer fiscal ties and better debt-limit enforcement policies among EU countries. That has given the market place a “risk on” mentality so far Tuesday. That has boosted the Euro currency and pressured the U.S. dollar index. The EU debt crisis is still a major underlying bullish factor for the gold market, due to its safe-haven asset status.

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