Gold, as an asset class, has delivered returns at a CAGR of 10% over the past 20 years. Owning physical gold is one way to consider exposure to the precious metal.
Another good idea is to buy gold mining stocks.
Newmont Corporation (NEM) looks like an attractive name among gold miners. In May 2021, NEM stock had surged to a high of $75.31. However, with some near-term weakness in gold, the stock has declined to current levels of just over $58. (See Newmont stock charts on TipRanks)
I’m bullish on the stock. Besides the potential for a renewed rally, Newmont currently offers an attractive dividend yield of 3.6%. If gold remains firm, dividends can sustain, and possibly increase in the coming years.
Reasons to be Bullish on Gold
The price action in gold mining stocks largely depends on the price trend for gold. With inflation accelerating, there were concerns that of a relatively early rate hike.
However, recently Fed Chairman Jerome Powell indicated that the impact of the Delta variant of COVID-19 on the economy is uncertain. If the new variant cases continue to rise, there might be a case for renewed economic weakness.
This can potentially delay any rate hike. It’s also worth noting that even if interest rates trend higher in baby steps, real interest rates are likely to remain negative for an extended period. This is good news for precious metals.
Rising geo-political tensions can also support upside for gold. Even central banks have remained aggressive gold buyers with an objective of diversifying reserves. These factors are likely to ensure that gold remains in an uptrend over the next few years.
Newmont’s Strong Fundamentals
Being in a capital-intensive industry, it’s important to talk about the balance sheet. A strong credit profile is a key reason to like Newmont Mining.
As of Q2 2021, the company reported cash and equivalents of $4.6 billion. Additionally, the company has undrawn credit facilities of $3 billion. With a total liquidity buffer of $7.6 billion, the company seems fully financed for the next 12-24 months.
Another important point to note is that Newmont reported a net-debt-to-EBITDA ratio of 0.2. There is ample headroom for leveraging in a scenario of asset acquisition, or a significant ramp-up in investments.
Given the fundamentals, the company is positioned to maintain dividends, and pursue share repurchases.
Asset Base Provides Cash Flow Visibility
Newmont has a quality asset base with a focus on the Americas and Australia. With more than 10 years of gold reserve life, the company has a clear cash flow visibility.
For Q2 2021, the company reported free cash flow of $560 million. This would imply an annualized free cash flow potential of over $2 billion.
As well, the company expects an all-in-sustaining-cost of $970 an ounce for the current year. However, by 2025, Newmont has guided for an AISC of $800 to $900 an ounce. Clearly, the company is positioned for robust EBITDA and cash flows, especially if gold trades around $2,000 an ounce.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, NEM stock comes in as a Moderate Buy, with four Buy and three Hold ratings assigned in the past three months.
The average Newmont price target is $70.73 per share, implying 21.1% upside potential from current levels.
Newmont seems attractive at current levels, considering the company’s fundamentals and asset base. Gold is also likely to remain in a long-term bull market, and this can support upside for NEM stock.
Additionally, the stock also seems attractive for income investors. The credit profile of the company indicates sustained dividends. Furthermore, if gold trades above $2,000 an ounce, there is visibility for healthy dividend growth.
Overall, the correction seems like a good accumulation opportunity. A sharp reversal from current levels might be on the cards.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article
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