As my faithful followers know, when it comes to investing in gold I much favor owning US gold coins as opposed to “paper gold” or the gold miners. However, the dip in Newmont Mining (NEM) following its big one-time special dividend payout was too good to pass up. I started an initial and small position in the company at that time, hoping to add on drops. Yet, the gold market has been so strong I haven’t gotten another discounted opportunity. Yet, with shares currently under $39, they look too cheap to pass up.
Source: Yahoo Finance
Stars Are Aligned
There are multiple reasons why the current macro environment points to a continuation of the strong gold rally going forward:
As the graphic below shows, the US$ Index is up roughly 3% YTD. But that didn’t stop the gold rally. Gold is up ~17% YTD.
On the interest rate front, Federal Reserve Chairman Jay Powell spoke today and apparently did little to change consensus the Fed will cut interest rates by another 0.25% later this month. According to one source, odds for the Fed to do another 0.25% interest cut were recently as high as 90%. While another cut is unlikely to weaken the US$ to any significant degree, it does reduce the “missed opportunity” costs of owning gold in that returns in money market accounts – already quite low – will likely drift lower still. So this is generally bullish for gold.
Add to all these tailwinds a very uncertain political and trade outlook, and it is pretty much a Goldilocks environment for gold investors in my opinion.
Why Newmont Goldcorp Will Prosper
I expect Newmont to prosper in the coming months and years for a few different reasons:
- The buyout of Goldcorp earlier this year was at a small premium to begin with. But with gold prices now ~$200/oz higher than when that deal was announced, it was obviously well-timed and the higher price of gold will likely rule over any concerns about the quality of Goldcorp’s mines.
- The Nevada joint-venture with Barrick Gold (GOLD) is predicted to yield excellent synergies from their respective assets.
- Newmont recently announced the start-up of its all-electric underground Borden gold mine.
- Newmont’s shares are a counter-cyclical play on an overall market and economy that is looking more and more risky.
The Goldcorp buyout was done at a low-premium with an estimated forward EV/EBITDA ratio of about 7x. That is before adjusting for ~$1 billion in asset sales and $100 million in expected synergies. So the deal was already cheap to begin with. The roughly $200/oz rise in the price of gold since the acquisition was announced means that Goldcorp’s EBITDA would have risen quite dramatically. As a result, the deal was a steal at significantly less than a 7x multiple.
The Nevada JV
Following a hostile bid attempt by Barrick Gold, the companies agreed on a JV that combined their very attractive Nevada mines. Newmont Goldcorp will own 38.5% of the JV based on agreed upon NAVs for the various assets. The companies expect they can save an estimated $450-500 million annually, given the regional proximity of mines that will enable significant cost and capital spending synergies. The JV closed on July 1 of this year.
The JV contains three of the world’s Top-10 Tier One gold assets:
Source: Barrick Gold Q2 Presentation
So not only are the Nevada assets top-tier to begin with, but with two miners like Newmont and Barrick sharing the costs to exploit them, the returns are likely to be very rewarding to shareholders.
Borden: The “Mine of the Future” Is Commercial Today
On October 1, Newmont announced the Borden mine went in-service on-time and on-budget. The mine features state-of-the-art health and safety controls, digital mining technologies and processes, and low-carbon EVs. In recognition of Borden’s contribution to the future of safe and sustainable mining, both the Canadian and Ontario governments each granted C$5 million towards electrification of the mine.
In the meantime, Newmont is able to borrow money at very attractive prices. The company recently issued $700 million of Senior Notes due 2029 at a very low rate of 2.8%. That’s very attractive in any environment, but especially attractive considering gold is up ~17% YTD. The low-rate is also indication of Newmont’s high quality assets and a vote of confidence from investors in the company’s future.
Summary & Conclusion
The higher price of gold couldn’t have come at a better time for Newmont. It will help them recover faster from the big Goldcorp acquisition costs and indicates the Nevada JV with Barrick is likely to be even more profitable than originally envisioned. Meanwhile, chances are high that Newmont could sell some non-core mines and reduce its overall average cost-of-production further. That would be another short-term and positive catalyst.
Based on a higher gold price, falling energy prices, and the resulting margin expansion for the company’s production, I reiterate my Buy on Newmont Goldcorp and raise my price target by $1 to $46.
Note, Deutsche Bank (NYSE:DB) raised NEM from Hold to Buy Tuesday with a $45-50 price objective. And note that despite Tuesday’s 300-point drop in the DJIA, NEM was up 1.7% on a $10+/oz rally in gold to $1505.
Disclosure: I am/we are long NEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.
I may increase my holdings in NEM over the next 24 hours.