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Engineers detonate the Yanacocha gold mine in Cajamarca, Peru.
Dado Galdieri/Bloomberg
It’s taken a while, but a goldmine
newmont
‘S
stock, a Baron’s pickup, has finally started doing what we thought it would — and it’s not too late to buy one.
Back in September, we argued that the price of gold could bounce back and that Newmont (ticker: NEM) was cheap, both factors that would ultimately help propel the stock higher. Shares didn’t do much at first, falling 4.5% when we picked it up at its low point in early March. This can be blamed on the price of gold, which rose marginally, but that didn’t necessarily help as the economy looked set to rebound and investors began to favor riskier assets.
Recently, Newmont stock has shown some life. This is up about 9.6% from the March low, while
S&P 500
has been largely flat. Credit from investors seeking haven amid banking sector crisis boosted gold prices. That doesn’t hurt the problems at Silicon Valley Bank and
First Republic Bank
(FRC) threatened to damage economic growth and force the Federal Reserve to stop raising interest rates—perhaps as soon as next week’s meeting. Gold gained 4.7% in March during Thursday’s close.
Yes, things like production — the company said on its fourth-quarter earnings call that the high end of its guidance range would put this year’s production slightly above last year’s — but if Newmont can sell the same amount of gold for a higher price , it will boost overall sales. Analysts already expect sales this year to reach $12.36 billion, up 3.7% from last year.
“What’s more important is the price of gold and that’s really what’s going to drive my [sales] Expected,” says Mike Dudas, analyst at Vertical Research Group.
That sales growth also comes without doing any additional work, which means Newmont’s margins should be even higher. Again, gold prices are not the only thing that affects profits. In February, the company reported fourth-quarter sales of $3.2 billion, above estimates of $3.09 billion, but missed gross margin forecasts as cost of sales reached $1.78 billion, which exceeded expectations by $1.5 billion. The higher expense was caused by salary increases, higher energy costs and other items, and contributed to the net loss.
Now, however, it is possible that gold prices will climb and the increase in cost will be lower. According to FactSet, analysts expect EBITDA—earnings before interest, taxes and non-cash expenses—to rise 11.4% to $5.07 billion this year.
“With gold prices moving up and costs moderating, you should see some margin and cash flow growth for the company, and that’s what investors will be eyeing,” says Dudas.
The stock still looks cheap, despite Newmont’s recent rally. It is trading at 6.7 times enterprise value to EBITDA, which is lower than its five-year average of nine times. Dudus has a $60 price target on the stock, up 31% from Thursday’s close of $45.78, but FactSet’s average analyst price target of $55.87 points to gains of 22%.
No need to stand knee-deep in a stream. Newmont seems like an easy way to strike gold. b
write to Jacob Sonenshine at [email protected]