Gold futures contracts may have given handsome 29% gains this year already, but gold producer Newmont Mining (NEM) has given a five-fold return (124.46%). This makes Newmont, which fell nearly 5% last year, a Phoenix of sorts. Here's why it's the best stock of the year to own.
Recall that streaming giant Netflix had posted an unbelievable 80% rise in the first half of 2015, and ultimately ended with 134% gains in 2015, making it the best performer among all stocks. It should continue reaping rich rewards for investors.
Newmont Mining has thrived amid global economic uncertainties. Besides low all-in gold costs, copper put a sparkle in the miner's earnings. While rapid subscriber growth and expansion did the job of Netflix, Newmont has used gold's rise to its benefit.
Gold's superb uptick this year, marred by known unknowns like Brexit impact, U.S. rates and China slowdown, has benefited gold miner stocks. Goldcorp (GG) shares are up 72% year-to-date. Agnico Eagle Mines (AEM) has doubled in value in six months. Even, Randgold Resources (GOLD) is up nearly 98%.
What makes Newmont Mining special is its solid position to boost output and lower cost profile. Its projects, where it will see growth, are helping the company tide over the slump in aging mines like Yanacocha in Peru. Newmont Mining is a gem of the gold stock group. Organic growth from Merian-Suriname project is possibly less than six months away, and that will boost earnings in a big way.
While a big cloud has always previously loomed over Newmont Mining stock due to its debt, but that problem is also going away. The company is taking steps to align with its top priorities like lowering debt and investing in high margin projects. With an operating margin of 21% (trailing twelve months), Newmont beats most of its large sized peers including Barrick, Goldcorp, Newcrest (NCMGY) and Franco-Nevada (FNV) . Newmont is one of the best growth opportunities you can find.
There is hope that recent move to sell its stake in the Batu Hijau copper and gold mine in Indonesia for $1.3 billion, will help Newmont trim its $5.7 billion debt pile. Don't be scared by this huge number. In fact, rivals like Barrick Gold have over $9 billion in loans. From a debt/equity point of view, Newmont Mining with a debt-to-equity ratio of 0.5 looks much better than Barrick Gold (ABX) (1.2), Anglogold Ashanti (AU) (1.1) and Polyus (OPYGY) (1.1).
With gold prices set to go higher, companies like Newmont Mining that have high skin in the game in terms of gold production will only see better days if the precious metal shoots up as predicted. There was a period of weakness for gold and gold stocks when the Fed rate hike looked like it was coming sooner than expected. But the disappointing May jobs report and Brexit bedlam have made it much tougher for Fed to hike rates, given the uncertain global economy.
Citing Brexit uncertainty, Goldman raised its gold price deck for 2016/17/18 to $1,260/$1,261/ $1,250 from its prior estimate of $1,202/$1,150/$1,150. Jefferies also forecasted gold price of $1,200/oz. for 2016-17.
These forecasts only underline the strong free cash flow outlook for Newmont Mining. RBC Capital has estimated that at a forecast gold price of $1,250/oz. in 2017, Newmont Mining can generate free cash flow of $1.4 billion.
Annual free cash flow (FCF) was in the $300-to-$700 million range for the past two years. The higher FCF, along with the Indonesia deal, can help the company pay back a substantial portion of debt and also bank-roll new development projects.
At a five-year expected price-to-earnings-to-growth (PEG) ratio of 1.84, Newmont Mining Shares even after a stupendous rise are cheaper than Franco-Nevada Corp (4.14), GoldCorp (-2.21) and Agnico Eagle Mines (4.99).
It's entirely possible for Newmont shares to have another solid half-year, just like Netflix did in 2015, especially if gold prices continue to edge upwards.
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