Newmont Stock: Hold On For 25% Gains

Despite more than a 60% rise since the March lows of this year, at the current price of $63 per share, Newmont stock (NYSE: NEM) still has considerable upside potential left. Newmont’s stock has rallied from $39 to $63 off the recent bottom compared to the S&P 500 which increased 56% during the same period. The stock was able to beat the broader market in the last 7 months due to a sharp rise in gold prices during the current pandemic, which benefited Newmont as 94% of its revenue comes from the yellow metal. Global gold prices reached their all-time high during the current crisis and are currently about $1,910/ounce with it expected to remain at such elevated levels on account of a bleak near-term economic outlook. Higher gold prices and shipments are likely to lead to a 15% rise in total revenues (and thus RPS) of the company in 2020, while the P/S multiple could remain close to the current levels. Although the stock currently is 78% above its level at the end of 2017, higher revenues and improving margins provide Newmont’s stock a further upside of close to 25% from its current level. Our dashboard What Factors Drove 78% Change In Newmont Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the stock price rise between 2017 and 2019 is justified by the 32% growth in Newmont’s revenues, from $7.4 billion in 2017 to $9.7 billion in 2019. This was mainly driven by a sharp rise in gold shipments reflecting the impact of the Goldcorp acquisition in 2019. Newmont reported losses in 2017 but has since then improved its margins in the following two years due to higher grade ores and higher revenue. With shares outstanding increasing sharply due to the acquisition, revenue per share saw a slight decline of 4.2% during 2017-2019.

The P/S multiple continued to increase from 2.6x in 2017 to 3.3x in 2019 suggesting that the market expected the company to continue with its healthy performance. The P/S multiple increased sharply in 2020 and currently stands at a little over 4.7x. This was mainly due to a sharp rise in the stock price on the back of a surge in global gold prices and with Newmont actually benefiting to a large extent from the current pandemic while almost every other sector is seeing a downturn.

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Trigger for upside?

A slowdown in economic and industrial activities and expectations of a global recession, following the outbreak of coronavirus this year, has increased gold’s value as a hedging instrument. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to over $1,910/ounce currently due to higher demand. With rising investment in the yellow metal by major central banks and expectations of interest rates declining, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current Covid-19 crisis. This was reflected in the company’s H1 2020 results, where Newmont’s revenue increased by 22% y-o-y.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. The gradual lifting of lockdowns and easing of global supply bottlenecks is likely to help a large company like Newmont which has a global supply chain. This is projected to lead to higher shipments post the crisis. Though gold prices could drop post-Covid, the drop is unlikely to be significant due to the subdued economic growth outlook. In fact, higher shipments could offset a slight drop in gold price realization.

Thus, rising revenue and margins during the current crisis in 2020, when most industries are adversely affected, is a big positive for the mining giant. Additionally, expectations of continued healthy revenue and margin growth in 2021 due to the Nevada JV (with Barrick Gold) and higher production, and with investors’ focus shifting to 2021 numbers, we believe Newmont’s stock is set to rise further. At the current level, investors have an opportunity to see a potential upside of 25% in the stock to reach close to $80.

For further insight into the gold mining space, see how Newmont and Freeport-McMoRan compare with each other.

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