If an investor wants to buy a major gold miner, Newmont Mining Corp (NYSE:NEM) probably isn’t a bad pick. Indeed, NEM stock has posted exceptional returns of late, as Newmont Mining stock has more than doubled since early 2016.
A solid first-quarter report on Thursday morning should help the bull case. Newmont Mining earnings came in above analyst consensus, and full-year guidance looks solid. Gold hit an 18-month high in January, and increased market volatility and geopolitical tension could help the yellow metal going forward.
But after the gains of the last two-plus years, I question whether there’s much upside left in Newmont Mining stock. More importantly, I question whether, over the long-term, there’s any reason to invest in NEM, or any other gold miner, at all.
NEM Earnings Look Solid
Newmont’s first-quarter earnings look solid across the board. Revenue of $1.82 billion did miss analyst estimates by 1%. But non-generally accepted accounting principles earnings per share of $0.35 was two pennies better than Street forecasts.
Looking closer, the news looks good as well. Adjusted EBITDA rose 12% year-over-year, despite lower production. Quarterly production of 1.2 million ounces was in line with the company’s expectations and should ramp as the year goes on.
AISC (all-in sustaining cost) of $973 per ounce leaves plenty of room for profit, given realized prices of $1,329, up 9% year-over-year. And the AISC figure is toward the lower end of a full-year range of $965-$1,025, a good start to the year.
The quarter seems to show a gold miner on track. Gold pricing is a tailwind. Newmont is controlling costs. Production will benefit from new projects coming online in the second half of the year. In fact, Newmont is likely to pass Barrick Gold Corp (USA) (NYSE:ABX) as the world’s largest gold producer.
All told, it’s a good quarter. But it doesn’t do much to change the two fundamental problems facing NEM stock.
NEM Stock Valuation
The first problem is that Newmont Mining stock isn’t exactly cheap. Earnings multiples aren’t always the best way to value miners, but at almost 24x forward earnings, NEM stock isn’t a value play.
An 8.3x EV/EBITDA multiple does help the case here a bit; cash flow multiples are in the teens. But in the mid-term, there’s not a ton of reason to expect torrid bottom-line growth for Newmont Mining.
After all, the company is guiding for roughly flat production in 2019 — followed by a dip for the next three years. Costs should come down next year — and then stabilize. Lower capital expenditures will help free cash flow — but also limit the company’s growth opportunities as its mines age over the next decade. According to the company’s investor presentation after Q1, it expects roughly flat production through at least Q4.
And once cost savings are felt in full next year, there’s not much fat left to cut. Interest expense already has come down nicely, thanks to debt reduction. But for the most part, Newmont Mining’s free cash flow is going to flatten out relatively soon. At 16x that free cash flow, that’s not a hugely enticing profile.
Should You Ever Buy NEM Stock?
Even those models assume that all goes to plan. And the history of the mining space — particularly in gold — shows that’s rarely been the case.
After all, the point of owning a miner is to gain leverage to upside in the price of the underlying commodity. If the price of gold increases, a miner’s cash flow should increase at a much faster rate. And — at least in theory — its stock price should do the same.
That has not been the case, however. ABX, Goldcorp Inc. (USA) (NYSE:GG), Kinross Gold Corporation (USA) (NYSE:KGC), and AngloGold Ashanti Limited (ADR) (NYSE:AU) all have declined at least 60% over the past decade. Gold has risen over that period.
NEM stock has performed better than its peers. But it’s still down over 8% over the last ten years, with its total return just 5% including dividends.
Is this time necessarily different? Perhaps. Newmont has fixed its balance sheet and should generate solid free cash flow over the next few years. There’s a case for gold to continue to rise amid higher inflation expectations and rising geopolitical tension. That higher gold price should help Newmont Mining earnings — and Newmont Mining stock.
But the problem remains. It’s simpler, and safer, to just buy gold. Options and futures offer the same leverage miners offer in theory – without the problems that so often afflict the model in practice. If an investor wants leveraged upside to gold prices, there are easier ways to get it than buying a gold miner. Even after a solid Q1, that problem hasn’t changed for Newmont Mining stock.
As of this writing, Vince Martin has no positions in any securities mention