Shares of the world’s largest gold miner, Newmont Corporation (NYSE:NEM), are trading 60% below their April 2022 record peak. Meanwhile, spot gold prices are within 10% of their all-time high. The disconnect, combined with Newmont’s 4.7% forward dividend yield, has presented a shiny opportunity for income investors.
The Denver-based company saw its stock slip to a three and a half year low of $34.20 last week after it completed its latest acquisition. On November 6th, it finally wrapped up its buyout of Australian gold and copper miner Newcrest Mining Limited, a complimentary business it has been pursuing for almost a year. The two companies have more than just gold mining and similar names in common. Both were founded in 1921 — when the U.S. economy endured the ‘Forgotten Depression’ ahead of the famed Roaring 20’s.
More than 100 years later, the gold mining industry faces a very different environment. A strong U.S. dollar, elevated Treasury yields and hawkish Federal Reserve commentary around inflation have prevented gold prices from reaching the elusive $2,000 per troy ounce level. At the same time, geopolitical conflicts in the Middle East and Ukraine hold the possibility for higher gold prices given the asset’s status as a safe haven investment.
This means that Newmont will likely continue to be at the mercy of volatile gold prices. Along with production levels, spot gold tends to be the biggest driver of the industry performance. Both factors were at play in the company’s third quarter results.
How were Newmont’s third-quarter financials?
In the third quarter of 2023, Newmont’s average realized gold price increased 14% year-over-year to $1,920. The gold miner failed to capitalize on the increase, though, as production declined 13% to 1.29 million ounces due to a series of setbacks.
At the Ahafo mine in Ghana, production was slowed by the discovery of a hairline fracture in a grinding mill gear. Management made the decision to operate below capacity, and as of October, the site was operating at 80%. A return to full capacity isn’t expected until the second quarter of 2024, when the gear is replaced.
At the Penasquito mine in Mexico, operations were suspended due to a worker dispute. Newmont reached a deal with the union on October 13th, and production has since ramped up. Full operating capacity at this site is expected by year end.
The issues caused third-quarter revenue to decline 5% when Wall Street was anticipating slight growth. Making matters worse, Newmont’s all-in sustaining costs jumped 12% to $1,426 per ounce, causing the company to fall short of earnings per share (EPS) estimates too.
Is Newmont Stock undervalued?
Needless to say, Newmont missed out on higher gold prices in 2023. The ‘gold’ lining here is that the miner is in a better place heading into 2024.
Labor issues have been resolved in Mexico, and Ghana should be fully operational by mid-year. Assuming gold prices remain near historic highs and there are no further production snags, financial results should improve significantly — especially if the Newcrest integration leads to synergies as management projects.
MarketBeat’s earnings tab shows that analysts expect Newmont to return to profit growth next year, with EPS coming in at $2.78. This means the stock is trading at a mere 12x 2024 earnings, which is at the low end of its historic range.
The S&P 500’s lone gold miner also looks undervalued relative to industry peers. Its closest competitor, Barrick Gold, trades at 14x next year’s earnings estimate. Agnico Eagle Mines and Franco-Nevada are trading at 21x and 31x next year’s earnings, respectively.
Newmont’s industry-best 4.7% dividend makes it an even more compelling gold mining value play. Despite the disappointing third-quarter results, the Board maintained its commitment to creating shareholder value by declaring a $0.40 per share dividend. It is payable December 22 to shareholders who own the stock at the end of November 2023.
Given the low valuation and expectation of better profits ahead, Wall Street’s commentary following the Q3 report has been largely bullish. Five firms have called the stock a buy compared to one hold and no sells. Including the hold, revised 12-month price targets range from $42.00 to $58.00 with an average of approximately $52.00. If NEM can claw its way back to April 2023 levels, as this implies, shareholders could be extracting a 60% total return.