Despite a massive rally in gold prices, shares of the world’s largest miner of the yellow metal have been underperforming. Investors should go prospecting.
Gold is up 27% over the past 12 months compared to a basically flat performance for the S&P 500, and the outlook remains favorable. The Federal Reserve has been lowering rates and markets expect the central bank to keep going despite reasonably strong consumer-price inflation in the U.S. The Fed’s counterparts around the world are also in easing mode. What is more, threats of geopolitical chaos are elevated, with no resolution in sight for Hong Kong’s unrest and a possible “no deal” Brexit on the horizon.
Nevertheless shares of
the world’s biggest gold miner by annual production, are up just 11% so far this year compared to a 32% surge for its closest rival
Gold prices above $1,500 an ounce should provide a massive profitability lift to Denver-based Newmont. Its all-in sustaining cost of production, which includes cash expenses and the capital expenditures needed to sustain gold output, was just $1,016 per ounce in the second quarter. The company sees this falling to $975 per ounce for the full year.
Investor discontent can be traced back to
’s $10 billion acquisition of Vancouver-based Goldcorp earlier this year, giving the company its present name and status as the world’s largest gold miner. Many shareholders would have preferred Newmont to accept a takeover offer from Barrick, which would have created a true golden colossus but which Newmont rejected.
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Newmont and Barrick did form a Nevada joint venture to drive down costs at some of their key mining sites. Moreover, Newmont can still prove the doubters wrong by turning around operations at a couple of underperforming Canadian mines it received in the Goldcorp deal. Morningstar analyst
says the company’s strong operational track record argues in its favor.
“If Newmont is able to do what they did with other mines in recent years with Goldcorp, there’s an opportunity there,” Mr. Inton says. Any further leg up in gold prices would just be gilding the lily.
Newmont currently trades at 22.8 times forward earnings, according to FactSet. That is below its five-year average multiple of 24.5, and looks downright cheap compared to Barrick’s 35.8 times. For investors, this looks like a golden opportunity.
Write to Aaron Back at firstname.lastname@example.org
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