Since the bursting of the tech bubble in March 2000 and before the recent financial and credit crises struck, at least three sectors have managed to post significant gains: bonds; real estate; and small-caps. For some reason, however, gold remained under the radar for most investors. Yet, since the stock market peak, prices have climbed past many psychological marks. The shares of companies that mine the metal have gone along for the ride.
The perennial question for any gold investor is whether to buy gold bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.
While generally favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM) in particular as a strong example of the type of stock that should bring value to your portfolio for years to come.
Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs, even in the rising price environment.
Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future and it is certainly not exposed to politically unstable regions.
In that regard, the risk is spread out, as the company continues to maintain an aggressive worldwide exploration program and is actively participating in and taking advantage of the ongoing industry consolidations.
In terms of costs, Newmont enjoys an overall favorable cost structure, although the recent quarter painted a very bleak picture when it came to capital expenditures. Its South American operations are the major factor in keeping the company’s costs down. This is particularly true with the Yanacocha property in Peru, where cash costs are in the lowest-per-ounce price range.
The company’s diversified portfolio of low-cost mines allows it to remain profitable, even during prolonged weakness in the gold bullion market. In the past 10 years, Newmont has posted net losses three times, yet each year it has generated positive operating cash flows.
Over the past five years, Newmont’s investment rate has been around 60% (investment rate is the percentage of profits the company has returned back to its business operations).
This strategy is consistent with what most producers do; return every dollar earned, and then some, back into the operations. However, with Newmont, it seems to come with ease, adding further to its attractiveness, as it can grow even during periods of depressed gold prices and at a lower investment rate.
Newmont’s cash flows are highly sensitive to the price of gold, because the company remains largely unhedged, thus exposing itself to the whims of the gold market. However, market data and the current economic environment suggest that the gold market is dancing with the bulls, so the company’s unhedged strategy promises profits, as the price of gold rises further.
This is the stock that saw its market price go up double percentage points over the past three years and its sales double every three years. The company is growing aggressively—both internally and by acquisitions—and has sufficient cash in the bank to finance that growth.
Newmont Mining appears to be the perfect choice for investors looking for a company with excellent fundamentals, a proven track record, and experienced and knowledgeable management. This is not a recommendation necessarily to buy the stock right now, but definitely take a look at it.
Newmont is a leader in gold. In technology, a company that has fallen on hard times, but that I feel is set for fresh growth is Microsoft Corporation (NASDAQ/MSFT), which you can read about in Microsoft May Be Set for Prime Time.
George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »
Forecasts Aug. 29, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)