Despite close to a 75% rise since the March lows of this year, at the current price of about $69 per share, we believe Newmont stock (NYSE: NEM) still has some upside potential left. Newmont’s stock has rallied from $39 to $69 off the recent bottom compared to the S&P 500 which increased 46% during the same period. The stock was able to beat the broader market in the last 4 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. Although the stock currently is at almost 2x its level at the end of 2017, the fact that global gold prices reached their all-time high recently and is currently about $1,972/ounce with it expected to remain at such elevated levels on account of a bleak near-term economic outlook, Newmont’s stock still has the potential to see an uptick. 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 P/S multiple could drop marginally by about 5% as gold prices decline slightly post-Covid. This could amount to about 10% rise in Newmont’s stock price. Our dashboard What Factors Drove 96% 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 an improved top line. With shares outstanding increasing sharply due to the acquisition, revenue per share saw a slight decline of 4.2% during 2017-2019.
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However, P/S multiple continues 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. P/S multiple increased sharply in 2020 and currently stands at a little over 5x. 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. The company’s P/S could further rise marginally and hover between 5x and 6x in the near term, which could push the stock price higher.
What’s the trigger for an 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 $1,972/ounce currently due to higher demand. With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, 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 recently announced Q2 2020 results, where we saw a 4.8% rise in Newmont’s revenue despite gold shipments dropping by 22% y-o-y.
However, the gradual lifting of lockdowns is also giving investors confidence that developed markets may have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. The 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, followed by 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 see further upside of about 10% from its current level of $69. As per Newmont valuation by Trefis, we have a price estimate of $76 per share for Newmont’s stock.
For further insight into the gold mining space, see how Newmont and Freeport-McMoRan compare with each other.
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