Despite rising more than 50% from its March lows of this year, at the current price of $60 per share, Newmont stock (NYSE: NEM) is still undervalued and seems like a good bet at the present time. Newmont’s stock has rallied from $39 to $60 off the recent bottom compared to the S&P 500 which increased a little over 60% during the same period. Initially (March to August 2020) NEM stock outperformed the market 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. However, NEM’s stock price declined in the last 2 months on the back of a drop in the global gold prices with lockdowns being lifted. With gradual lifting of lockdowns and easing of supply constraints, production and shipments are expected to go up, while the global price outlook still remains positive despite recent volatility. We believe higher revenue and improved earnings in 2021 along with an elevated P/S multiple is likely to drive another 30% rally in the stock from its current level. Our dashboard What Factors Drove 71% 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 higher revenue. 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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The P/S multiple continued to increase from 2.6x in 2017 to 3.3x in 2019 as the market expected the company to continue with its healthy performance. The P/S multiple increased sharply in 2020 and currently stands at a little over 4.6x. 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. With price outlook for precious metals remaining positive, Newmont’s P/S multiple is likely to remain at the current elevated level in the near term.
Where is the stock headed?
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, which, in turn, led to a surge in global gold prices. With rising investment in the yellow metal by major central banks and expectations of interest rates declining, 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 recent results, where Newmont revenues for the first nine months of 2020 increased 20% on a y-o-y basis while earnings dropped due to an unusual gain recorded in the previous year period.
With the gradual lifting of lockdowns, the gold rally also seems to have faced impediments after the price increased from $1,500/ounce at the beginning of 2020 to over $1,950/ounce in September 2020. In fact, with economies opening up, the gold price has declined over recent weeks and has remained volatile, with it currently close to $1,870/ounce. However, with the new spike in Covid-positive cases and the economic recovery being slower than expected, precious metals’ price outlook remains positive with gold and silver prices expected to remain elevated. The actual movement in commodity prices and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.
Rising revenue and margins during the current crisis in 2020, when most industries are adversely affected, is a big positive for the mining giant. Additionally, 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 rise further. As revenue and earnings growth remains strong in 2021 due to higher volume and favorable price realization, the P/S multiple will also remain elevated. At the current level, investors have an opportunity to see a potential upside of 30% in the stock, which could reach close to $80.
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