The shares of Newmont Corporation (NYSE: NEM) have declined by about 32% year-to-date, underperforming the broader S&P 500. There are a couple of factors responsible for the decline in Newmont stock. Gold, which accounts for over 85% of Newmont’s revenue – appears to be out of favor as an investment avenue. Prices for the yellow metal are down by about 7% year-to-date and by about 16% from recent highs seen in March due to rising interest rates and a strengthening U.S. dollar. Prices for other commodities such as copper, zinc, and silver have also been trending lower this year, impacting the company’s topline. Moreover, Newmont’s profits are also being hit by rising costs of labor, consumables, and energy. Over Q2, the most recently reported quarter, the all-in sustaining costs – a measure of total production costs – rose to $1,150 per ounce from $1,050 per ounce. Newmont expects the cost pressure to persist until 2023, considering a tight labor market and high oil prices.
However, there’s good reason to consider Newmont stock at current levels of about $42 per share. Newmont’s stock is down by almost 50% from highs seen this April and currently trades at under 14x consensus 2022 earnings. We think this is an attractive valuation considering that Newmont is the world’s largest gold miner, with high-quality assets. The company’s gold mineral reserves stand at about 93 million ounces, a large portion of which is located in low-risk regions such as North America. The company has also fairly consistently raised its gold production, with plans to boost production from around 6 million ounces in 2022 to as much as 6.8 million ounces by around 2025.
Gold prices could look up in the medium term, given the tough global economic outlook and mounting geopolitical uncertainties. U.S. GDP has contracted over the last two-quarters straight with consumer confidence remaining weak. Russia is also looking to escalate its war on Ukraine after its army suffered multiple setbacks earlier this month. These factors could make gold a bit more appealing, helping price realizations for Newmont. The company has previously estimated that every $100 increase in the gold price per ounce results in a $400 million rise in free cash flows.
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Newmont’s dividend is also thick, with the annual payment standing at over $2 per share, translating into a dividend yield of about 5% at the current market price. The company should be able to sustain its dividend, given that its cash holding stood at a relatively strong $4.3 billion at the end of Q2. This could make the stock attractive to investors in a rising rate environment.
We estimate Newmont’s valuation at about $65 per share, which is about 50% ahead of the current market price. See our analysis of Newmont revenue for more details on the company’s business model and key revenue streams.
With inflation rising and the Fed raising interest rates, Newmont stock has fallen 32% this year. Can it drop more? See how low can Newmont stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||-4%||-20%||69%|
|Trefis Multi-Strategy Portfolio||-6%||-21%||213%|
 Month-to-date and year-to-date as of 9/22/2022
 Cumulative total returns since the end of 2016