Newmont Gains 12% in 3 Months: Should You Buy the Stock?

Newmont Corporation's NEM shares have racked up a 12.2% gain in the past three months, outperforming the Zacks Mining – Miscellaneous industry's decline of 1.8% and the broader Zacks Basic Materials sector's decrease of 6.5%. It has also topped the S&P 500's 7.6% rise over the same period. The bullishness appears to have been catalyzed by expectations of solid earnings in the second quarter on the back of a rally in gold prices.

The stock is currently trading at a roughly 3% discount to its 52-week high of $45.92 reached on Jul 14, 2023.

Technical indicators show that NEM has been unremittingly trading above the 200-day simple moving average since Apr 23, 2024. After a series of sporadic movements, the stock broke the 50-day SMA on Jul 3, 2024. Notably, following a golden crossover on May 13, 2024, the 50-day SMA continues to read higher than the 200-day moving average, manifesting a bullish trend, with the 200-day SMA acting as the support level.

Newmont Trades Above 50-Day SMA

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Is the time right to buy NEM's shares for potential upside? Let's take a look at the stock's fundamentals.

Key Projects, Newcrest Buyout to Catalyze Growth

Newmont continues to invest in growth projects in a calculated manner. The company is pursuing several projects including Tanami Expansion 2 in Australia, the Ahafo North expansion in Ghana and Cadia Block Caves in Australia. These projects should expand production capacity and extend mine life, thereby driving revenues and profits.

Moreover, the acquisition of Newcrest Mining Limited has also created an industry-leading portfolio with a multi-decade gold and copper production profile in the most favorable mining jurisdictions globally. The combination of Newmont and Newcrest is expected to deliver significant value for shareholders and generate significant synergies, with $500 million in total annual pre-tax benefits expected by the end of 2025. NEM also remains on track to meet its 2024 gold production target of around 6.9 million ounces with solid performances of its managed Tier 1 assets and contributions of the sites acquired from the Newcrest buyout.

Solid Financial Health, and Attractive Dividend Yield & Payout

Newmont has a strong liquidity position and generates substantial cash flows, which allows it to fund its growth projects, meet short-term debt obligations and drive shareholder value. At the end of the first quarter of 2024, Newmont had liquidity of $6.7 billion, including cash and cash equivalents of around $2.3 billion. Its operating cash flow jumped more than 60% year over year to $776 million in the quarter.

Moreover, as a leading gold producer, Newmont stands to benefit significantly from the record-setting upswing in gold prices, which should boost its profitability and drive cash flow generation. Gold prices are hitting record highs this year, and the yellow metal has been among the best-performing assets. Prices skyrocketed to an all-time high of $2,449.89 in May, and are currently hovering near the $2,400 per ounce mark. The rally has been driven by strong demand from central banks, a dovish Fed interest rate outlook, global uncertainties and geopolitical tensions.

NEM offers a healthy dividend yield of 2.2% (above the S&P 500′s average dividend yield of roughly 2%) at the current stock price. Its payout ratio is 57% (a ratio below 60% is a good indicator that the dividend will be sustainable), with a five-year annualized dividend growth rate of 15.5%. Backed by strong cash flows and sound financial health, the company's dividend is perceived to be safe and reliable.

Higher Production Costs Strain Margins

Newmont, like most miners, is buffeted by higher production costs, which are likely to weigh on its margins over the near term. Its gold costs applicable to sales rose roughly 13% year over year in 2023. Newmont also saw a 19% surge in all-in-sustaining costs — the most important cost metric of miners. Both cost metrics increased year over year in the first quarter of 2024. The impacts of increased direct operating costs are leading to cost inflation. Higher materials, labor and contract services costs, despite easing somewhat lately, remain as concerns.

Rising Earnings Estimates & Strong Growth Prospects

The Zacks Consensus Estimate for NEM's 2024 earnings has increased around 4.6% over the past 30 days. The consensus estimate for second-quarter 2024 has also been revised 4% upward over the same time frame.

The Zacks Consensus Estimate for 2024 earnings is currently pegged at $2.48, reflecting an expected year-over-year growth of 54%. Moreover, earnings are expected to register a roughly 57.6% growth in the second quarter. NEM has a long-term EPS growth rate of 47.9% versus 19.6% for its industry.

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Valuation: Bit Stretched But Reasonable

Newmont is currently trading at a forward 12-month earnings multiple of 15.9X, a roughly 20.6% premium to the peer group average of 13.18X. The valuation looks reasonable considering the company's healthy earnings trajectory.

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Newmont Underperforms S&P 500 & Peers

Despite the rally in gold prices, Newmont's shares have managed to register a modest gain of 4.5% over the past year, topping the industry's 3.8% increase but underperforming the S&P 500's rise of 27.7%. Moreover, it has underperformed its peers, Barrick Gold Corporation GOLD, Agnico Eagle Mines Limited AEM and Kinross Gold Corporation KGC, which have gained 5.5%, 41.1% and 76.1%, respectively, over the same period.

One-Year Price Performance

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Wrapping Up

With a robust portfolio of growth projects, solid financial health and bullish technicals, Newmont presents a compelling investment case. A healthy growth trajectory, rising earnings estimates and an attractive dividend yield are the other positives. Rallying gold prices should also boost NEM's profitability and drive cash flow generation. However, despite the upbeat growth prospects, its high production costs warrant caution. Holding onto this Zacks Rank #3 (Hold) stock will be prudent for investors who already own it.

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