Newmont Mining Could Be a Good Long-Term Buy

Newmont Mining (NEM) has struggled due to weakness in the gold market as the stock is down almost 15% in the past year. However, in the second quarter, the company received a boost from lower oil prices and favorable exchange rates, which offset the impact of weak metal prices.

Positives to consider

In fact, its revenue in the second quarter was up around 8% from the year ago period to $1.9 billion, while earnings adjusted for special items increased to 26 cents per share compared to earnings of 20 cents in the same period last year.

Also, the company has significantly improved its AISC to the tune of 20% since 2012.

In addition, Newmont is swiftly progressing with its non-core asset sales. In July, Newmont sold its equity stake in the Valcambi gold refinery in Switzerland for total net proceeds of $119 million. This is a strategic move that will further strengthen its balance sheet, and enhance focus on its core business. According to Randy Engel, Executive Vice President for Strategic Development, “Since mid-2013, we have executed $1.6 billion in non-core asset sales, allowing us to further pay down debt, invest in new, profitable production and return capital to shareholders.”

Focus on inorganic growth

Apart from its internal growth, Newmont also has an inorganic platform to expand its business. In this direction, the company has entered into a purchase agreement with AngloGold Ashanti Ltd to acquire Cripple Creek & Victor (CC&V) gold mine. The deal is valued at around $820 million in cash along with a 2.5% net smelter return royalty for gold production from potential future underground ore.

Talking about this deal, CEO Gary Goldberg said, “CC&V represents a value-accretive opportunity for Newmont to improve mine life and costs in a favorable jurisdiction. Consistent with what we’ve achieved elsewhere, we believe we can lower direct mining costs by up to ten percent through improved productivity and optimization.”

In addition, Newmont has also announced that it intends to buy some of Barrick Gold’s assets. As per Bloomberg, “After taking over operations this year at the Kalgoorlie Super Pit in Western Australia, Newmont would be interested in buying out Barrick’s 50 percent stake.” Acquiring quality assets seems to be Newmont’s strategy for long-term growth, which should strengthen its position in the long run.

Conclusion

Finally, if we consider the valuation, Newmont might not look like a good investment. Its forward P/E doesn’t look attractive at 22.4 as compared to a trailing P/E of 19.06, but analysts anticipate that its earnings could increase at a CAGR of 13.96% in the next five years. Moreover, the stock looks undervalued at current levels as it has a P/S multiple of 1.28, way below the industry average of 32.31. So, Newmont mining could be a good buy for the long run that investors should not ignore.

Published on Oct 19, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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