Newmont: Only Long-Term Players Will Be Rewarded

Intro

We wrote about Newmont Corporation (NYSE:NEM) back in June of last year, when we stated that the total-return potential of the miner remained significant. NEM stock at the time had recently tested its 200-day moving average and profitability was on the rise. However, despite the fact that gold prices have been more or less flat over the past nine months or so, Newmont now finds itself down over 37% and well below its 200-day moving average since we penned that piece. To make matters worse, we may even see lower prices in Newmont over the near term until we finally get a confirmed swing low in the share price.

The reason why investors need to be cautious here over the near term can be seen on Newmont's intermediate chart. As we can see below, NEM has had a very poor start to calendar 2023, with shares now delivering a sell signal through the intermediate MACD technical indicator. In fact, if one wanted to pull up an intermediate chart of gold, one would find a similar topping pattern. The acceleration of the downswing which we have seen in NEM year-to-date means underside support of approximately $40 a share will most likely be tested in upcoming sessions. Whether this level holds or not remains unclear at this stage. Therefore, if there ever was a time to digest the following truth in one's investing journey, it is now.

Truth: Volatility Does Not Always Equate To Risk

Given the sizable drop mentioned in Newmont over the past nine months, many investors decided to liquidate their positions in order to protect their capital as much as possible. The question here, though, is whether liquidating was the correct decision or if indeed doubling down on the long investment was the better choice. Since we do not know the future, this question cannot be answered but I will stand behind the following statement.

Unless one is committed to having an attitude of NEVER selling their Newmont stock, then one should not be invested in this miner

What do we mean by this? Well although Newmont announced on its recent fourth-quarter earnings call that spending is to increase on the company's most profitable projects, the stock's trajectory (due to rising mining & Labor costs, etc.) will take its cue from the price of gold. The price of the yellow metal remains below its 2011 high, and although NEM shares spiked to the upside early last year on gold's temporary rise above $2,000 an ounce, they were doubly quick in collapsing when gold prices eventually came down. Suffice it to say, Newmont remains a leveraged play on gold, so it only should be owned by investors who have the mindset highlighted above. Anything else and you are setting yourself up for disaster.

Now, given the huge amounts of money printing, since 2008 which was compounded by even more currency debasement post-pandemic, it is baffling, to say the least why Newmont has pretty much traded sideways for the best part of 17 years now. Why we have seen significant inflation in the likes of food, energy, raw materials, etc. over the past 18 months and not in gold is an excellent question but NOT relevant for the NEM investor. The reason being is that the market discounts everything, so investors need to be prepared (even if inflation goes much higher) for gold prices and the likes of Newmont stock to remain subdued for some time to come. In fact, given what has gone before, it is the most likely scenario.

Fundamental Strength

Fundamentally, however, and getting back to our volatility versus risk paradigm, we do not believe Newmont's recent decline points to heightened risk being in this play. The company continues to trade with an attractive valuation and profitability got a boost in the recent fourth quarter due to rising production coinciding with a higher gold price. Newmont showed once more that it can easily generate free cash flow at the present gold price and this really is the key for the long-term investor.

With positive cash-flow generation, Newmont can double down on M&A opportunities, and expand the likes of Cerro Negro and so many more mines to keep production levels elevated. Furthermore, the balance sheet remains very strong with the recent Q4 impairments resulting in the company's goodwill and intangible assets being at their lowest levels in quite some time. (Less Risk) Furthermore, with no debt due for 6 more years and with cash & ST investments now totaling almost $3.8 billion, Newmont's financial base is solid which demonstrates to us the company will be able to outlast any sustained volatility in this space.

Conclusion

Given Newmont Corporation's keen valuation and strong profitability, we do not believe that recent volatility has increased the risk in this play. At the end of the day, we believe Newmont Corporation will trade much higher than at present levels eventually because its metal in the ground simply has to increase in value. Only invest here, though, if you are willing to stay the course with Newmont Corporation. We look forward to continued coverage.

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