Newmont Mining (NYSE:NEM) fell from its all-time high in 2011 of $70 share to just $17 at its nadir a few years ago. This was particularly dispiriting for investors, as NEM stock reached $60 back in the mid-1990s.
In other words, Newmont was dead money for a long time, but there’s finally some good news. Gold (NYSEARCA:GLD) is finally back. It’s been a rough eight years or so for precious metals investors. While the stock market soared, gold slumped and Silver (NYSEARCA:SLV) fell even more steeply. With precious metals on the decline, leading mining companies sank as well.
But now gold is surging again and Newmont is on the upswing. Gold recently topped $1,700 per ounce. Traders have been looking for safe-haven trades with the novel coronavirus wreaking havoc on the world economy. And gold certainly fits the bill.
Newmont is riding the wave as well. Shares topped $65 this week, pulling it to within just a few dollars of its all-time high from a decade ago. Traders bid Newmont up following an uneven earnings report that had some strong points, but also a few warning signs.
Earnings and NEM Stock
Newmont reported earnings on May 5, and there were a lot of moving parts to unpack. The headline numbers at first glance seem huge, with profits up 9x, for example. However, much of that increase was due to Newmont recording gains selling mines and stakes of other mining firms. These sorts of gains, while beneficial for shareholders, are one-time in nature.
On a pure operating earnings basis, Newmont’s EPS and revenues figures came in slightly shy of analyst expectations. As far as the coronavirus goes, the company currently has around 90% of its mining capacity running. That’s a great figure. But the missing 10% is still a significant hit, as there are large costs to idling a producing mine.
Additionally, with gold up this high, the company is earning a profit margin of around $600 per ounce of gold that it produces. Losing 10% of production (roughly 150,000 ounces per quarter) is a meaningful drag going forward.
It’s true that precious metal miners, such as Newmont, are enjoying a best-of-both-worlds set-up right now. The price of the primary metal they sell, gold, has been booming. However, their costs are not going up, which is unusual.
In past booms, such as the late 2000s-2011 run-up in gold, you had massive commodity price inflation across the board. Sure, the $1,900/oz gold price looked great in 2011, but it came with a serious drawback. The price of everything to run the mines soared as well.
Diesel fuel was painfully expensive with oil around $100/barrel. Steel and other basic inputs for mine construction soared in price. And geologists and other skilled employees demanded higher wages thanks to the boom in demand for mining personnel.
Thus, much of the apparent gains from high gold prices were diluted, as costs soared right along with revenues. For companies that had a policy of hedging the price of gold, like Barrick (NYSE:GOLD), things looked even worse.
The good news this cycle — at least so far — is that gold is booming but other costs are muted. Fuel prices are at rock bottom right now. Base metals are sliding. There’s certainly no labor price inflation either with unemployment surging. It’s a great time to mine gold from the cost side.
On the other hand, without any sort of inflationary impulse, the rally may fade quickly in gold prices. The Fed printing leading to inflation narrative is likely to break down if the prices of oil, copper, steel, and so on all remain in the dumps.
Speaking of copper, Newmont mines a lot of that as well and will see its revenues slide if Chinese demand doesn’t pick back up. All that to say, Newmont is currently enjoying a perfect situation as far as earnings go, but going forward, its profits margins will face downward pressure.
NEM Stock Verdict
With Newmont, you have good news and you have bad news. The good news is that the company is performing really well right now. And the Covid-19 crisis has only had a modest impact on the company’s ability to operate. Thanks to its low-cost base, Newmont is making excellent profits at the currently robust price of gold.
The bad news, however, is that the market has become downright euphoric. Following earnings, the company’s market capitalization topped $50 billion. That’s simply incredible. You don’t want to pay such a gigantic price for a mining company generating just a few billion dollars a year of profits.
There are just too many things that could go wrong. Political unrest is always a concern. Newmont could make bad acquisitions or have promising exploration and development projects fail. The price of gold could slide. The coronavirus could impact supply chains or labor, making it hard to keep operations going smoothly. At the right price, these would be acceptable risks.
At nearly an all-time high share price for Newmont, however, investors are betting on everything continuing to go just right for the gold giant. That’s a risky play. And remember that you should rarely pay a high P/E ratio for a mining company anyway because the assets deplete.
You don’t have a brand or intangible asset. Once the gold, silver, or other metals are exhausted, you have to buy or build another mine to replace it. Paying something close to 20x earnings for a mining company rarely ends well. If gold prices keep rising, Newmont stock will perform in the short-run. But handle it with care.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.