NEM - Gold Is My Highest Conviction Pick For 2024: Consider Newmont Stock

2024-01-02 07:15:00 ET

Summary

• I am very bullish on gold heading into 2024 and have been accumulating gold-related investments aggressively over the past several months.
• Newmont is one of the most attractive risk-adjusted gold investments in the market right now.
• I discuss why I have such high conviction in gold and NEM right now.

Newmont Corporation ( NEM ) is one of my top picks right now because it offers an attractively priced leveraged exposure to two metals that I am quite bullish on over the long term. Moreover, its balance sheet remains in excellent shape and its geographic regions are not considered to be very risky from a geopolitical perspective. Finally, its valuation appears to be quite attractive at the moment, especially given our bullish outlook on its underlying products. In this article, I will discuss why each of these factors makes NEM a compelling buy as we head into 2024.

#1. Bullish Gold Outlook

In a recent article , we highlighted several compelling reasons why we are bullish on gold ( GLD ) as our highest conviction bet in 2024 in the current economic climate:

One major reason is the aggressive gold-buying spree by central banks worldwide in recent years. Central banks have acquired gold at the fastest pace on record since they became net buyers in 2010. These purchases have been led by central banks in Singapore, Turkey, China, Russia, and India and in part reflect the increased economic weight of BRICS nations relative to the G7 countries and their desire to diversify their sovereign reserves away from the U.S. Dollar and towards gold in order to strengthen their financial independence from the United States.

Soaring global geopolitical tensions are also a reason why we think that gold's risk-reward profile is very attractive right now. Given that gold tends to serve as a safe haven during periods of heightened geopolitical turmoil, the potential for conflict in the Korean Peninsula, the Taiwan Straits, and/or a war between Iran and Israel remains high, while ongoing conflicts in Eastern Europe and the Middle East continue to simmer all could serve as catalysts for gold prices. Of particular concern is the catastrophic economic fallout that would undoubtedly result from a Chinese invasion of Taiwan as part of its long-term plan to take control of the island nation (which the head of the Communist Chinese Party recently asserted was 'inevitable' in his New Year's address). In such a scenario, gold would very likely outperform other asset classes, and potentially even soar as the long-term viability of the U.S. Dollar as the world's reserve currency may be called into question if the U.S. military were to suffer major setbacks in the conflict or - worse yet - decided to stand back and let the CCP seize control of Taiwan.

Last, but not least, the Federal Reserve is likely done raising interest rates and is increasingly likely to cut them in the first half of 2024. This is a bullish indicator for gold prices as they have historically soared after the Federal Reserve finished its rate hiking programs.

For example, between 2006 and 2011, gold prices more than tripled as the Fed paused and then eventually slashed interest rates:

Gold prices soared once again between 2018 and 2020, as the Fed was forced to back off its attempts to raise rates and then eventually had to slash them to near-zero levels to try to revive the economy after the COVID-19 crash:

We think the same is about to happen, and some would argue that this trend has already begun, with gold up sharply since early October as the narrative has shifted from interest rates staying higher-for-longer to likely falling in 2024:

#2. Bullish Copper Outlook

Another reason we are bullish on NEM is that the long-term outlook for copper prices appears quite bullish. For example, the Federal Reserve's anticipated rate cuts in 2024 have already positively impacted copper prices and will likely continue to do so.

Moreover, there are lingering supply-side constraints for copper, as evidenced by the recent decline in London Metal Exchange and COMEX inventories and the expected substantial future demand for copper that will be required to increasingly electrify the global energy grid.

NEM is strategically positioned to benefit from rising copper prices thanks in large part to its recent acquisition of Newcrest Mining ( NCMGF ). This merger is expected to more than quadruple NEM's copper exposure, as Newcrest's Cadia mine in Australia contains a substantial amount of copper, giving NEM significant copper reserves ahead of the projected supply deficit in 2025-2026? ?.

Overall, NEM's existing copper assets, including those in Western Australia, Nevada, and Peru, along with Newcrest's long-life, long-dated copper assets in Australia and British Columbia, will provide the combined company with a robust and diversified copper production base that should have a considerable runway, with some mines like Cadia expected to operate until the 2050s or 2060s.

#3. Strong Balance Sheet

Another reason why we really like NEM right now is due to the fact that it has a strong balance sheet, as evidenced by its BBB+ (stable outlook) credit rating, strong 2.12x current ratio, and low 0.72x net debt to EBITDA ratio. from S&P. Moreover, its current assets exceed its long-term debt. This is important given the volatility of gold and copper pricing, as it should enable NEM to not have to worry about financial distress even if gold and copper prices were to fall considerably in the coming years.

#4. Lower-Risk Mining Regions

Approximately 70% of Newmont's midcycle production in 2027 is projected to come from low-risk geographic regions like the U.S., Canada, and Australia. This helps to reduce geopolitical risks to the investment thesis and provides stability and reliability in its production outlook. Given that many other miners ( GDX ) - including blue chip peers like Barrick Gold ( GOLD ) have considerable exposure to more geopolitically risky regions, this fact should give investors greater confidence in NEM's value proposition and provide shares with a bit of a premium valuation.

#5. Attractive Valuation

Last, but not least, we are bullish on NEM right now due to its attractive valuation. Its current price-to-earnings ratio of 17.06x stands at a clear discount to its five-year average of 20.19x and its price to NAV per share of 1.12x also looks quite cheap compared to its five-year average of 1.30x. When compared to another low geopolitical risk blue-chip miner such as Agnico Eagle Mines ( AEM ), NEM also looks attractive, as AEM trades at 1.44x its NAV and a 25.9x price-to-earnings ratio.

When combining our bullish outlook for NEM's underlying copper and gold profits and its discounted valuation relative to its own history and that of peers, we expect the stock to deliver compelling risk-adjusted total returns moving forward.

Investor Takeaway

While 2023 was a bit of a disappointing year for NEM stock, we think that 2024 could be much better.

Between our bullish, high-conviction outlook for gold, the bullish long-term outlook for copper, and NEM's stellar balance sheet, low geopolitical risks, and discounted valuation, NEM offers investors a solid dividend yield, good portfolio diversification, and attractive risk-adjusted total return potential. As a result, we have been buying the stock aggressively in recent months and view it as a Strong Buy heading into 2024.

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