CA - Newmont: Blood Is All Over The Street For The Gold Mining Leader

2023-10-03 09:00:00 ET

Summary

• Newmont Corporation investors faced a hammering as gold mining stocks were not spared from the recent plunge in gold prices.
• Given the Fed's higher-for-longer scare, gold buyers have fled, worsened by a resurgent USD.
• However, I don't expect NEM to fall back toward its March 2020 lows, suggesting peak selling exhaustion could be near.
• I argue why the risk/reward profile favors buyers at the current levels, although near-term volatility could continue.
• It's time to be greedy when there's blood on the Street.

Newmont Corporation (NEM) investors are licking their wounds as the recent hammering in underlying gold prices (XAUUSD:CUR) also intensified downward volatility in gold mining stocks. Despite its market leadership, Newmont isn't immune to the downswing in gold prices, as it fell below the technically important $1900 support zone.

I urged Newmont investors to add exposure in late October 2022, anticipating a resurgence in gold prices and benefiting the leading gold mining stocks. While that thesis panned out over the next three months, gold prices formed a top in early January 2023, as sellers decisively rejected further buying upside above the $2,090 resistance zone. That pivotal level has held firmly since August 2020, leading to significant profit-taking.

With gold prices inching closer to the $1,815 support level formed early this year, I assessed it's apt for me to provide an update on whether it's timely for Newmont investors to consider buying the significant dips.

Investors should be keenly aware of the significant challenges that recently led to a massive rotation out of gold-related exposure. The Fed's higher-for-longer positioning and the strength of the USD have stunned investors. I had anticipated the 10Y Treasury yield to hold its October 2022 resistance zone, but bond buyers were in no hurry to return, allowing further selling pressure to intensify. As such, the 10Y recently surged to nearly 4.7%, decisively breaking above that resistance zone. Furthermore, the remarkable strength of the USD followed through, surging above its early January highs.

As such, the recent challenges likely forced gold buyers to bail out, as they anticipated a worse selloff moving ahead. However, Newmont capitalized on the relatively attractive valuations in gold mining peers to acquire Newcrest (NCMGF) to expand its scale and market leadership.

Newmont benefits from having exposure to geographically favorable mining regions, including through Newcrest in Australia. Accordingly, 80% of its production is derived from mines in Australia and the Americas. Moreover, management stressed that " two-thirds of this production comes from 10 large, long-life, low-cost Tier 1 assets," proffering the company significant leverage against its peers.

While the company posted a challenging first-half report card due to elevated costs and lower production, Newmont anticipates a more robust performance moving ahead. Analysts' estimates are also favorable, with Newmont's adjusted EBITDA of $910M in the second quarter as the inflection point. Accordingly, Newmont's adjusted EBITDA is expected to rise sharply through Q4, reaching $1.41B. Its adjusted EBITDA margin is also expected to recover to 44.8% from the lows of 33.9% in Q2. In other words, the worst could be over for NEM.

Notwithstanding my optimism, Newmont buyers could still give up the $37 support zone underpinning NEM's recovery from its November 2022 lows.

However, I don't expect NEM to fall further toward its March 2020 lows at the $33 level, suggesting the risk/reward seems attractive.

I assessed that the recent downside volatility is likely linked to gold prices losing a technically significant support level, spooking the market into a weaker-than-anticipated second-half performance.

Given the estimates suggesting a second-half growth inflection, execution risks are expected to be higher as gold prices floundered recently. As such, I believe the market has tried to price in such challenges, which could subsequently lead to a tepid performance from Newmont.

While the market's caution is justified, operators have also quickly priced in these headwinds. However, I must stress that I have not assessed a bullish reversal at the current levels. As such, investors shouldn't rule out the possibility that further selling could force a re-test of the $33 support zone before reaching selling exhaustion, leading to a more robust rebound.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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