NEM - Newmont: Breakout Approaching (Technical Analysis)

2023-07-16 21:42:56 ET

Summary

• Newmont's takeover of Newcrest Mining and higher-than-expected operating costs have led to investor disappointment during 2023.
• The weakening U.S. dollar and an unexpected rise in commodity inflation could support Newmont's gold/silver/copper operating metrics going forward.
• Despite Fed tightening risks, Newmont shares are rated a Buy due to an approaching price breakout and its position as one of the largest global producers of precious metals.

Newmont ( NEM ), a leading global miner of gold, silver, and copper has been a disappointing investment during 2023 in terms of shareholder performance. The short-term dilutive nature of its takeover of Newcrest Mining ( NCMGF ) ( NCMGY ) on underlying fundamental results is one reason. The second is revenues and net profits have disappointed on higher-than expected operating costs.

However, change is a constant in life and on Wall Street. I believe the overall valuation is more fair now, including the projected Newcrest merged results coming next year. Plus, precious metals have caught a serious bid on the big drop in the dollar's value over the last week. Basically, as I explained in a bearish dollar article here days ago, Wall Street and foreign investors are becoming quite worried U.S. bank policy makers are about to quit tightening too soon, which could allow a rebound in inflation back to 4% to 5% YoY rates by the end of 2023.

On top of a weaker dollar supporting the import of inflation from commodities and goods made/produced overseas (remember international trade is critical for our modern economy), I am very concerned another spike in crude oil prices is approaching fast. You can read my explanation for the likely bullish return of interest in energy during July here .

So, an "unexpected" background of rising inflation including most commodities over the next 6-12 months may very well support precious metals and Newmont operating metrics going forward. I am now thinking... still rising stock market and home wealth in America combined with better-than-expected "soft landing" demand for the economy could usher in shortages of all types of products, including crude oil and copper next year. With copper inventories near record lows vs. usage in July 2023, what will ever rising demand to meet the manufacturing needs of copper-heavy electric vehicles do for market balance in the coming months and years?

Technical Trading Breakout Closing In

Really, Newmont's share price has jumped off the mat over the past couple of trading sessions, after appearing to be knocked out permanently in the boxing ring during May-June. This reversal action has been taking place in the whole precious metals mining space.

Below I have drawn an 18-month chart of daily price and volume changes. You will notice price is about the same as a year ago, around $45. Other important data points to ponder are all the trendlines and moving averages converging around the current quote in the middle of July. The 50-day, 200-day, 250-day (not pictured), 100-day (not pictured), 20-day (not pictured), and a green trendline drawn from the highs of April 2022 through other peak trades since then, all come together in the $43 to $45 area. My view is once $47 is breached to the upside, a significant wave of buying interest could show up from the technical trading crowd to kick-start a material move higher.

Another incredibly bullish momentum signal is coming from the 20-day Chaikin Money Flow indicator. The big swing from selling momentum in late May to buying momentum today is often what you see near major bottoms in all kinds of equity investments.

On a note of caution, my regular momentum constructs like the Accumulation/Distribution Line and On Balance Volume calculation are not quite screaming money flows have turned positive. Unfortunately for mining investors, these usual technical leaders for price do not always work at bottoms in this sector.

For a bullish goal, several weeks of strong buying momentum after price breaks out above $47 would confirm something special may be taking place for Newmont shareholders. Of course, by then NEM's price could rapidly be above $55, quite a distance from the $40 low six weeks ago.

Final Thoughts

Gold and silver have clearly moved into a longer-term uptrend over the past year as the value of U.S. dollars has slid.

In past articles, I have mentioned the possibility of severe shortages of silver vs. mined supply because of its necessary use in solar panel production. With solar farm and home installations expected to rise markedly over the next decade, and the latest panel inventions using even higher amounts of silver to conduct electricity, the silver price outlook is super-bullish from today. Think about this data point: the industry projection for U.S. solar installations alone during 2025-28 is estimated to be the same as all past installations for total volume before 2025 combined!

Some analysts are estimating solar panel demand for silver will rise from less than 5% of mined totals eight years ago to a number closer to 50% ten years out, using current industry growth numbers. (Dramatically higher silver prices may encourage substitutions or new inventions. However, the main substitute under development today is copper, which could experience much higher percentage price gains than silver from oversized EV demand.)

In addition, I have discussed in article after article since 2022 how gold/silver valuations have reached deep into undervalued territory in relation to financial asset values, plus the prevailing levels of Treasury debt and M1 or M2 money stock in America. I have a "fair value" estimate nearing $3000 for gold and $40 for silver, based on 60 years of relative pricing data. If both price target "averages" are reached in late 2023 or sometime in 2024, Newmont's income generation may be about to explode higher upsizing its underlying worth for shareholders.

What's the investment risk of owning Newmont? After the Newcrest merger is complete, this company will hold the greatest diversification (lowest individual mine asset risk) out of all precious metal miners on the planet, with limited debts and advantageous economies-of-scale production costs. So, company-specific operating risks will be slighter compared to mining peers.

In terms of major downside, an overly tight Federal Reserve and deep recession are the two scenarios that could keep a lid on the stock quote for a spell. Ironically, the vast majority of investors are in this boat for sentiment, believing inflation is dead (after the 3.0% CPI report last week) and the U.S. central bank can now reverse monetary policy in favor of pumping economic growth. Both Wall Street economists and main street investors are concerned the Fed has been too aggressively tight.

However, the dollar's exchange rate vs. overseas fiat currencies is telling quite a different tale. The weaker dollar value suggests the Fed has not tightened enough, with the risk of inflation reversing higher the focus intelligent investors should now have.

With its Q2 2023 earnings announcement scheduled for July 20th, a stronger-than-expected report alongside some more concrete management estimates on the combined Newmont/Newcrest financial profile and growth outlook could be the catalyst for a sustainable upmove in price.

I rate Newmont's depressed shares a Buy for investors. A price breakout is close to becoming reality. Once the share quote rises above $47, it may never look back. With so many positives lining up for gold/silver/copper into 2024, owning one of the world's main producers of all three is an idea worth contemplating for your portfolio. For a company already solidly profitable (P/E of 19x forward estimates), paying a sizable 3% to 4% dividend upfront (Newmont now has a variable dividend payout policy based on free cash flow), yet better days ahead for operations should push the share price dramatically above $60 over the next 6-12 months. How high will depend on where gold/silver/copper prices end up.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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