Summary
- With 8M ounces equivalent of projected annual gold production, it is unsurprising that NEM has enjoyed an excellent recent stock recovery, as it appears more central banks hedged against the recession.
- The stock may also further rally, since the rising gold prices may trigger expanded profitability and dividend payouts, lifting investors' sentiments at a time of uncertain macroeconomic outlook.
- Naturally, the commodity market is highly cyclical and volatile, pointing to the stock's suitability for those with higher risk tolerances.
The Recession Hedge Investment Thesis Is Robust
Newmont ( NEM ) had guided for an FY2022 output of 6M ounces in gold and another 1.3M ounces equivalent from copper, silver, lead, and zinc. The management also projected an 8M gold-equivalent ounces of production annually through 2040 , suggesting the longevity of its mine reserves globally.
The Correlation Of Gold And NEM
These numbers matter indeed, since they correspond with a robust correlation in NEM's stock prices and gold spot prices. At the time of writing, the stock had already enjoyed a 24.5% recovery, as gold prices similarly gained by 17.5% over the past three months.
The strength of gold prices was partly attributed to the -10.5% decline in the US dollar from September 2022 heights, aided by the improving macroeconomic outlook. More market analysts have projected a soft landing through 2023 indeed, as the Feds' commentaries turned increasingly dovish thus far , aided by the declining inflation rates in the PPI and CPI reports.
The Fed's recent meeting minutes also suggested a terminal rate of ~5%, with a potential pivot from 2024 onwards, as the projected inflation rate moderates to 3.1% by the end of 2023. Eric Strand, manager of the AuAg ESG Gold Mining ETF, said:
It is our opinion that central banks will pivot on their rate hikes and become dovish during 2023, which will ignite an explosive move for gold for years to come. We therefore believe gold will end 2023 at least 20% higher, and we also see miners outperforming gold with a factor of two. ( CNBC )
The Correlation Of Gold And USD
Notably, this correlation had been visible over the past few decades, suggesting the commodity's long-term inverse relationship with inflation rates and economic downturns. It is no wonder some market analysts have long touted gold as the world's safe-haven metal thus far.
For example, gold prices had similarly rallied during the previous recessions in 2008 and 2020, as the US Dollar Index ( DXY ) plunged. This was particularly attributed to the spike down in the market and retail demand for gold and gold-backed investment funds then.
The World's Gold Purchases In Tonnes
We have already seen a tremendous increase in gold demand by central banks thus far, with purchases growing by 673 Tonnes for the first three quarters of 2022. Notably, Q3'22 accounted for nearly 59.4% of the year's purchases at 400 Tonnes. The total YTD global demand for the commodity also grew by 18% YoY by September 2022, with Q3'22 recording an exemplary increase of 28% YoY at 1.18K Tonnes.
Similarly, the Chinese government also grew its gold reserves for two consecutive months by December 2022, with a combined volume of 62 Tonnes to a total reserve of 2.01K Tonnes. Notably, the cadence marked the country's first major purchase after three years of the Covid Zero Policy, suggesting a further move toward safer assets. Ole Hansen, head of commodity strategy at Saxo Bank, said:
The metal has also been buoyed by the reopening in China with pictures of very crowded gold markets seeing pre-Lunar demand and the PBoC [People's Bank of China] announcing it bought 62 tons of gold during the last two months of the year. ( CNBC )
The combination of these global events and macroeconomic sentiments may naturally drive the rally of gold prices and consequently, NEM's stock prices ahead. As a result, we may also see FY2023 bring forth improved dividend payouts as the company's profitability expands. We'll see.
So, Is NEM Stock A Buy , Sell, Or Hold?
NEM 1Y P/E Valuations
NEM is currently trading at an NTM P/E of 24.28x, lower than its 3Y pre-pandemic mean of 25.85x, though higher than its 1Y mean of 21.58x. Based on its projected FY2025 EPS of $2.78 and current P/E valuations, we are looking at a price target of $67.49, suggesting a 28.6% upside potential from current levels.
NEM 1Y Stock Price
This is surprising indeed, since the NEM stock has recorded a tremendous 39.5% recovery since the November 2022 bottom. For now, the uptrend movement appears moderately sustainable, attributed to the market analysts' projection of a 99.1% probability for the Fed's 25 basis point hike in early February.
It remains to be seen how things will develop, due to the promising rally in gold prices thus far. Gold is trading at $1.9K per ounce at the time of writing (similar to April 2022 levels), indicating a notable expansion of 16.6% from the October 2022 bottom of $1.62K.
As a result, NEM may consistently achieve stable top and bottom lines ahead, at an approximate revenue of ~$12.5B and EPS of ~$2.8 for FY2023, against FY2021 levels of $12.22B and $2.96, respectively. This is assuming that these optimistic gold prices hold over the next few quarters, if not more.
In addition, the NEM management clearly outlined its annual dividend payout structure , based on the reserve gold price of $1.2K per ounce. This is on top of the incremental payments between 40% and 60% of the total Free Cash Flow ((FCF)) generated. As a result, it is unsurprising that market analysts projected attractive FY2025 dividends of $1.94 with forward yields of 3.67%, against its 4Y average of 3.01% and sector median of 2.12%.
Therefore, we continue to rate NEM as a speculative buy here. Naturally, these cyclical commodity stocks are only suitable for investors with higher risk tolerances and who closely monitor the market. Incidentally, investors should only add here if the exercise consequently lowered their dollar cost average, since the excellent dividends may not offset the short-term volatility.
For further details see:
Newmont: Rally May Be Coming As Gold Returns As Potential Recession Hedge