Newmont Corporation (NEM) stock has trended higher by 13.7% over the last six-months. This does not come as a surprise considering the positive momentum in gold.
I remain bullish on NEM stock and I believe that the stock is likely to remain in an uptrend. Let’s talk about the positive catalysts.
First and foremost, Newmont Mining stock price has a high positive correlation with gold prices. Therefore, it’s important to discuss the reasons to be bullish on the precious metal.
Geo-political tensions have escalated in the recent past. It’s unlikely that these frictions will de-escalate anytime soon. In this scenario, investors seek refuge in assets like precious metals and government bonds.
Another important factor to be bullish on gold is inflation. With the recent surge in energy price, the inflation scenario will only worsen.
As a hard asset, gold has been a hedge against high inflation. It helps in preserving the purchasing power of money. As a matter of fact, central banks have also been diversifying their reserves with purchases of gold.
However, the macro-outlook is not the only reason to be bullish on Newmont Corporation. The company’s fundamentals point to further upside for NEM stock.
Cash Flows Will Continue to Swell
Newmont Mining has already been reporting strong numbers. In particular, the company’s cash flows have been impressive.
For 2021, Newmont reported average realized gold price of $1,788 an ounce. For the same period, Newmont reported adjusted EBITDA of $5.9 billion and free cash flow of $2.6 billion.
The key point to note here is that gold is currently trading above $1,900 an ounce. It’s very likely that gold prices will remain firm. Therefore, Newmont is positioned for free cash flow in excess of $3 billion for 2022.
Given the strong cash flows, Newmont also has an investment grade balance sheet. For 2021, the company ended with cash of $5 billion and a total liquidity buffer of $8 billion.
Further, with net debt-to-adjusted EBITDA of 0.2, the company has robust financial flexibility for aggressive investments.
The Newmont dividend another reason to be bullish as free cash flows increase. NEM stock already has an attractive dividend yield of 3.2%. It’s very likely that annual dividends will increase if gold prices remain firm.
Long-Term Revenue Visibility
Besides the financial profile, a strong asset base is another reason to like Newmont Mining. As of December 2021, the company reported 96 million oz of gold reserves, and 112 million oz of gold resources.
This implies more than 10 years of gold reserve life. Additionally, the company has a project pipeline that will help in sustaining production through 2040. With 91% of the assets located in Americas and Australia, the company is in a zone that’s geo-politically safe.
Recently, Kinross Gold (KGC) announced that the company will be suspending Russian operations, which was expected to account for 13% of 2022 production. The asset location is therefore an important investment consideration in current times.
It’s also important to add that as the company’s cash buffer swells, there is a case for opportunistic acquisitions. This will further boost the growth and cash flow outlook.
From an EBITDA margin perspective, Newmont mining expects the all-in-sustaining-cost to improve to $920 to $1,020 an ounce in the next few years. Even with an assumption that gold remains sideways, the company is positioned for EBITDA margin expansion and cash flow upside.
Wall Street’s Take
Turning to Wall Street, Newmont has a Hold consensus rating, based on two Buy ratings and six Holds assigned in the past three months. The average Newmont price target of $68.50 implies 6.4% downside potential.
Concluding Views
The Federal Reserve might pursue multiple rate hikes in 2022. However, that seems largely discounted in gold prices. At the same time, geo-political tensions might act as a deterrent for an aggressive rate hike. It’s therefore likely that gold will remain firm.
Newmont Mining has a strong balance sheet and a quality asset base. The company is likely to report strong free cash flows in the current year.
With a possibility of dividend growth, the stock is due for re-rating. Overall, these factors make NEM stock worth considering even after the recent rally.
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