After a steady rise in the first couple months of the year, briefly exceeding $1700/troy oz, gold prices dropped below $1500 last week. The gold miners have similarly tanked; tracked by the Market Vectors ETF (NYSE: GDX), the index hit a year-to-date low of below $40 last week. When we see such a large decrease in price, we like to examine the situation in terms of a potential buying opportunity. “Buy when others are fearful,” is an oft quoted phrase associated with Warren Buffet, and we think there are select opportunities in the mining industry. Today we focus on Newmont Mining (NYSE: NEM), a newly initiated position by Ray Dalio also held by Mark Hart and Ranjan Tandon.
Management’s production guidance is 5.0 to 5.2 million ounces with estimated cost of sales at $625 to $675 per oz. President and CEO, Richard O’Brien, expects NEM’s gold output to rise to 6 to 7 million oz. by 2017. We caveat that that figure will depend on progress at the Conga. Yanacocha, Cerro Quilish and Conga should be able to contribute 200,000 oz, 300,000 oz, and 300,000 oz, respectively for an approximate total of 800,000 oz. While we think that Yanacocha and Cerro Quilish should be able to hit their numbers, the Conga remains a questions mark for us. An independent review was conducted regarding the Conga’s environmental impact assessment (EIA), and NEM is currently in the process of running its own analyses on the economics of the project. We will be very focused on the company’s evaluation of capex requirements for development and political updates from its negotiations with the government. While the analyses are being conducted, the Conga capital spending will be temporarily paused and exploration spending will be decreased. If the numbers do not look good, we suspect the funds will be redistributed amongst NEM’s other projects. Australia, Ghana, and Nevada would likely be the recipients of the additional capital, which will still boost output by an amount similar to that of what Conga would have produced. For those concerned about pipeline projects if Conga does not come through, we believe NEM is aptly suited from a capital and technical standpoint to enter into joint ventures. O’Brien has indicated that M&A activity will target early stage projects aka junior miners.
We note that NEM has a unique dividend policy—gold price-linked dividend. The quarterly dividend has a base price of $0.10 per share when gold trades between $1,100 to $1,199 per oz and increases by $0.05 per share for every $100/oz increase in the average gold price for the period. There are additional bumps when gold prices exceed $1,700. For Q2, this resulted in a dividend of $0.35 per share.
Looking at valuation, North American precious metal stocks have historically traded 1.0x to 3.0x NAV. We take the median of 2.0x giving the growth orientation of NEM and our belief that the company’s gold production will be pretty steady in the forthcoming years. 2.0x NAV puts the stock price in the $60s, leaving ample room for upside from the current price in the $40s. This estimate does not include the exploration efforts in Surnam (Meridian project) and Nevada (Canyon project). NEM’s production growth projections (35% production growth by 2017) is certainly on the aggressive side but is better positioned than its peers to meet those expectations. We feel that the stock is undervalued and that broadly speaking gold equities are oversold.