We look at a fantastic buying opportunity in one of the largest producers of gold in the United States. Our sister publication Hot off the Wire (www.wallstanalyst.com/HOTW) has published a detailed research note with their forecast on the price of gold. They provide a fundamentals-based analysis of the yellow metal, in light of the US monetary policy and the recent announcements by The Fed.
We use those predictions to provide our readers with an investment idea for a stock that we think can move up 20% within the next six to nine months. Our valuation is based on our gold price forecast and also on fundamentals of the firm and its industry power.
Newmont Corporation (NYSE: NEM) is the largest US gold producer and the 3rd largest in the world with revenues of $9.9 billion in 2012 and a profit of $2.2 billion. Their reserves of gold are 85 million oz, which makes them second in terms of reserve after the legendary Canadian Barrick Gold. With cash costs of $667/oz and with gold hovering at the $1,350+ range, NEM provides significant value to their investors, even if it keeps functioning at its current pace.
Despite its size and status in the markets, Newmont’s shares have been facing significant pressure in the past year. Gold prices are down 23% in 2013 as are most stocks in the industry, which are trading much below their recent highs. Newmont seems to have been punished more by the markets due to its visibility. It is the only one of the top-10 gold producing firms that trades in the sophisticated US markets, where investors can easily short sell the stock or at least move out to other liquid investable alternatives in gold (like futures).
NEM is down 3.53% yesterday (due to the move in gold) and down 7.17% in the last month. The low multiples in the US make it even more attractive as its peer group (all trading outside the US) has significantly higher multiples. Total industry level PE is currently at 23, while NEM is trading at 11.25. As we expect gold prices to turn a corner due to the additional volatility in the equity markets coming soon, we do not see how these ratios are justifiable. As the price of gold starts rising again, the market will realize the value of NEM when compared to its global peers in the coming months.
We see PE rationalization happening on the stock in the coming months and even with a 16 PE (our estimate) and constant EPS, we will see the stock trading at the $38-$40 range. We see a 20% upside from it current price of $29.78.