Investing in Gold: Is Newmont Mining Worth It?

Source: Thinkstock

While the share of gold mining companies have generally performed very well so far this year, one well known company in the sector has been lagging – Newmont Mining (NYSE:NEM). Newmont Mining shares are up only 5.5 percent this year, whereas the Market Vecors Gold Miner ETF (NYSEARCA:GDX) is up 23 percent. Not only have Newmont shares underperformed in the short run, but longer term, it is lagging as well. The stock is trading near its 2008-9 low back when gold traded at around $700/ounce. Does this make Newmont shares an opportunity, or should you stay away and try to find winners elsewhere?

Before investing in Newmont, investors should be aware of a crucial difference between this company and other mining companies. Newmont Mining is somewhat unique among gold miners in that it is headquartered in the United States, and it is the only primary gold mining company that is a member of the S&P 500. This is unusual because most mining companies are headquartered in Canada and trade on U.S. exchanges as American Depository Receipts (ADRs.) This is the case because the Toronto Stock Exchange has come up with detailed criteria that a company must meet in order to trade there, and these criteria have become the industry standard. By trading in the United States, Newmont doesn’t file these reports. This makes it more difficult for industry analysts to evaluate Newmont relative to its peers on an apples to apples basis. At the same time, this fact could be indicative of an opportunity in Newmont shares.

Newmont has a lot going for it. The company is the second largest gold producer by ounces produced. Only Barrick Gold (NYSE:ABX) produces more than Newmont’s 5.1 million ounces annually. Not only is Newmont large, but it is highly diversified; it has operations on every continent except for Europe. Furthermore, it has a unique dividend policy. Management is committed to returning capital to shareholders, and so it pays a dividend that is correlated to the gold price. I think one of the reasons Newmont shares have been weak recently is the fact that it cut its dividend. However, this was to be expected by those who are familiar with the company’s policy.

With 5 million ounces of production and estimated costs of about $1,125/ounce, the company will make about $200/ounce or $1 billion prior to taxes, interest payments, and administrative expenses. With the company valued at $12 billion, this isn’t cheap. However, the company expects costs to come down in 2015 and in 2016 to about $1,000/ounce, which means this figure will be about $1.5 billion next year assuming the gold price remains roughly the same.

Thus, while Newmont is not incredibly cheap, it will offer a lot of leverage to the gold price. For instance, if gold rises to $1,550 the company’s profits will double! This could very easily lead to a doubling in the share price.

Despite these attributes, investors should be aware of a couple of drawbacks to owing Newmont shares. First, the company has $6.5 billion in debt. This is a lot. I am not so much concerned that Newmont won’t be able to pay it back, but this debt has to be serviced, and this detracts from Newmont’s bottom line. Second, Newmont Mining isn’t really growing its production. While it has the resources it needs to continue mining at about 5 million ounces a year for many years, there really isn’t any growth planned for the foreseeable future.

Ultimately, Newmont is a stable company that will do very well if the gold price rises, but I don’t see anything in Newmont’s literature to really spark my interest. There is no growth, no portfolio rearrangements, no major acquisitions or divestitures, and no radical cost reduction agenda. Therefore, as a gold bull, I don’t think you will do poorly owning Newmont shares, and if you are in a position where you need a dividend this might be a stock worth holding. But I think that enterprising investors who dig a little deeper into the sector will come across more intriguing opportunities. With that being said, I’m not buying the stock, but I wouldn’t bet against it either — management could come out and surprise us.

More From Wall St. Cheat Sheet: