Analysis of Newmont's Stock Performance
Newmont ( $Newmont(NEM.US$ $Newmont Corp(NEM.AU$), headquartered in Denver, Colorado, is the world's largest precious metals mining company. Its main business is gold mining, but it also mines copper, silver, zinc, and lead. The company is active in North and South America, as well as in Australia and Ghana in West Africa, and is a representative upstream enterprise in the global precious metals industry. Since the beginning of 2024, the company's stock price has undergone significant fluctuations, dropping nearly 28% within the first month before stabilizing and rising again. As of May 30, Newmont's stock price has risen by a total of 3.22% this year.
What factors affect Newmont's performance?
According to Newmont's annual report, the company's gold mining sector generates nearly 90% of its total revenue and is the absolute factor affecting its performance. The remaining products include copper, silver, zinc, and others, which together account for approximately 10% of its revenue.
The stock prices of gold mining companies are influenced by various factors, including:
1. Gold price: The profitability of gold mining companies is closely related to the price of gold. An increase in the gold price usually means an increase in the sales revenue of mining companies, which could possibly boost their stock prices.
2. Production costs: The mining costs, including direct mining costs and operational costs, also affect the profitability and stock prices of mining companies. If costs are effectively controlled or reduced, the stock prices of mining companies may benefit.
3. Production volume: The gold production of mining companies directly affects their revenue. An increase in production volume can increase revenue and profit, which could possibly drive up stock prices.
As the world's largest gold mining company, Newmont's stock price trend should be closely related to the spot gold price. However, as shown in the graph below, there was a deviation between Newmont's stock price and the world's largest gold ETF product, GLD, earlier this year.
We will analyze this phenomenon from two perspectives: external environment and internal operation.
I. Concerns about rising mining costs in the market
Overall, in the past year, driven by market interest rate cut expectations and risk aversion sentiment, the price of gold has continued to soar, outperforming most assets in the past few months, which has driven up the stock prices of products directly related to gold prices such as GLD.
Although this may also push up the price of gold mining company Newmont, on the other hand, investors are generally concerned that the mining costs of large-scale mines may continue to rise due to inflationary pressures and resource scarcity, which will have a negative impact on the profitability of mining companies.
At the same time, since mining companies are usually large multinational corporations with operations all over the world, the growing geopolitical risks will also directly affect investors' judgment of their performance. Therefore, from the perspective of the external environment, the benefits of gold mining companies in this wave of soaring gold prices are not as lucrative as expected.
II. In terms of internal operation, large-scale acquisitions affect company profitability
Looking back at the company's performance over the past year, the profitability level has been relatively low, and there was a massive loss in the fourth quarter of 2023. Some of the reasons can be attributed to Newmont's large-scale acquisitions. After all, what the acquiring company buys is not only the assets of the acquired company but also their problems and liabilities, which will bring new risks to the acquiring company.
In 2019, Newmont merged with Goldcorp, and at the end of 2023, the company acquired Australian mining company Newcrest Mining for approximately $15 billion. The continuous acquisitions did expand the company's scale, making it the world's largest gold mining company, but in the short term, it continuously deteriorated earnings per share, undermined investor confidence, and led to a significant decline in its stock price.
So, is Newmont's future promising?
As a real industrial enterprise, the gross profit of the gold mining industry is equal to output multiplied by the profit per unit of output. The output is determined by supply and demand, and the profit per unit of output is determined by the gold price and costs under inflation. Gross profit will directly affect the company's stock price.
In fact, in the first quarter of 2024, Newmont issued a pleasing financial report - the first-quarter revenue reached $4.023 billion, higher than the market's expected $3.67 billion, and the adjusted earnings per share were $0.55, higher than the market's expected $0.36. Operating cash flow improved significantly, reaching $776 million, and EBIT also increased significantly to $1.694 billion, a year-on-year increase of 71.11% and a quarter-on-quarter increase of 22.4%.
The strong rise in the gold price directly surpassed the various problems mentioned above, not only expanding the company's free cash flow but also reducing its operating costs due to strong market demand, making the operating capital normalized, significantly boosting Newmont's profits.
Based on this, we can make a basic estimate of Newmont's stock price trend in the future:
1. If the Fed's interest rate cut plan fails to land in the second half of the year, market demand for safe-haven products will fall, and the gold price will drop, Newmont's income will lose its biggest support, and its stock price is expected to decline.
2. However, currently, the market still holds the expectation of an interest rate cut, and geopolitical risks continue to increase. According to the general rule, when interest rates decrease, gold's anti-inflation property becomes prominent, often accompanied by a stronger gold price. Looking back at the performance of the gold market price during the three rounds of interest rate cut cycles since 2000, although the duration of the interest rate cut was different, the gold price all saw varying degrees of increase.
It is expected that the gold price may experience interval shocks in the short term, but in the long term, it is still in an upward channel. In this situation, the company's free cash flow can still maintain a good state, operating costs can continue to be optimized, and with the downward trend of inflation, costs may stabilize or even slightly decrease, profits will continue to increase, thereby driving up the stock price.
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