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Owning some gold has long been a part of the Money Morning investing philosophy. After all, gold offers some insurance against the dollar-debasing policies of the U.S. Federal Reserve.
One of the easiest ways to acquire the yellow metal is to buy a gold mining stock such as Newmont Mining Corp. (NYSE: NEM).
With gold prices down more than 27% in 2013, gold miners have really taken it on the chin. Newmont stock has fallen along with the other miners, having plunged a whopping 50% in 2013.
Gold miners get hit disproportionately hard when the price per ounce falls because it directly affects their profitability.
When gold prices are high, companies can afford to explore and extract more gold from their mines because of the premium they receive from its sale. Conversely, when gold is hovering near lows, miners do everything in their power to reduce expenses (which includes new exploration) and costs of all types.
So the cost to produce an ounce of gold, as well as the current price of gold, is the key to analyzing this industry. Keeping the cost of production below the actual price of an ounce of gold is paramount to a miner’s success.
Newmont Mining (NYSE: NEM): Poised to Gain from Higher Gold Prices
The price of gold is currently about $1,200 per ounce, while Newmont’s all-in costs to produce that same ounce is $993, according to the company’s most recent third-quarter filing. But that’s down 16% from the prior year quarter, helping to preserve profitability.
Over the last three quarters, in fact, NEM managed to cut spending by $700 million, which is an improvement of 13% from the same period a year ago.
Even with the shrewd cost-cutting, revenue has still languished. Revenue declined 20% from $2.5 billion to $2 billion for the most recent quarter. And this was not due to lack of gold production, since the company produced and delivered 4% more gold than it did a year ago.
Here’s why that ability to keep mines producing gold at a rapid clip is vitally important…
When a gold miner needs to keep cutting costs, it will be forced to not only cut general costs but also scale back production – and in some cases close down mines entirely. Scaling back production is no small decision, and its impact will ripple well into the future.
The problem with closing down a mine is that it can take years for a mine to become fully operational. Closing and re-opening a mine is not like flipping a switch.
Newmont Mining’s ability to weather the storm of lower gold prices without decreasing production bodes well for its long-term prospects. When gold prices start rising again, Newmont will be in the cat-bird seat, able to supply enough gold to meet the demand.
Other things I like about Newmont Mining are that it’s the second-largest gold producer in the world, has mines in fairly safe regions, and possesses plentiful reserves.
Not that Newmont doesn’t need to deal with some challenges. Its Conga project in Peru, where production was to start in 2015, has faced opposition from locals that has caused major delays.
Yet other mines, such as those in Australia and New Zealand, have been bright spots with improved gold production.
Bigger Is Better for This Gold Mining Stock
The sheer size of Newmont Mining gives the company the wherewithal to handle any further downward pressure on the price of gold. NEM has a market cap of $11.6 billion and reasonable debt of about $6.5 billion, especially when you compare it to the $15.4 billion in debt of its largest rival, Barrick Gold Corp. (NYSE: ABX).
Speaking of Barrick, that miner’s recent moves to reduce debt by issuing new shares (and thus diluting their value) has cast an unfair shadow over Newmont. But during the most recent conference call, Newmont Chief Executive Officer Gary Goldberg assured investors he has no plans to add debt or follow Barrick’s lead of issuing new shares.
What Newmont is doing, however, is streamlining operations by selling off portions where it doesn’t see a competitive advantage. It recently sold its investment in Canadian Oil Sands, as well as its Midas mill complex in Nevada.
When gold prices start going back up, Newmont’s financial flexibility and its ability to churn out gold through a number of avenues will result in a spectacular ride for Newmont stock.
The billion-dollar question is, when will all this happen?
So far we’ve seen that the bottom on gold and gold miners has been a series of missed calls by amateur and professional traders alike. And Newmont Mining’s share price sits at levels now it hasn’t seen for over 10 years.
I honestly can’t say we’ve seen the bottom for gold and gold mining stocks.
But given the damage done to gold mining stocks, the potential for things to get much worse is relatively small at this point. And Newmont’s potential for gains, given its advantages in an environment where gold prices are rising, could prove very rewarding.
That’s why, for the portion of your portfolio that’s been allocated for precious metals, NYSE: NEM is a BUY.
For further in-depth analysis of the entire precious metals market, you would be wise to check out Peter Krauth’s work and his recommendations through Real Asset Returns.
About the Author: David Mamos brings nearly 15 years of analytical experience to the table, with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation, and execution of trading strategies for aggressive investors.
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