Gold prices touched an all-time high of US$2,135 per ounce last year, rising 13% in 2023. There is a good chance for the precious metal to soar higher in the next 12 months due to the possibility of interest rate cuts, geopolitical tensions, and an uncertain macroeconomy.
Historically, gold has been viewed as a store of value and a hedge against inflation, offering investors an opportunity to diversify their portfolios. One way to gain exposure to gold is by investing in blue-chip mining stocks such as Newmont Mining (TSX:NGT).
Valued at $52 billion by market cap, Newmont is among the largest mining companies globally. While gold prices have gained pace in recent months, Newmont Mining stock is down 26.5% in the last year, trailing the broader markets by a wide margin. However, the pullback has increased the TSX stock’s dividend yield to 4.8%. So, let’s see if you should invest in Newmont Mining stock at the current valuation.
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Is Newmont Mining stock undervalued?
Newmont is among the world’s leading gold companies and a producer of copper, silver, zinc, and lead. Its portfolio of assets is anchored in favourable mining jurisdictions in Africa, Australia, and the Americas.
Newmont is the only gold producer part of the S&P 500 index and has returned 73% to shareholders in the past decade after adjusting for dividends. In this period, the S&P 500 has returned 227%.
However, the TSX gold stock trades at an attractive valuation, given its high dividend yield and strong earnings estimates. Last November, Newmont closed the acquisition of Newcrest, which should help it achieve US$500 million in pre-tax synergies in the next two years. Newmont also expects to improve its cash balance by at least US$2 billion on the back of portfolio optimization through 2025.
Newmont has a unique dividend policy. For instance, it distributes $1 per share annually if gold prices trade over US$1,400 per ounce. Newmont also has a variable dividend, which is based on the free cash flow it generates.
In the last 12 months, Newmont distributed $1.6 per share in cumulative dividends, translating to a yield of 4.8%. In addition to its tasty dividend yield, Newmont stock trades at 11 times forward earnings, which is very cheap given its earnings are forecast to expand by 35% in 2024.
What is the target price for Newmont Mining stock?
Newmont’s underperformance in the last year has surprised investors as the company reported a net income of US$286 million in the third quarter (Q3) of 2023, compared to US$212 million in the year-ago period. Further, its operating cash flow improved from just US$466 million to US$1 billion in this period.
Newmont continues to reinvest in capital expenditures, which should drive future cash flows and earnings higher. It ended Q3 with a free cash flow of US$397 million, compared to an outflow of US$63 million last year.
Newmont Mining has a robust balance sheet, ending Q3 with US$3.2 billion in cash and US$6.2 billion in total liquidity. It has a net debt-to-adjusted earnings before interest, tax, depreciation, and amortization ratio of 0.7 times, which is reasonable.
Due to its compelling valuation and strong financials, Newmont Mining stock trades at a discount of 100% to consensus price target estimates.
