Mining stocks are companies that find, extract, and process deposits of valuable minerals and materials such as gold, silver, copper, iron ore, aluminum, lithium, cobalt, zinc, coal, potash, and phosphate.
Several of these commodities play a crucial role in the global economy and are used as raw materials across industries. So, while the economy is expanding, the demand for these mined materials should increase, thereby boosting prices. Alternatively, the cyclical nature of the economy drags demand for commodities lower during recessionary periods.
So, it’s essential to identify mining stocks that can weather economic downturns. One such Canadian mining stock is Newmont (TSX:NGT), which has a market cap of $78 billion.
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Newmont is a gold mining stock
Gold mining companies can potentially deliver higher returns compared to physical gold as they can expand production and reduce costs during periods of higher prices. A widening earnings base should eventually drive company valuations higher, making Newmont a top investment option right now.
Newmont is among the largest gold miners in Canada. With operations and assets in the U.S., Canada, Mexico, the Dominican Republic, Peru, Argentina, Chile, and Ghana, the company also explores for copper, silver, zinc, and lead. With proven and probable gold reserves of over 90 million ounces, it has a land position spanning 62,800 square kilometres.
Investing in Newmont allows you to gain exposure to gold, a safe-haven metal that helps in portfolio diversification. The precious metal has historically been used to hedge against inflation, geopolitical risks, and economic recessions.
Gold prices have surged over 20% in 2024 and recently traded near all-time highs. As the prices of gold mining stocks are tied to the commodity they mine, Newmont shares have rallied 30% in the last 12 months.
Newmont stock has surged close to 150% in the past decade if we adjust for dividend reinvestments. Today, the company pays shareholders an annual dividend of US$1.35 per share, translating to a yield of almost 2%. However, Newmont has reduced its quarterly dividend from US$0.40 per share to US$0.25 per share as it aims to optimize its asset portfolio.
Is Newmont stock undervalued?
While Newmont’s dividend cut has disappointed investors, the company has allocated US$1 billion to repurchase its stock over the next two years. Moreover, once its portfolio restructuring is complete, Newmont may raise dividends again.
Newmont has created a portfolio focused on tier-one and emerging tier-one operations and districts. In the second quarter, it produced 1.6 million ounces of gold and 477,000 gold equivalent ounces of copper, silver, lead, and zinc. In the June quarter, it generated US$1.4 billion in operating cash flow and US$594 million in free cash flow, which meant the company spent more than US$800 million in capital expenditures.
Newmont stock is relatively cheap and trades at less than 10 times the operating cash flow. Analysts covering the TSX mining stock expect adjusted earnings per share to expand from US$1.61 in 2023 to US$3 in 2024 and US$3.75 in 2025. So, priced at 13.4 times forward earnings, Newmont stock is cheap and trades at a discount of 10%, given consensus price target estimates.
