Newmont: Asymmetric Risk/Reward Makes It A Strong Buy Here

Gold Price and Mining Stocks Divergence - Gold prices (XAUUSD:CUR) have consolidated at December 2023 levels, while Newmont Corporation (NEM) and other gold mining stocks have underperformed, with NEM hitting new lows below November 2023 levels [1] - The VanEck Gold Miners ETF (GDX) has broadly derated, indicating a divergence between gold prices and gold mining stocks [1] - GLD (gold ETF) has outperformed GDX (gold miners ETF) since May 2023, suggesting market concerns over execution challenges in the gold mining sector [2] Newmont Corporation's Recent Developments - Newmont's acquisition of Newcrest has significantly bolstered its gold reserves, now estimated to last about 20 years, with expected synergies to drive operating performance [1] - The company is currently focused on integrating Newcrest assets, with management taking time to assess and optimize the acquisition [2] - Newmont is scheduled to report Q4 earnings on February 22, with investors advised to pay attention to updated FY24 guidance and management commentary [2] Financial Performance and Valuation - Analysts estimate Newmont's adjusted EPS to increase by approximately 40% in 2024, suggesting a bottoming out of earnings decline in 2023 [2] - The company's all-in sustaining costs (AISC) are around $1,400 per ounce, with expectations of further cost reductions due to improved scale economies [2] - Newmont's adjusted net margin is forecasted to improve significantly to 15.4% in FY24, supported by a robust balance sheet with an adjusted EBITDA leverage ratio of 0.46x [2] - Despite a "B+" valuation grade indicating relative undervaluation compared to materials sector peers, Newmont's forward EBITDA multiple of 6.5x is higher than the median of 5.6x for metal and mining peers [2] Market Sentiment and Investment Opportunity - The market remains cautious about production and execution risks in 2024, particularly related to the Newcrest integration [2] - NEM's recent price action suggests a potential bear trap or double-bottom setup, indicating a possible long-term low [3] - The stock's relatively attractive valuation, solid balance sheet, and improved earnings growth profile in 2024 may attract dip buyers, creating a mean-reversion opportunity [3] Industry Challenges - Gold mining investors are concerned about costs, mine quality, and production shortfalls, which have contributed to the underperformance of gold mining stocks in 2023 [2] - The sector faces ongoing execution challenges, as reflected in the divergence between gold prices and gold mining stocks [2]