If one were to look at the trailing-year market performance of gold mining stalwart Newmont Mining (NYSE:NEM), it’d be easy to dismiss the enterprise as an irrelevant player. Down 17%, the stock looks ugly amid an array of superior alternative options. However, with the sudden convergence of the “fear trade” (investing in safe-haven assets), which has caused gold prices to rise, and accelerating consumer prices, NEM stock could potentially regain positive momentum. Therefore, I am bullish on the stock.
Anxieties and Price Acceleration Collide Favorably for NEM Stock
Though historically a safe-haven asset for commanding high intrinsic value, gold presents narrow utility in modern economies. In part, that’s because monetary engineering gives central banks more flexibility in managing challenging disruptions. Also, gold is a “dumb” commodity, paying no dividends and hiring no workers. On occasion, though, the yellow metal can be quite relevant, presenting an upside opportunity for NEM stock.
Additional Insight: Despite its limitations, gold remains a favored asset in times of uncertainty, which could benefit Newmont Mining amid current geopolitical tensions and inflationary pressures.
Most recently, a geopolitical crisis has turned alarmingly hot. Last week, tensions rose in the Middle East as the U.S. government warned that Iran was preparing a potential strike against Israel. The ill feelings – which have long existed – hit a fever pitch when Iran’s consulate in Damascus, Syria, was bombed, resulting in the deaths of seven members of its Revolutionary Guard Corps.
Iran blamed Israel for the attack and on Saturday responded with a drone and missile strike. Throughout the buildup of regional tensions, the focus centered on oil. That’s understandable, given that the world continues to run on the critical energy commodity. However, gold has been a clear beneficiary of the so-called fear trade or a pivot to safe-haven assets amid uncertainty.
Additional Insight: The interplay between geopolitical tensions and the fear trade highlights the potential for increased interest in gold as a safe-haven asset, benefiting companies like Newmont Mining.
Another factor that could boost NEM stock is broader inflationary pressures. From the latest reading of the Consumer Price Index (CPI) report, the key inflation gauge came in higher than expected. Naturally, the main culprit was the spike in energy costs, a dynamic that will almost certainly swing higher.
However, the other big catalyst was the March jobs report, with U.S. nonfarm payrolls increasing by around 303,000. That was a sizable move from February’s print of 270,000 payrolls. Further, the unemployment rate cooled down to 3.8% from the prior month’s 3.9%.
Additional Insight: Rising inflation and a strong job market could contribute to a positive environment for gold prices and consequently benefit Newmont Mining’s stock performance.
Monetary Policy Quandary Smiles on Newmont
While gold has been an intriguing investment idea starting from when the COVID-19 crisis first capsized the global economy, its fear-trade catalyst clashed with broader economic realities. Yes, inflation is generally “good” for gold and other commodities due to the relative devaluation of the dollar. However, the Federal Reserve had the unenviable task of unwinding prior monetary excesses.
Additional Insight: The balancing act of the Federal Reserve’s monetary policies and the impact on gold prices could influence the performance of Newmont Mining stock in the near term.
So, gold generally performed well up to the early months of 2022. Not surprisingly, NEM stock mimicked this price action. However, both the asset and the security tumbled in the spring of 2022 as the Fed began aggressively raising interest rates to tackle accelerating prices. By raising the cost of borrowing, the central bank could potentially slow the economy.
If done correctly, monetary policymakers could engineer a soft landing: cooling inflation and the job market without leading to a recession or, worse, a depression. Unfortunately, at this moment, the Fed finds itself in a quandary. Basically, the economy suffers from high inflation, high interest rates, high employment, and low consumer confidence (relative to pre-pandemic levels).
In theory, the Fed could raise interest rates. However, that’s a risky move because we live in an environment where 6.5% of the U.S. population uses buy now, pay later (BNPL) apps to pay for groceries. A higher rate would upset a fragile framework for everyday consumers.
On the other hand, the idea of lowering rates seems less likely now. So, if the Fed takes any action, it might be a modest one. Ultimately, this should be a net positive catalyst for NEM stock because inflation will likely shoot higher.
Again, the world runs on oil, and oil impacts practically everything because it’s responsible for moving everything. Subsequently, this circumstance could create a positive feedback loop of fear begetting more fear and inflation begetting even more inflation.
NEM’s Valuation May Require an Adjustment
Right now, NEM stock trades at 3.77x last year’s revenue, which was $11.81 billion. However, with the rising price of gold, Newmont should be able to extract higher revenues from its mined metals. Subsequently, analysts are looking for Fiscal Year 2024 revenue to land at $22.22 billion.
Additional Insight: The potential for increased revenues driven by higher gold prices may necessitate a reevaluation of Newmont Mining’s valuation and potential upside.
Still, the catalysts driving up both the fear trade and inflation are intense. Frankly, they just got even more intense over the weekend. As such, the high-side sales estimate of $24.6 billion is likely realistic. At that level, and assuming the same share count of 1.15 billion, NEM stock is trading at 1.81x projected 2024 sales.
On a trailing-year basis, the gold industry features a price-to-sales ratio of 2.8x. So, there is an argument to be made that at the current market price, NEM stock is undervalued. However, such a discount probably won’t last too long.
Is Newmont Mining Stock a Buy, According to Analysts?
Turning to Wall Street, NEM stock has a Moderate Buy consensus rating based on five Buys, seven Holds, and one Sell rating. The average NEM stock price target is $43.32, implying 12.11% upside potential.
The Bottom Line on NEM Stock
While NEM stock has struggled since 2022 amid monetary policy concerns, the rise of the fear trade and legitimate concerns of inflation may create a positive feedback loop that bolsters the gold mining industry. Essentially, the geopolitical flashpoints could spark concerns of additional upheavals. Also, the supply chain disruptions could ripple across industries, creating price acceleration. Interestingly, then, Newmont could be an underappreciated and potentially undervalued stock.
Disclosure
