Since the bursting of the tech bubble in March 2000 and before the recent financial and credit crises struck, at least three sectors have managed to post significant gains: bonds, real estate, and small-caps. For some reason, however, gold remained under the radar for most investors. Yet, since the stock market peak, prices have climbed past many psychological marks. The shares of companies that mine the metal have gone along for the ride.
The perennial question for any gold investor is whether to buy bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.
While favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM), in particular, as one of the best stocks in gold, because I believe this stock will add value to your portfolio for years to come.
I’ll go even so far as to say that this stock is the only one you will need to own for the next decade, with its good price appreciation potential and dividend.
Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs.
Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future, and it is certainly not exposed to politically unstable regions.
In that regard, the risk is spread out, as the company continues to maintain an aggressive worldwide exploration program, and continues to actively participate in and take advantage of the ongoing industry consolidations.
In terms of costs, Newmont enjoys an overall favorable cost structure. Its South American operations are a key reason why costs are kept down. This is particularly true with the Yanacocha property in Peru, where cash costs are in the lowest per-ounce price range.
The company’s diversified portfolio of low-cost mines allows it to remain profitable, even during prolonged weakness in the gold bullion market. In the past 10 years, Newmont has posted net losses three times, yet each year, it has generated positive operating cash flows.
Over the past five years, Newmont’s investment rate has been around 60%. (Investment rate refers to the percentage of profits the company has returned to its business operations.)
This strategy is consistent with what most producers do; return every dollar earned, and then some, to operations. However, with Newmont, it seems to come with ease, adding further to its attractiveness, as it can grow even during periods of depressed gold prices and at a lower investment rate.
Newmont’s cash flows are highly sensitive to the price of gold because the company remains largely unhedged, thus exposing itself to the whims of the gold market. With the recent stalling and a couple of earnings per share (EPS) estimate misses, Newmont is down to just above its 52-week low of $42.95, and with the selling, I feel there is decent above-average upside potential.
This is the stock that saw its market price go up double percentage points over the past three years, and its sales double every three years. The company is growing aggressively—both internally and by acquisitions—and has sufficient cash in the bank to finance that growth.
Newmont is an ideal candidate for investors looking for a company with excellent fundamentals, a proven track record, and experienced and knowledgeable management.