We expect shares in gold and copper mining group Newmont (NYSE:NEM) to post steady gains in the coming months, supported by the gold price, which looks set to increase further in 2021, and strong company fundamentals.
Gold (Newmont’s primary business), has been the safe haven for investors amid the Covid 19 pandemic and while some analysts are bearish on its prospects as countries emerge from the pandemic, others say we are a long way off the end of the crisis and that gold will increase yet further.
It’s true that ETFs (exchange traded funds, which invest in gold companies) have already come off their highs on hopes that the vaccines will bring about an end to the pandemic during the course of 2021, but there are many risks embedded in these rosy perspectives.
Goldman Sachs wrote in a recent research report about the “disappointing” roll-out of vaccines and said it expected a “somewhat slower roll-out in the coming months than was previously expected”. It also said the vaccines give hope, but there are fears over the new variants and rising cases.
And it’s not just the number of cases and restrictions that could see investors hold onto gold. The many macroeconomic consequences of the pandemic – think a housing collapse, a weak US dollar, the inevitable fiscal and monetary stimulus – would all support the gold price.
Why Newmont?
Given that gold looks set to continue apace, the big question is why Newmont when there are several other big players among the leading gold mining stocks out there to choose from? We think it’s fundamentals, a generous dividend policy and Newmont’s valuation are three big ticks for investors.
Already the company has given an upbeat outlook for 2021 and beyond, predicting rising gold production (6.5 million ounces for 2021) while improving costs. It also posted strong third quarter results and although these were boosted by one-off gains, this didn’t stop Credit Suisse calling the increase “a positive surprise”.
What to expect next…
Some positive news at the company’s upcoming exploration and reserves announcement on February 10 and its full year results on February 18 could give a further boost to the group, which has already proclaimed that it has the world’s largest gold reserves. Mining companies are working with tangible assets which inevitably run out but for now it’s looking like Newmont has plenty to work with.
From a macro point of view, the Chinese economic stimulus package will give support to commodity prices as companies’ demand for precious metal components and copper will come back and if that’s not enough to make you dig for gold, the company just initiated a $1 billion share buyback and adopted an ambitious dividend policy, increasing its pay-out by about 60% to $0.40.
The share price, trading at about a 14% discount to its 52 week high, gives further encouragement. Analysts, whose recommendations fit mainly into the ‘hold’/’buy’ area have target prices going up to the mid-80s.
When going for gold, much depends on how optimistic you are about when the pandemic will end. We are cautious enough on the pandemic to believe that gold still works for 2021.
