Newmont Mining: Positioned to Outperform - Seeking Alpha

Newmont Mining (NYSE:NEM), like all other gold producers, is benefiting from the surge in gold prices. In the second quarter, the company posted increase in sales, adjusted income and operating cash flows, thanks in large part to support from gold prices that averaged $1,260 per ounce in the second quarter, as opposed to $1,179 a year earlier.

In the third quarter, gold prices improved even further to an average of $1,329. Not surprisingly, Newmont Mining, which is one of the world's largest gold producers, posted strong third quarter results. The company reported 14.8% increase in sales to $1.79 billion, 6.3% increase in net income (continuing ops.) from a year earlier to $169 million, 188.6% surge in adjusted profits to $202 million, 7.2% increase in operating cash flows to $509 million and 50.9% increase in free cash flows (cash in excess of capex) to $240 million.

However, the yellow metal as well as gold stocks could experience volatility in the near future. That's because Donald Trump's ascension to presidency may lift gold prices. A number of analysts previously predicted a rally in gold prices if Trump were to become president. As per ABN Amro's Georgette Boele, Trump's policies could be "inward looking," "weaken the fundamentals of the US economy" and exacerbate an already uncertain global environment. This could lift the yellow metal's demand, which is considered as a safe haven asset. Analysts at JP Morgan have even said that investors should load up on shares of Newmont Mining on the backdrop of US elections.

On the other hand, the US Federal Reserve is gearing up to increase interest rates, which is a negative for gold. So far this year, the Fed has kept the interest rates unchanged. But earlier this month, the policymakers pointed to strengthening US economy, solid job gains while saying that the inflation could be slowly inching towards the 2% target. With the hawkish comments, the US central bank could be preparing for a December rate hike.

Also, note that the current gold spot price is weaker than the third quarter average. Following the election results, the commodity has gained 2.35% to $1,305 an ounce. But it is still almost 2% below Newmont Mining's Q3 average realized price. The yellow metal has stayed below $1,300 throughout most of October. This means that if the election-fueled rally in gold prices fails to hold its ground, then Newmont Mining could experience lower realized prices in the fourth quarter as compared to the third quarter.

Newmont Mining stock has been under pressure. Over the last three months, shares have fallen almost 20% to $36 at the time of this writing. The stock could swing both ways in the coming weeks due to abovementioned reasons. I suggest investors consider buying this stock on weakness, particularly if it falls below $30 mark.

That's because firstly, despite the volatility in gold prices, the industry's fundamentals seem to be improving. A number of major gold miners, such as Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG) are no longer targeting production growth. In a recent presentation, Goldcorp said that production from large-cap miners is going to decline by 8% between 2015 and 2018. The company also pointed out that global mine supply peaked in 2015 and will likely decline in 2016 and subsequent years. We have already seen that the world's total gold output has now fallen for two quarters in a row. The most recent drop occurred in the third quarter when the miners produced 846.8t of gold, down from 851.2t in the same quarter last year. Meanwhile, demand is projected to grow by roughly 7% this year. This, coupled with shrinking supply, should have a positive impact on gold prices in the long run.

Strength in prices will fuel revenue, earnings and cash flow growth at Newmont Mining. But that is also true for most of the other miners. What sets Newmont Mining apart is that unlike most of its peers, the company is targeting production growth. The company has produced 3.57 million ounces of gold in the first nine months of this year, up 3% from 9M-2015, and has recently said that it is on track to produce between 4.8 and 5.0 million ounces in 2016. This would be slightly lower than 5.04 million ounces produced last year, but the company could still end up beating the guidance and post increase in production. And even if it doesn't, Newmont Mining aims to increase output to up to 5.4 million ounces by 2017. The growth will be driven by a number of projects (e.g. Long Canyon, Tanami expansion) which will offset the negative impact of asset sales (e.g. Batu Hijau).

Thanks to increase in production, Newmont Mining's revenues, cash flows and earnings could grow faster than those of its peers. This could fuel the stock's outperformance. In the meantime, Newmont Mining will also reward investors with higher dividends.

Newmont Mining benefits from having an under-levered balance sheet, with a total-debt-to-equity ratio of 46%, lower than the industry's average of 54.6%, as per data from Thomson Reuters. The company boasts solid liquidity of roughly $6 billion and has also been generating strong levels of free cash flow of almost $500 million this year. The company is well positioned to boost payouts. And it did by doubling dividends to $0.05 per share for the fourth quarter, and will likely further hike dividends in 2017. On top of this, the company has also modified its gold-price linked dividend policy and is now promising annual payout of at least $0.10 per share in a sub $1,150 an ounce price environment.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.