Investors in the leading gold mining company Newmont Corporation (New York Stock Exchange: NEM) have had a horrible year. NEM posted a price drop of more than 50% from its April highs, hit by a trifecta of threatening headwinds: geopolitical risks, record inflation, energy costs and rapidly rising in the dollar index (DXY).
We postulated in our previous article noting that we believe the market had already forced NEM to a long-term capitulation low. As a result, NEM has outperformed the SPDR S&P 500 ETF (SPY) since our article, posting a -3.5% total return vs. SPY’s -8.4% (based on Seeking Alpha data).
We stand by our view that NEM is likely to consolidate its support in the near term. Additionally, we note that Street analysts have panicked over the past two months, notably cutting Newmont’s revenue and earnings estimates. As such, it raised its NTM EBITDA multiples well above its 10-year average. However, we are not fazed by the reaction of the Street analysts.
We believe that the strength of NEM’s price action suggests that NEM has a potential opportunity to bottom out at current levels, even if the consolidation continues. However, we urge investors looking for a quick rally to be careful as worsening macroeconomic headwinds cannot be ruled out, exacerbated by an increasingly aggressive Fed driving the dollar index higher.
Despite that, we explain why we think investors can remain bullish at these levels, as we posit that many of their near-term challenges have likely been reflected.
As such, we reiterate our Buy recommendation on NEM.
Wall Street analysts panicked, but NEM stood firm
As seen above, Newmont’s revenue estimates were down substantially from its August projections. Additionally, Street analysts see the impact extending well into FY23. Thus, The Street has notably lowered the bar for the company to cross when Newmont reports on its next Third Quarter Earnings Release November 1st
We analyze that the revisions are prudent. Gold futures (GC1) fell nearly 11% from their August highs to their recent September lows. GC1 has been consolidating at those levels for the past month.
As the company’s operating performance is sensitive to volatility in gold prices, we assess that Street “hastily” adjusted its estimates in time for the company’s earnings release.
However, it is also critical for investors to consider that gold futures have already retreated to what we call their “final line of defense” – the 200-week moving average (purple line). It has supported GC1’s medium-term uptrend since bottoming in 2018. Therefore, long-term buyers likely saw an attractive opportunity to enter these levels, which helped support their recent buying momentum.
For now, we continue to see constructive price action. However, we need the buying cadence to improve and help GC1 regain its mid-term bullish bias, which it had already lost. Without regaining its bullish bias, a sustainable recovery in gold prices is unlikely, and GC1 could continue to move sideways, with a possible break below its 200-week support.
However, we have reasons to be positive.
Newmont is expected to recover its growth
Even analysts who lowered Newmont’s estimates before its third-quarter release project that Newmont’s revenue and adjusted EBITDA growth should rebound through FY23.
Investors are therefore reminded that Newmont’s operating performance could continue to face significant challenges in the second half of 2022. However, given the considerable beating in NEM over the past six months, we believe it is debatable that this has been reflected. a substantial disadvantage.
Additionally, we note that analysts have become increasingly bearish on Newmont and its industry peers through September as they continued to cut their earnings estimates notably.
Is NEM Stock Buy, Sell, or Hold?
NEM has managed to hold onto its September lows solidly for the past month. Coupled with the lowered estimates, it sets up NEM well as it heads towards its third quarter earnings.
Therefore, we believe that investors willing to take a position before earnings may want to consider adding exposure here. But of course, if the company signs much weaker than expected, downside volatility cannot be ruled out.
Despite that, we like NEM’s constructive price action, which bodes well for an accumulation phase.
Therefore, we reiterate our Buy recommendation on NEM.