Newmont: the best inflation stock available (NYSE: NEM)
Inflation above a healthy level of around 2% per year can be a terrible thing. It erodes your purchasing power, increases essential household obligations such as energy and food prices, and forces you to work longer hours. to earn the same amount of money that you were earning a short time ago. It’s our job to recommend stocks to our readers, and today’s article is geared towards “investing in inflationary environments”.
Newmont Corporation (NYSE:NMS) is widely known as the largest gold mining company in the world, and it’s my top choice for inflation hedging for the rest of 2022. The stock has all the qualities needed to fight the inflation and presenting excess returns as a low risk; Here’s why.
Inflation – An overview, what has changed and Newmont’s role
The inflation we all experience is due to push and pull factors, which is unique. We’ve had pandemic shutdowns accompanied by stimulus, which has caused spending to increase while supply has dwindled, and that’s a big part of why we’re at an inflation rate of 8.54%. Added to this are the most recent geopolitical tensions with Russia, which have exacerbated high inflation, particularly in non-essential areas such as food and energy.
Inflation is unlikely to subside anytime soon, so I checked some correlations over the weekend to see what well-known inflation hedges are doing. Much has been made of Bitcoin’s properties as an inflation hedge, but it is clear that it is gold that is resurfacing as an inflation hedge. This prompted me to look for a “best in class” gold stock to present to our readers.
I wanted to make a scatter plot in Excel that would explain the correlation with the help of Solver, but the data cleaning process would have taken too long. So, I instead chose to run a regression model in Portfolio Visualizer and extract it to Excel to make it more presentable. I decided to test the correlation between Newmont stock and two ETFs, namely PIMCO 15+ Year US TIPS ETF (NYSEARCA:LTPZ) and PIMCO 1-5 Year US TIPS ETF (NYSEARCA:STPZ), which are inflation-linked bond ETFs. Correlation analysis shows us that Newmont’s stock has a positive correlation with inflation in the short and long term, suggesting that it is a valid option as an inflation hedge. .
Newmont Key Drivers
Profits and operations
Newmont released its fourth quarter and year-end results in February and beat its earnings estimate of 1 cent per share. The company has achieved significant results through its nine world-class assets around the world. The company’s Australian segment posted a strong performance with high-grade minerals from its Tanami project, more than offsetting the challenges posed by the Covid-19 lockdowns. Tanami and Boddington contributed to 1181 thousand ounces of gold produced in the company’s Australian segment in the last financial year, a 3.48x increase from 2020.
Additionally, Newmont’s operations in the Americas also flourished. The Peñasquito mine in Chile delivered strong crushing performance while Musselwhite was a cornerstone of quarterly results. The company’s North American segment delivered 1598 thousand ounces gold in its full year, a 3.95x year-over-year increase.
Finally, Newmont’s operations in Africa appear to be gaining momentum with its Akyem, Ahafo and Subika mines all contributing to annual production of 862,000 ounces, a 3.52x increase from the previous year.
Company-wide, Newmont reported an increase in its annual financial performance with an increase in revenue of 6.3%, adjusted EBITDA of 7.06% and adjusted net income of 10.79%. This leaves Newmont in a strong position heading into its 2022 fiscal year as metal prices remain elevated (see chart below) and pandemic lockdowns continue to ease.
Key operational indicators
Newmont’s cash flow has grown significantly relative to its CapEx over the past three years. CapEx is a big deal for mining companies because their maintenance reinvestment rates aren’t cheap, and Newmont has managed to hold up well while proliferating its cash flow. Additionally, Newmont has invested heavily in global expansion, such as its exploration investment in Peru to unearth South America’s largest gold mine, Yanacocha. From a shareholder perspective, it’s encouraging to see her investing aggressively while generating substantial cash flow.
Newmont’s gross margins have also increased by 99.57% over the past three years, demonstrating the economies of scale made possible by its leading position. world’s largest gold producer.
Operationally, Newmont is robust, which tells me that it provides its investors with due diligence and commitment.
The price of a stock refers to the expected return of an asset in an efficient stock market. I like to use pricing metrics because they explain how a stock will perform in different market circumstances and the risk that comes with it as well. For starters, Newmont’s beta of 0.349x means the stock is around 2.87x less risky than the S&P 500. That’s pretty impressive, considering its stock also has outperformed the S&P 500 index over the past 5 years.
I used Portfolio Visualizer to run a four-factor model from Carhart, which explains a stock’s historical global annualized alpha against the S&P 500, its alpha against the index in a dynamic market, its alpha in a value driven market and its alpha in a size driven market.
My conclusions were that Newmont behaved in the following manner from January 2000 to April 2022.
- Outperformed by 2.69% when the broader market is in a state of momentum.
- Outperformed by 2.60% in a value driven market.
- Underperforms the market when small cap stocks outperform large cap stocks.
Although not representative of the entire stock market, the ETF charts below support the claim that we are currently in a large-cap value market. That leaves Newmont stock with plenty of support going forward if the Carhart model is anything to go by. And besides, it somewhat justifies the statement that large cap value surpasses small and the growth of large caps during periods of high inflation.
Newmont is one of top 50 dividend payers on the S&P 500. The stock offers tremendous value to shareholders with a dividend payout ratio of 74.58% at a forward yield of 2.60%. The company’s ability to sustain such dividends is certainly intact considering its $4.28 billion in operating cash and 6.30x in cash per share. Additionally, Newmont’s interest coverage ratio of 7.53x and its dividend coverage ratio of 1.45x suggest that distributions could be sustained for some time.
Starting from bottom to top. Newmont’s operating margins and cash from continuing operations were a little light last year. The company’s operating margins have shrunk due to higher variable and fixed costs amid rising global inflation. This proves that even the primary sector, which is often the best placed to fight inflation, is struggling to maintain its profit margins. Newmont’s cash from continuing operations also came 14.6% less during the previous financial year than in 2020, leaving it with a gap between its organic cash inflows and the success of its income statements.
Suppose one takes the view of a bird’s nest rather than looking at Newmont’s idiosyncratic features; it’s safe to say that the broader market is in turmoil with global indices mostly in the red zone. There have been a lot of geopolitical tensions and there is talk of another “Omicron Esque” variant that could hit the world this year. The problem with stocks is that risk-free diversification into an asset such as Newmont doesn’t matter because almost all assets decline in a bear market with considerable magnitude.
Newmont stock has a positive correlation with TIPS bonds, which are indexed to inflation. The company has benefited from rising metal prices, which may persist as high inflation looks set to continue. In addition, Newmont shares have good qualities from a price and dividend perspective. It is a well-balanced asset and a “best in class” investment if you are looking to hedge inflation.