Gold and Newmont in 2023Buying Gold Miners Hand-Over-Fist: Newmont Vs. Barrick Gold
Dec. 27, 2022 8:00 AM ETBarrick Gold Corporation (ABX:CA), GOLD, NEM, NGT:CAGDX, GDXJ, GLD87 Comments
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Samuel Smith
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We believe 2023 could be a big year for gold miners.
NEM and GOLD are leading blue chips in the sector.
We discuss our bullish outlook for the sector and compare NEM and GOLD side by side to offer our take on which is a better buy at the moment.
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After a couple of lackluster years, we believe 2023 could finally be a big year for gold miners (GDX)(GDXJ). Newmont Corp (NYSE:NEM) and Barrick Gold (NYSE:GOLD) are leading blue chips in the sector. In this article, we will discuss our bullish outlook for the gold mining sector and compare NEM and GOLD side by side to offer our take on which is a better buy at the moment.
Why Gold Miners Will Shine In 2023
The gold mining sector has struggled over the past two years.
To some this might be surprising given that there have been numerous potential upside catalysts for gold (GLD) during that period: rebounding outbreaks of COVID-19, four decade high inflation, the outbreak of the Russia-Ukraine war, the rising threat of recession, and soaring geopolitical tensions in the Middle and Far East.
However, it appears that a combination of Central Bank tightening and rising interest rates have suppressed gold prices, while rising operational costs for miners have combined to squeeze their profits and beat down their share prices. Furthermore, rising geopolitical risks and even worse economic conditions in other major economies outside of the United States have led to a stronger dollar, which in turn has weakened gold's relative performance.
That said, there are several reasons why we believe that 2023 will likely be much kinder to gold miners.
First of all, gold miners have been beaten down to levels that we think make them a highly compelling value. For example, NEM and GOLD - two industry blue chips with some of the very best assets and balance sheets in the sector - both offer historically attractive dividend yields and trade at historically attractive valuations.
Second, industry fundamentals are likely to improve moving forward given that a recession is expected to hit in 2023 which should result in moderating operational (labor and energy) costs.
Third, the outlook for the gold price is also improving significantly for several reasons. Central bank demand for gold hit a 55-year-high in 2022 and was up 383% year-over-year and - with demand accelerating throughout the year - we see no reason to believe it will taper off in 2023. Furthermore, with a recession on the horizon, investors may increasingly go into risk-off mode and gold is typically an investment of choice in such a horizon. Perhaps most importantly of all, the chances of further aggressive interest rate hikes seem to be weakening significantly. This is a bullish indicator for gold because it means that real interest rates will likely remain negative even if inflation does begin to decline substantially next year. Historically, negative real interest rates have been very bullish for gold prices.
Last, but not least, China serves to be a potential major x-factor for gold prices in 2023 and beyond as well. This is because it is buying gold hand-over-fist right now (with Reuters reporting that China's central bank recently announced that it planned to add an additional $1.8 billion in gold to its reserves) and if China were to attack Taiwan, the price of gold would likely spike as well.
Better Blue-Chip Miner Buy: NEM Vs. GOLD
With that said, which blue chip miner is a better method to gain exposure to potential upside in the sector?
NEM reported relatively disappointing Q3 results that included:
Management reaffirmed that it is on track to achieve full-year guidance.
The balance sheet remained in stellar shape with total liquidity of $6.7 billion and a net debt to adjusted EBITDA ratio of 0.5x (well below NEM's target of 1.0x), with no debt maturities until 2029.
Near-term projects continue to advance, reflecting the ongoing viability of its impressive production pipeline
That said, the company was free cash flow negative, and it turned in disappointing adjusted earnings per share during the quarter due to high capital expenditures relative to cash inflows (a timing issue, though also somewhat impacted by inflation) and lower realized prices and sales volumes.
As a result of the inflation related headwinds and some lingering weakness in the gold price, NEM announced on the earnings call:
there are two key inputs to our dividend framework that we are critically reviewing. The first, as I've been discussing for some time now, is the long-term gold price and the assumption we use for both reserve pricing and project approvals. This assumption is a key input for determining the payout level of our base dividend.
The second key input is the free cash flow we expect to generate above this base level, and this is impacted by the current global economic environment that we are all operating in. Over the next month, we will finalize, and our Board will approve our business plan. We will then provide a comprehensive update on these inputs and associated outputs with our long-term outlook during our 2023 guidance webcast.
However, I can assure you that we clearly understand the importance of returning cash to our shareholders, and we have a proven track record of doing so. With our third quarter dividend declared, we will return nearly $4 billion through dividends since we introduced our framework two years ago. We will continue to take a long-term view to determine the appropriate level of current dividend payouts, and we remain committed to a clear dividend framework.
What this essentially means is that there is a potential for them to effectively cut their variable gold price-based dividend by shifting their framework on what gold price is needed to pay out a certain dividend amount. While this is a slightly bearish development, it does not sound like it will be a dramatic shift, and we remain bullish on the long-term outlook for gold and copper - the two main metals that NEM produces - so our long-term outlook on NEM remains unchanged.
GOLD meanwhile reported Q3 results that were quite solid. Some investors appeared to be disappointed that the company's variable dividend payout was only $0.15 this quarter instead of the $0.20 level it was at last quarter, and doubtless some investors were expecting again this quarter. However, it is important to note that GOLD also repurchased $141 million worth of shares during Q3, or over 0.5% of their market cap, so this was a meaningful allocation of cash as well and led to them reducing their quarterly variable dividend payout.
In addition, GOLD beat analyst consensus expectations on the top and bottom lines and confirmed that it remains on pace to meet full year production targets while also growing total reserves net of depletion by year end thanks to very positive developments on its exploration and new project development front. The company also sold its non-core royalty asset portfolio, freeing up cash to be redeployed into highly accretive share buybacks and high-returning growth projects. As a result, management believes this move increased shareholder value.
Overall, we continue to be very bullish on GOLD's long-term value proposition for the following reasons:
While the gold price may be subsiding at the moment due to short-term concerns about the direction of interest rates, we believe that the Federal Reserve will be forced to pivot once the pain of the impending recession becomes obvious. Furthermore, there are numerous geopolitical risks that do not appear to be priced into the markets - particularly the gold price - at the moment. If a major conflict were to flare up in the Middle East or Far East or if the war in Ukraine were to escalate into nuclear conflict or spill over into another country, gold prices would very likely shoot higher.
GOLD's fundamentals remain quite solid, and it continues to generate significant free cash flow alongside a stellar balance sheet. There is little reason to worry about the business itself, so we believe the sell-off is unwarranted.
Finally, we love the idea of buying an equity stake in GOLD's large production reserves. Between its long-term high-quality gold production pipeline and its growing copper pipeline (which we are particularly excited about given our bullish view on copper), we expect GOLD to generate significant cash flow in the coming decades. Ultimately, we view GOLD as a deeply undervalued high-quality and well-managed business that offers some diversification relative to the rest of our portfolio.
Overall, both companies offer attractive risk-reward at the moment - especially given our bullish outlook for gold and copper prices - but we slightly prefer GOLD given that its valuation is slightly cheaper than NEM's:
EV/EBITDA P/FCF
GOLD 7.68x 23.43x
NEM 8.21x 24.06x
Investor Takeaway
Given the current macro forces at play, we are very bullish on gold and especially dividend paying blue chip gold miners heading into 2023. Two of our favorites NEM and GOLD appear to be on sale and should experience significant upside if/when gold prices move higher.
While we slightly favor GOLD due to its cheaper valuation, we assign Strong Buy ratings to both stocks and hold them as part of our exposure to the materials sector in our portfolio at High Yield Investor.