Down 14% After Earnings, Should You Buy the Dip in This Gold Stock?

Gold prices have continued their relentless climb higher ahead of next week's U.S. presidential election, with the popular currency hedge catching a high-profile boost from billionaire investor Paul Tudor Jones when he warned on CNBC recently that “all roads lead to inflation.” Investors are also eyeing a shift toward gold by BRICs nations, where central banks have been heavy buyers of bullion this year as they look to replace U.S. dollar reserves.

But while gold futures (GCZ24) peaked at yet another record high today - this time, above $2,800 - the only gold producer included in the S&P 500 Index ($SPX) just limped to its worst day since 2008. Should investors think about buying the dip, or is something seriously amiss? Here's a closer look.

About Newmont Stock

Newmont Corporation (NEM) is a mining company involved in the exploration, production, processing, and refinement of gold, silver (SIZ24), zinc, copper (HGZ24), lead, and molybdenum. Their portfolio includes 17 managed operations across nine countries. 

Headquartered in Denver, Newmont has a market cap of $54.4 million. The mining stock has also consistently paid a dividend for over 30 years, and yields 2.09% based on the current quarterly payout of $0.25 per share.

NEM has gained 21.3% over the past 52 weeks, and 13.4% on a YTD basis. However, that includes a steep 18.7% pullback over the past five days. The stock's six-day losing streak is currently highlighted by an all-out collapse of 14.7% on Oct. 24, when the miner fell short of earnings estimates.

Newmont Misses Big on Labor Costs

Last week, Newmont reported third-quarter results. Earnings of $922 million, or $0.81 per share, missed analysts' $0.83 per share estimates. Revenue rose 84% YoY to $4.61 billion, boosted by higher gold prices, but still missed Wall Street’s estimates.

Management attributed the earnings miss to higher labor costs, even as they continue to make progress on debt reduction and divesting non-core assets. Newmont says it retired $233 million in debt since the last earnings call, and is on pace to generate at least $2 billion in gross proceeds from the divestment of our non-core assets.

The miner generated $1.6 billion of cash flow from operations and $760 million in free cash flow during Q3, and returned $786 million to investors through share repurchases and quarterly dividends. Newmont approved an additional $2 billion buyback program during the quarter, bringing the total authorization to $3 billion. 

The company ended the quarter with $7.1 billion in total liquidity. All in sustaining costs for the fourth quarter are expected to be approximately $14.75 an ounce, down 8% from Q3. 

How Do Analysts Rate NEM?

UBS just downgraded NEM to “Hold” from “Buy” after earnings, and trimmed its price target to $54. 

However, most analysts are upbeat. With 16 analysts in coverage, the average rating for Newmont stock is a “Moderate Buy.”

The mean price target for NEM is $60.23, implying expected upside of more than 28% from here.

For investors intrigued by management's plans to pay down debt and shed non-core assets, NEM looks cheap now, valued at 8.1x cash flow and 7.33x EV/EBITDA - a discount to its own historical valuations, as well as the materials sector median readings. 

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On the date of publication, Ruchi Gupta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.