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Is Now a Golden Opportunity to Buy Newmont Mining?

By Scott Levine – Oct 24, 2016 at 5:50AM

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Not every mining company that glitters is gold, but this one might be.

Image source: Getty Images.

Newmont Mining Corp. (NEM -0.70%) is one of the usual suspects investors mention when talk turns to gold-mining stocks. And you don't need to be around a water cooler to know that the gold industry -- following the recent drop in the price of gold -- has been on a lot of investors' minds recently.

Despite the drop, the price of gold is still up about 19% year to date, and many people expect it to continue higher in the months ahead. So let's dig into this gold digger and see if now is a good time to pick up shares.

Delving into Debt

Carrying a lot of debt shouldn't immediately disqualify a company from occupying a part of your portfolio. The debt-to-equity ratio is one of several metrics used to gauge a company's leverage; it gives a sense of how reliant the company is on debt to finance its assets relative to shareholders' equity.

ABX Net Financial Debt (Annual) Chart

ABX Net Financial Debt (Annual) data by YCharts

One of the ways in which Newmont has demonstrated a commitment to securing its financial health is by strengthening its balance sheet. According to Morningstar, Newmont ended 2015 with $3.44 billion in net debt -- approximately 33% lower than the $5.11 billion with which it ended 2013. And through the first half of 2016, that figure has come down even further. At the end of the second quarter, Newmont had only $2.62 billion in net debt -- a 24% reduction from where it began the year.

Newmont is not alone in this endeavor. Barrick Gold (GOLD -0.11%), with which Newmont is often compared -- both companies have market caps just over $18 billion -- has reduced its debt by $4.1 billion over the past six quarters. Unlike Barrick, though, Newmont has been able to improve its equity position, relying on less leverage.

ABX Debt to Equity Ratio (Annual) Chart

ABX Debt to Equity Ratio (Annual) data by YCharts

In fact, Newmont has not only veered away from Barrick in this regard, but from peers like Goldcorp (GG) and Kinross Gold (KGC 1.38%) as well.

Looking at liquidity

Having looked at Newmont's leverage, let's examine how well-suited it is to service its debt. We'll use two metrics to gauge its liquidity: the quick ratio and the current ratio. Measuring the company's ability to meet its short-term obligations, the quick ratio subtracts the company's inventories from its most liquid assets -- like cash and short-term investments -- and divides that by its current liabilities. The current ratio, on the other hand, adds inventories back into the equation in order to assess the company's ability to meet short-term and long-term obligations.

ABX Quick Ratio (Annual) Chart

ABX Quick Ratio (Annual) data by YCharts

For both metrics, most investors consider a quick ratio above 1.0 as a healthy sign, as it indicates that a company has more than $1 in current assets minus accounts receivable for each $1 of payments due within a year, including accounts payable and the current portion of long term debt.

Clearly, Newmont can safely attend to both its short-term and long-term obligations -- but if people need any further assurance, they can compare Newmont to its peers. In doing so, it becomes even more apparent that Newmont is well-positioned to service its debt.

Is there a sale?

Having looked at both leverage and liquidity, we find that, as a company, Newmont seems like a more compelling proposition than its peers. So let's now turn to the stock. Up more than 90% year to date and more than 76% from this point last year, shares have been on a good run. Let's see if there's still a good value to be had.

In the mining industry, a paramount concern for companies is the value of their assets -- namely, their mines. So let's turn to the company's book value -- its total assets minus its total liabilities -- for some perspective on how the stock is priced.

ABX Price to Book Value Chart

ABX Price to Book Value data by YCharts

Trading at 1.6 times book value -- marginally higher than its five-year average of 1.5 times book value -- Newmont's stock is much more reasonably priced than that of Barrick Gold. It would be myopic of us, however, to solely consider one other company, so let's consider the stock in relation to the entire industry. According to Morningstar, investors will have to pay a premium for Newmont's shares, which trade slightly higher than the industry average of 1.4 times book value.

Also of the utmost importance to mining companies -- arguably more so than common metrics like earnings per share -- is the amount of cash they're generating. How is Newmont's stock priced in this regard? Trading at 7.6 times operational cash flow (three-year average), Newmont's stock seems a little pricey compared to its five-year average of 7.2. But when we consider this in terms of the 10.3 times cash flow which is the industry average, according to Morningstar, shares seem much more attractively priced. 

The takeaway

Valuing a company's stock is far from simple. Having taken a long look at Newmont Mining Corp., there are some compelling reasons to consider digging into your pocket and picking up shares of this gold-digger. Financially, the company appears to be on solid ground, and the stock seems to be reasonably priced. Even if it seems a little on the pricey side, investors should not be deterred. 

Scott Levine has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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