When you look at a gold stock like Newmont Mining Corp (NYSE:NEM), you can't consider it in isolation. You have to look at how it fares versus similar companies. And on that score, the first big plus is that Newmont made money in 2014, but that's not where the analysis of Newmont's value should end.
What's Newmont worth?
Valuation is a tricky game. For example, Newmont has a price to earnings ratio (PE) of around 20 right now based on trailing earnings. That's below the company's five-year average of around 31, which suggests it's trading relatively cheaply compared to its own past.
That stacks up really well compared to the gold industry's big dog, Barrick Gold Corporation (USA) (NYSE:GOLD) since Barrick's P/E is ... Well, it doesn't have one because it doesn't have earnings. That means its P/E isn't meaningful. The same is true (either because of a lack of earnings or earnings being so small that the P/E is outlandishly large) of GoldCorp (USA) (NYSE:GG), Agnico Eagle Mines Ltd (USA) (NYSE:AEM), Gold Fields Limited (ADR) (NYSE:GFI), and Franco-Nevada Corporation (NYSE:FNV).
So, on some level, it's a good thing, perhaps even an impressive thing, that Newmont has a useable PE ratio. But it's only just so helpful in figuring out how Newmont stacks up against the competition.
You'll have to use another view
Shifting gears to book value, Newmont has a price to book value ratio (PB) of 1.1 compared to its five year average of 1.8. It's roughly 40% below its five year average. So, again, it's trading relatively cheaply compared to its own history.
However, unlike PE, where earnings play a big part, all of the above competitors have useful PB values. And all but one of those companies is trading below it's five year average PB ratio. The lone standout is Franco-Nevada, which is trading right in line with it's five-year average of 2.1. That makes sense because it's the only peer with no debt on the balance sheet, suggesting it may deserve a premium PB valuation.
The others trade at discounts ranging from around a 20% discount to the five-year average PB to a 50% discount. Newmont sits somewhere in the middle of the range. Add in the fact that it made money where others didn't, and it makes sense that it wouldn't be a cellar dweller. And the fact that it has a notable slug of debt, unlike Franco-Nevada, probably suggests it shouldn't be at the top, either.
One more, for good luck
Another way to look at Newmont is enterprise value to earnings before interest taxes depreciation and amortization, or EV/EBITDA. That acronym is a mouthful. Figuring out EV requires taking the company's market cap, adding in debt, preferred equity, and minority interests, and then subtracting out cash. The basic idea is that it's what a would-be acquirer would have to pay to take over the company. EBITDA is pretty much what it says it is.
Newmont's EV/EBITA is roughly 8.5. The above competitors range from around 6.7 to 66. So, once again, Newmont isn't in the dog house, but it isn't in the catbird seat, either. That said, it's toward the low end of the range relative to peers, so it's fairly cheap, but there are cheaper options.
A tough market
Using the common P/E multiple to look at Newmont isn't very useful, but it is telling when you consider that so many competitors have meaningless numbers. Essentially, this fact tells you that gold miners aren't doing well right now. Switching to an asset-based valuation like PB, Newmont is cheap compared to its own history, but not outlandishly cheap compared to peers. Looking at EV/EBITDA shows the same thing; cheap, but not outlandishly so.
The interesting thing is that the middle of the road seems to be where Newmont finds itself in other ways, too. For example, the gold miner's all-in sustaining costs, a measure of how much it costs to pull gold out of the ground, of around $1,000 an ounce is ... you may have guessed, neither the cheapest nor the most expensive in the industry.
At the end of the day, Newmont is a perfectly fine gold miner. However, unless you expect gold to rally strongly, there's no compelling reason to buy it over its peers. In fact, with gold prices low and commodity markets weak overall, it might even make sense to pay "more" for a company like Franco-Nevada that has no debt to weigh it down.
Why do that? Because Franco-Nevada's enterprise value is nearly 20% lower than its market cap. So if a company were looking for an acquisition target in an out-of-favor industry, Franco-Nevada would be a relatively cheap target. Newmont's EV is nearly 40% above its market cap, just for reference. Although that didn't stop industry heavyweight Barrick from sniffing around, Barrick and Newmont both have heavy debt loads and a deal couldn't be worked out. Franco-Nevada would be an easier bite to swallow.
That said, if you aren't in the mood for buying potential acquisition targets, despite it's middle of the road appeal, Newmont's dividend is linked to gold and the company doesn't hedge its gold exposure.
So, as noted above, if you think gold is ready to rally, Newmont is probably a good choice. Otherwise, there's not much separating it from the pack right now.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.