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Image: Anzá gold exploration project in Colombia Source: Mining
The investment thesis for Newmont (NYSE:NEM), the world’s largest gold producer, has remained the same for many years. NEM is an excellent long-term investment on account of its impressive balance sheet and, more specifically, its stable long-term production outlook.
However, I still believe it is essential to trade short term about 40% of your NEM position to profit fully from the sector volatility. Using TA patterns and RSI is recommended.
I believe it is about time to look at Newmont Corporation again, for three critical factors.
1 – Gold is at a new record high of $1,922 per ounce in Q3 ’20
We have already started the fourth quarter of 2020, and it is time to analyze the future third-quarter results and discuss what we should reasonably expect. We know that the gold price for the third quarter has reached another record high of $1,922 per ounce, nearly $200 per ounce above the price received by the company in the second quarter of $1,724 per ounce.
I recommend reading my article about the second-quarter results published on August 10, 2020.
2 – The gold price is now temporarily trending down
The gold price has shown signs of technical exhaustion after reaching an all-time high of $2,069.21 on August 6, 2020.
However, the World Gold Council (“WGC”) cautions that while the price of gold reached all-time highs in nominal terms, it remains below the inflation-adjusted record of $2,800 an ounce.
I have been warning readers on Seeking Alpha for quite some time about a potential retracement after gold reached $2,070 per ounce based on the 10-year chart pattern (adjusted for inflation).
The TA pattern is relatively straightforward. The pattern is called a Cup and Handle. We are now located in the second handle that I will analyze later in this article.
I believe we are still in the handle part, and the gold price is likely (but not sure) to go further down.
In general, the retracement in such a pattern is between 10% and 20% from the top, which would be a range of $1,863 (that we have reached) to $1,656. A reasonable retracement should be around $1.725 to $1,675. It explains why NEM has weakened lately.
3 – Newmont was pretty active during the third quarter of 2020
On August 17, 2020, Newmont entered into a strategic alliance agreement with Kirkland Lake (NYSE:KL):
[T]o jointly assess regional exploration opportunities around Newmont’s Timmins properties and Kirkland’s Holt Complex in Ontario, Canada. As part of the Strategic Alliance, Newmont has acquired an option (the Option) from Kirkland on the mining and mineral rights subject to a royalty payable by Newmont to Royal Gold, Inc. (the Holt Royalty) in exchange for a $75 million payment to Kirkland Lake Gold.
On August 20, 2020. Newmont and the Cedros community reached a definitive agreement resolving all outstanding disputes between Peñasquito and the San Juan de Cedros community (Cedros). Peñasquito mine has been acquired by Newmont from Goldcorp (NYSE:GG) and has produced 69K Au Oz in the second quarter of 2020.
On September 21, 2020, Newmont Corp. sold a portfolio of eleven royalties to Maverick Metal Inc. worth $90 million.
Newmont will receive total consideration of approximately $90 million from Maverix, consisting of $15 million in cash, 12 million Maverix common shares, and up to $15 million in contingent cash payments payable upon completion of certain milestones.
On September 29, 2020, Newmont Corp. and Agnico Eagle (NYSE:AEM) have established a 50-50 joint venture in Colombia to explore the Mid-Cauca belt, located in the northwest of Colombia.
The partners will concentrate their efforts on the Anzá gold project, in which Newmont has earn-in rights. However, the two gold producers are not limiting their joint venture to one project only and consider other prospective gold targets of district-scale potential in Colombia.
Newmont reached a three-phase deal with Orosur Mining (TSX, AIM:OMI) in 2018, which granted it the right to earn up to a 75% stake in the Canadian junior’s Anzá project. The asset, comprising contracts and applications totalling 200 square kilometres, is located 50 km west of Medellin and 60 km south from Zijin Mining’s Buritica operation.
Let’s have a look at the recent stock performance
Newmont Corp. is one of my long-term selected gold miners. The long-term portfolio includes Barrick Gold (NYSE: GOLD), Agnico Eagle, and Kirkland Lake Gold. Newmont and Barrick have outperformed the group and the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) in 2020.
Third-quarter revenue outlook and discussion
1 – Production of gold for the third quarter
The company indicated in the September presentation that gold production for 2020 is expected to be 6,000K Oz with total GEOs production of 7,000K Oz.
Note that it will be between 6.2 and 6.7 Moz from 2021 to 2023.
The gold production for the first six months of 2020 is 3,073K Oz. Hence, I have deduced that the gold production in 3Q will be around 1,450K Oz or about 1,690K GEOs.
2 – Revenues for the third quarter should reach a record high
Based on 1,690K Oz and an average gold price of $1,922 per ounce, I estimate the Q3 revenues at $3.25 billion, which will be a record as you can see below.
Conclusion and Technical Analysis
Newmont Corp. is one of the most stable gold producers with tremendous potential growth and an excellent net debt-to-adjusted EBITDA below 0.6x.
What I like the most is that management under CEO Tom Palmer plans to stay focused on improving margins, spending on existing projects that generate cash flow at a low gold price, and make sure that the balance sheet is balanced. He said recently:
“At Newmont, when we talk about discipline, it’s about continuing to run our business profitably at the bottom of the price cycle, at $1,200.”
The main question is, of course, the future price per share and the investment strategy that should be adopted. Tom Palmer believes that gold will remain high for quite a while.
“There are a lot of signals that point to gold staying at these elevated levels – with I think a lot of volatility around it – for some time to come.”
However, while the stock has retraced significantly from its recent highs, we should expect some more downside before the Q3 results. Any downside from here, mostly below $60, should be considered as an opportunity to accumulate again.
NEM is forming a descending broadening wedge with support at $58-$0.57 and resistance around $66.75-$67.25.
A descending broadening wedge chart pattern is a bullish reversal pattern, which means I recommend accumulating just below $60, knowing that support could be lower. On the selling side, I recommend taking partial profit between $66.75 and $67.25 and selling again above $71. The selling should not be exceeding 50% of your total holding.
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Disclosure: I am/we are long NEM, AEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also trade short-term both stocks using Technical analysis and RSI.