“I had a dream. It was the gold calling.”
– Matthew McConaughey as Kenny Wells in the movie Gold
arvy’s teaser: Gold is on fire, soaring toward $3,000 an ounce. But gold miners? A different story. Newmont Mining is cheap, yet struggling. Will rising gold prices lift it – or is it just another fool’s trap?
Gold & gold miners.
My old flame is back in the headlines.
The yellow metal has risen sharply in the past year, by an astonishing 44 % (chart 1). We are approaching an important milestone of $3,000 per ounce. As you will recall, gold moves in cycles, and I first wrote about it in December 2023 (In gold we trust), where I had reasons to believe that the stars were aligned. That the future of gold is bright. Now that the ancient metal is soaring, we need to keep an eye on the obvious beneficiary of higher gold prices. Gold miners. They are a truly special investment. A thing of their own.
And since I’m the gold bug of team arvy, I’ve been given permission to sprinkle a little on you.
Let’s talk about the largest gold miner in the world.
Newmont Mining.
Chart 1: The gold price over the last 20 years and its recent performance
Source: TradingView
Reputation, Reputation, Reputation
First things first. Let’s talk about the industry itself. Some companies and industries have good ones. Some don’t.
Gold miners are among the latter.
Their reputation is dodgy.
It’s bad.
As soon as they earn a lot of money, they pay high bonuses and live a lavish lifestyle with extraordinary expenses such as conferences, private jets or parties. Fraud and corruption are the order of the day. And they also tend to make value-destroying takeovers, because once the gold rush is on, they can’t get enough.
Takeovers?
As recently as 2023, Newmont (then with a market capitalization of $40bn) took over Newcrest in Australia for $17bn, creating the world’s leading gold company with solid copper production. Another huge takeover, just as the price of gold was beginning to rise.
Maybe some things will never change…
So, it’s not far-fetched that there are some incredible stories to be told in this industry, and even Hollywood couldn’t resist making a film based on a ‘too good to be true’ story (chart 2).
It’s about one of the biggest fraud scandals in the world. The Bre-X scandal.
I can highly recommend it😊!
Sceptics also claim that gold miners don’t move when the market rises because gold, the underlying commodity, is then simply calm. But if a bear market hits the stock market, gold miners are also stocks and will fall as well.
You see, you can’t win either way.
But this time it’s different!
Isn’t it?
Chart 2: The movie Gold with Matthew McConaughey
Source: IMDB
All-In Sustaining Costs
In recent years, most gold companies have restructured their balance sheets, rigorously streamlined their cost structures and are now generating solid free cash flow. They are also extremely transparent about their financial results and pursue a shareholder-friendly dividend policy.
Newmont Mining is also one of them. While this industry will never be perfect, we need to focus on the next important metric in this sector.
The All-In Sustaining Costs, or AISC for short.
What does this mean?
The AISC is a comprehensive metric introduced by the World Gold Council in 2013 to provide transparency on the total cost of gold mining. It includes not only direct mining costs, but also additional costs for maintaining production and operations.
It is therefore the actual cost of operating and extracting an ounce (31.1 grams) of gold.
While the price of gold has risen steadily over the past year, AISCs have also increased, much to the frustration of gold mine operators (chart 3). At Newmont Mining, they have risen significantly from around $1,000 per ounce to over $1,500. They are among the highest in the industry, ranging now between $1,000 and $1,700.
The main reasons for this were higher salaries for skilled labor, price increases for explosives for the mines, rising energy costs (especially diesel), higher costs for ESG (Environmental, Social and Governance), studies and exploration as well as problems with individual mines.
While Newmont’s costs per ounce rose by $500, the price of gold rose by over $1,000 in the same period. Ok, but according to our Milchbüechli calculation, that means: $1,000 – $500 = $500 more profit, all other things being equal!
That would mean that Newmont must have gained dramatically!
Wouldn’t it?
Chart 3: All-In Sustaining Costs (AISC) of Newmont Mining, Barrick Gold and Agnico Eagle Mines
Source: themarket.ch, Bloomberg
A Fool’s Trap
That wasn’t the case.
As I have already mentioned, gold mining companies are a thing of their own. They have so often been a fool’s trap.
Example?
Newmont’s stock initially benefited from rising gold prices, doubling in value, only to plummet by 65% due to the broader bear market in 2022 and the announcement of its takeover of Newcrest.
On top of that, management over-promised and under-delivered.
Never a good sign.
That said, the company itself is performing well, with strong fundamentals and record-high margins. Its P/E ratio of 12 is far below the 10-year average of 21, making it the cheapest it’s been in a decade. Plus, compared to gold prices, Newmont is trading at its biggest discount in a decade, too.
All in all, gold is heading for new highs, and a long-term bull market seems likely. This could create a compelling investment story for gold miners – a “Good Story”. However, adding them to a portfolio requires strong conviction – especially since the “Good Chart” looks anything but promising.
Even as a gold enthusiast, I’m keeping my excitement for gold miners in check.
But rest assured that we at arvy are eagerly watching from the sidelines.
Because an old flame never dies.
Chart 4: Newmont Mining over the last ten years
Source: Tradingview
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