Can Gold Miners Still Make Money?

Gold miners like Newmont Mining (NYSE: NEM) have found themselves in a fascinating quandary. Economics dictates that they should be making a lot more money but they are not.

The current economic indicators should favor gold, the US dollar has lost 10% of its value since the beginning of the year, stocks in a potentially dangerous looking bubble, and hysteria about a bond collapse, higher interest rates and inflation is running rampant. Despite all that gold prices have stagnated; hovering between $1,200 and $1,300 a troy ounce and taking several ugly dives, in the last six months.

This situation should not exist; speculators and conservative investors should be pouring their money into gold or gold-mining stocks. That is not happening; Newmont was trading at $35.63 a share on August 8, 2017, and stock in another large US gold producer; Freeport-McMoRan (NYSE: FCX) was trading at $14.60 a share on the same day.

Are Cryptocurrencies to Blame for Gold’s Weak Performance?

One potential culprit for gold’s weak performance is cryptocurrencies. The altcoin market might be sucking up money that might normally be going to gold.

Cryptocurrency prices seem to support this argument; bitcoin was trading at $3,438.98 a unit on August 8, 2017. The price of bitcoin increased by 481.68%; between 8 August, 2016 and August 8, 2017. Ethereum’s growth was even more extraordinary. The cost of a unit of ether grew by 2,424.01% during the same period. A unit of ether that was selling for $11.41 on 8 August 2016 – was fetching $288 a year later.

The reason altcoin might be slowly soaking up money that normally gets invested in gold is obvious; it is an even better hedge against inflation than gold. Unlike gold, a bitcoin can be sent anywhere electronically and used to buy a wide variety of merchandise online.

Cryptocurrency vs. Gold Guess who wins

There are also a growing number of Visa debit cards that convert bitcoin into fiat currencies such as dollars such as that from Bitpay. TenX is even planning to bring out a card that can convert several different altcoins (including ethereum) into fiat currencies.

If it works as advertised you might be able to use Litecoin via a TenX Visa’ or MasterCard, at places like the grocery store or the gas station. You cannot buy a liter of gasoline or food for your children with gold. Nor can you use gold to pay the mortgage or the electric bill, but you might be able to do that with Ethereum or Dash in the near future.

Basically cryptocurrencies provide protection against inflation and they are far easier to store and covert into real money than gold. You can even keep vast amounts of cryptocurrency in your pocket – via bitcoin hardware wallets such as the TREZOR.

A Disruptive New Technology that Threatens Gold

In Silicon Valley terminology, cryptocurrency is a very disruptive new technology that is superior to precious metals. Cryptocurrencies might be doing to metals what Google did to newspaper and phone book advertising. That would be to provide an alternative that is far cheaper and faster, much more convenient and easier to use.

Goldbugs will say sooner or later cryptocurrency will fail. It’ll get hacked or banned or something and the hedgers will all come crawling back to gold. But what if that catastrophe fails to occur, a lot of very smart people are devoting a vast amount of time and money to making altcoins work.

What happens to gold if they succeed? Will we see a world in which gold is only used for jewelry and electronic parts, and young people are confused by the plot of Goldfinger?

Are Goldminers a Good Contrarian Investment?

Naturally some stock pickers will smell a contrarian investment here. Large numbers of people are abandoning a reliable time tested hedging mechanism for flashy new tech that might fail at any minute. That might make companies like Newmont a contrarian buy, but are they a value investment?

The answer provided by the ycharts data is maybe. The numbers I found show that Newmont is making money, but it’s a long way from recovery. Important data about Newmont Mining includes:

  • Revenue is growing slightly. The $7.114 billion reported on June 30, 2017, was up slightly from $6.908 billion on March 31, 2017, and definitely better than the $6.143 billion reported in June 2016. That means Newmont’s revenue collapse is over.

 

  • Newmont’s income still stinks. It reported a loss of -$479 million on June 30, 2017. That was an improvement over the -$633 million recorded in March 2017, but still worse than the $40 million in net income reported last year.

 

  • A profit margin of 9.44% on June 30, 2017.

  • A free cash flow of $343 million on June 30, 2017. Up from $193 million in March 2017, but down from $494 million in second quarter 2016.

 

  • Assets of $21.14 billion on June 30, 2017. This number is considerably lower than in June 2016 when it was $24.70 billion. Although it has recovered from the $20.97 billion it fell to in March 2017.

 

  • Cash and short-term investments of $3.166 billion on June 30, 2017. This number is definitely an improvement over the $2.97 billion in March 2017 and the $2.948 billion from June 2016. Yet it also raises some serious questions, one potential problem is that Newmont is selling gold for whatever price it can get to raise cash. That’s bad because if all miners do it, the price of gold goes down.

  • $2.382 billion in cash from operations on June 30, 2017. This was down from $2.633 billion in March 2017 and $2.385 billion in June 2016.

 

  • A market capitalization of $19 billion on August 8, 2017.

 

  • An enterprise value of $21.86billion on August 8, 2017.

 

Okay so it looks as if Newmont has some float, but is it a value investment? I would say no for an interesting reason. The value of its basic product – gold is in serious decline. The only way companies like Newmont can make more money is to dig; and sell more gold, which drives down the price further.

Stay Away from Gold Mining Stocks

That makes gold into a traditional commodity – which makes it very vulnerable to market forces. The situation is made worse by low oil prices; which make it cheaper to dig gold. In the long run that might turn Newmont into a company with little or no float because prices are so low.

Among other things that means Newmont’s business might not be sustainable. Therefore investors need to stay away if they want to avoid the -4.36% negative return on equity reported on June 30, 2017.

Even the 7.5¢ dividend scheduled for September 17, 2017 is likely to vanish at some point. Something to remember is that Newmont paid a dividend of 42.5¢ as recently as March 2013. That payout fell to 2.5¢ a share in 2014 and stayed there until September 2016.

Bulls will say that the 5¢ a share dividend increase in the last year makes Newmont an income stock. I’m not buying that argument, because the dividend increase looks like an attempt to peddle a declining stock in a sagging industry off to gullible investors. The moral of the story is stay far away from Newmont; and gold-mining stocks, if you want to make money.