Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Does Gold Mining pay at Newmont Goldcorp?

I ask does gold mining pay because two of the largest gold miners, Newmont Mining and Goldcorp merged in January. However, the resulting company’s revenues and stock price are small.

In fact, Newmont Goldcorp (NYSE: NEM) recorded quarterly revenues of $1.803 billion on 30 March 2019. Meanwhile, Newmont Goldcorp’s stock was trading at $33.61 a share on the same day.

Consequently, investors will ask is Newmont Goldcorp junk or a value investment? On the value side Newmont generates a lot of cash in the form of a $571 million operating cash flow and a $346 million free cash flow on 30 March 2019.

Is Newmont Goldcorp a Value Investment or Junk?

On the junk side, Goldcorp had a Market Capitalization of $26.179 billion on 30 May 2019. However, some people will view Newmont as a bargain because of the low price. Correspondingly, Newmont Goldcorp reported a gross profit of $825 million, an operating income of $288 million, and a net income of $87 million on 30 March 2019.

Beyond income, Newmont Goldcorp had $3.545 billion in cash and equivalents and $56 million short-term investments on 31 March 2019. Thus, Newmont had $3.601 billion in liquid assets at the end of last quarter.

The cash makes Newmont a potential value investment because it has a low price and a lot of money in the bank. Some value investors will like Newmont because it is a cheap cash-rich company. Moreover, Newmont Goldcorp offers some impressive dividends.

Newmont Goldcorp’s Impressive Dividends

Finally, Newmont Goldcorp will pay a dividend of 14₵ a share on 20 June 2019. Notably, Newmont paid a bigger bonus dividend of 88₵ a share on May 1 2019, and a regular dividend of 14₵ on 21 March 2019.

Thus Newmont could pay $1.16 in dividends a four-month period. However, estimates Newmont had a dividend yield of 1.88%, an annualized payout of 56₵, and a payout ratio of 45.5% on 30 May 2019. Plus, Newmont has only paid a dividend for three years.

Note:’s figures may not include Goldcorp because the merger occurred less than six months ago. Despite’s assessment, I consider NEM a good dividend stock.

The Value case for Gold Miners

My value case for gold miners is simple. These companies extract and sell a basic commodity through often simple processes.

Yet, people will pay a ridiculous price for that commodity. For example, gold was trading at $1,324.50 a troy ounce and $42,583.66 a kilo on 3 June 2019, Kitco estimates.

Consequently, Newmont Goldcorp makes money even when the price of gold is low. To clarify, Newmont Goldcorp makes money by selling gold. Yet mining gold is a fairly simple, and sometimes cheap process. Modern heavy machinery allows a few people to excavate significant amounts of gold for the cost of salaries, equipment leases, and diesel fuel.

Additionally, Newmont mines products; silver and gold it can sell quickly for cash. Thus it can usually generate a steady stream of cash.

The Junk Case for gold miners

The junk stock case gold miners is that these companies’ profits depend on a heavily traded commodity: Gold.

That commodity; moreover, has a long history of irrational price swings, booms, bubbles, and crashes. When adjusted for inflation the record high price for gold in the last 104 years was $2,227.13 an ounce in January 1980, Macrotrends estimates. Meanwhile, the lowest price for gold I could find was $239.58 a troy ounce in January 1970.

On the positive side, miners like Newmont can still make money when gold prices are low. Negatively, the bottom can drop out of gold and reduce Newmont’s profits.

Does Gold Predict Market Instability?

Plus, many outsider factors affect gold prices including the cost of oil, the political situation, inflation, and market sentiment about the wider economy. Since many people, falsely, view gold as a “safe” asset its price increases in bad times and falls in good times.

Interestingly, gold prices can serve as an indicator of market sentiment. Notably, gold spiked at $657.65 during the Great Depression in 1934 and fell to $274.25 during the go-go years of the 1960s.

Thus, today’s falling gold prices; the metal was trading at $1,340 in February 2019 indicate market stability. Low gold prices usually indicate low inflation and strong faith in alternatives such as stocks, bonds, real estate, and fiat currencies. My theory is people sell gold to buy alternatives with higher returns its price is low.

Furthermore, irrational attitudes skew gold prices because there is a minority that places a strong faith in gold. So-called gold bugs will buy gold and hold it no matter what its price. Accordingly, gold-bugs will run up prices when gold is cheap by buying and hoarding the metal.

Stay Away from Gold Mining Stocks

Consequently, smart value investors will stay away from gold itself but consider gold miners. If you view gold mining companies as cheap but risky value or dividend income stocks, you could make money from them.

However, any gold-related investment can lose all of its value. Thus only people with cash to burn and a high tolerance for risk should own gold mining stocks. If you cannot afford to lose money stay far away from gold miners.

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