Gold has always long been perceived as a safe-haven asset, to which investors gravitate to store value in difficult economic times. Newmont Goldcorp Corporation (NEM) and Franco-Nevada Corporation (FNV), two of the world’s prominent gold mining companies, have been thriving since the onset of the COVID-19 pandemic last year as investors turned to gold to protect their wealth and hedge against the economic ravages of the global public health crisis.
The yellow metal kicked off 2021 with some weakness given the current improving economic outlook and uptick in the long-term Treasury yields. But there is increasing optimism that gold will resume its rally given expected economic weakness in the near term and increased amounts of government deficit-spending.
Both stocks generated significant returns over the past five years. While NEM returned 164.4% over this period, FNV gained 156.7%. In terms of their past year performance, NEM is a clear winner with 36.2% returns versus FNV’s 9.1%. But which of these stocks is a better pick now? Let’s find out.
Business Structure and Latest Movements
NEM is the world’s leading gold mining company and a producer of other precious and industrial metals including copper, silver, zinc and lead. NEM has the largest gold reserve base in the metals industry, underpinned by its world-class ore bodies in top tier locations. .
NEM and its joint venture partners recently achieved a key milestone in announcing the successful integration of the Alumbrera mine, plant and infrastructure with Yamana Gold’s (AUY) Agua Rica project to create the integrated MARA project. Moreover, the company completed two key projects last month at its Musselwhite mine in Canada, with the full commissioning of the mine’s conveyor system and the material handling project.
FNV operates as a gold-focused royalty and streaming rights company (and not a mining company) with its largest and most diversified portfolio of cash-flow producing assets in the United States, Canada, Australia, Europe, Africa, and internationally. It operates through two segments – Mining and Energy.
In September 2020, FNV amended its Sabodala gold purchase and sale agreement with Teranga Gold to compensate the company for displacement from the processing of Massawa ore. FNV also completed acquisition of a 2% NSR on all mineral production from Gold Fields’ Rio Baker concessions in Chile for $5 million in cash with contingent payments of up to $8 million.
Recent Financial Results
NEM is scheduled to release its fourth quarter and full year ended December 31, 2020 earnings results on February 18. In the third quarter, NEM’s revenue increased 17% year-over-year to $3.17 billion, due primarily to higher average realized gold prices. NEM produced 1.5 million attributable ounces of gold during the quarter. Its non-GAAP EPS came in at $0.87, relatively stable compared to the year-ago value of $0.86.
In the third quarter, FNV generated record revenues of $279.8 million, representing 18.6%% year-over-year improvement. Regarding its top-line, 91.9% was derived from gold and gold equivalents while 8.1% came from energy operations. The company sold 134,817 gold equivalent ounces, up 1.2% from the prior-year quarter due to higher contributions from the Hemlo and Candelaria mines. Its EPS came in at a record $0.81, rising 51% year-over-year.
Here NEM is in an advantageous position.
Past and Expected Financial Performance
NEM’s revenue and EPS grew at a CAGR of 15.3% and 168.1%, respectively, over the past three years. FNV’s revenue and EPS grew at a CAGR of 13.6% and 19.7%, respectively, over the same period.
Analysts expect NEM’s revenue to increase 22.8% in the current year. NEM’s current year EPS is expected to grow 63.2% year-over-year, and at a rate of 45.7% per annum over the next five years. In comparison, FNV’s EPS is expected to grow at a rate of 7.7% per annum over the next five years.
NEM has an edge over FNV here as well.
NEM’s trailing-12-month revenue is more than 11times FNV’s. But FNV is the more profitable with a net profit margin of 27.1% versus NEM’s 23.2%.
Moreover, NEM’s ROE and ROA of 10.48% and 4.38%, respectively, compare favorably with FNV’s 5.19% and 3.22%.
In terms of forward p/e, FNV is currently trading at 62.41x, which is 222% more expensive than NEM, which is currently trading at 19.38x. Moreover, NEM is less expensive in terms of trailing-12-month p/s (4.32x versus 23.65x).
In terms of trailing-12-month price/cash flow, FNV’s 31.16x is 187% higher than NEM’s 10.87x.
NEM looks more affordable compared to FNV.
NEM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, FNV has an overall rating of C which represents Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Momentum Grade, both NEM and FNV have grades of A, reflecting their potential to reach new heights relatively faster than their peers.
However, NEM has a Value Grade of C, given its lower-than-industry p/e ratio. FNV’s Value Grade of D is consistent with its stretched valuation multiples.
Moreover, of 48 stocks in the Miners – Gold industry, NEM is ranked #17 and FNV is ranked #23.
Beyond what I stated above, our POWR Ratings system has also rated both NEM and FNV for Growth, Stability, Sentiment, and Quality. Get all the NEM ratings here. Also, click here to see the additional POWR Ratings for FNV.
Optimism over a vaccine-driven economic recovery has boosted investors’ risk appetites, causing them to shift their focus from safe-haven assets to risky assets. However, as the global economy continues to be weak, the Fed is unlikely to change its accommodative stance in the near term, and gold is unlikely to face a bear market any time soon. Hence, we think both NEM and FNV are good long-term investments considering the global demand for gold, their market strength and continued economic expansion. However, NEM appears to be a better buy based on the factors discussed here.
NEM recently issued its five-year outlook, which reflects improving production and costs. The company announced its 2021 outlook with attributable gold production guidance of 6.5 million ounces. In addition, its attributable gold production is expected to be between 6.2 and 6.7 million ounces through 2023 and in a 6.5 and 7 million ounces range in the longer-term through 2025, with improving costs. NEM’s stronger financial position is one of the key factors that will help the stock perform better in the long run.
Click here to learn about other Buy-rated Gold Miner stocks.
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NEM shares were trading at $60.44 per share on Monday afternoon, up $1.14 (+1.92%). Year-to-date, NEM has gained 0.92%, versus a 4.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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