NEM: Newmont vs. Barrick Gold: Which Mining Stock is a Better Buy?

Gold has always been perceived as a safe-haven asset, with its nominal price rising over time. Given this nature, investors often tend to allocate a part of their total investments to gold to mitigate the overall risk of their portfolios. Given the current recession and weakening US dollar, investing in stocks that mine gold can help investors hedge their portfolios against market risks.

Gold prices have rallied 25% year-to-date, as people have shifted towards safe investment tools amid the recession. The dovish monetary stance combined with stalled stimulus talks has weakened the US dollar worldwide. And this has contributed to the growing prices and valuation of gold. This has incentivized two of the world’s largest gold mining companies Newmont Corporation (NEM) and Barrick Gold Corporation (GOLD) to expand their operations in mineral-rich countries to capitalize on the pandemic tailwind.

Both companies have generated significant returns over the past five years. While GOLD gained 254.3%, NEM returned 246.9%. In terms of year-to-date performance, NEM is the clear winner with 53.4% gains versus GOLD’s 49.4% returns. As the market recovery from the September sell-off shifted focus to the tech-oriented stocks, GOLD generated negative returns over the past month, while NEM returned 7%.

But which stock is a better buy now? Let’s find out.

Latest Movements

Moody’s Analytics upgraded GOLD’s senior notes Baa1 from Baa2 with a stable outlook on October 29th, given its excellent liquidity position. GOLD’s Tanzanian mine, Twiga Minerals Corporation, and Congo’s named Kibali mine are expected to produce at least 500,000 ounces of gold annually over the next 10 years.

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While GOLD has been focusing on Africa for new mining opportunities and expansion over the past couple of months, NEM has strengthened its presence in South America. NEM recently formed a joint venture with Agnico Eagles Mines in Columbia to explore and advance gold mining across the country.

NEM fortified its ownership interest in Maverix Metals by selling its royalty portfolio for $90 million.

Recent Financial Results

GOLD sold 1.25 million ounces of gold and 116 million pounds of copper in the third quarter ended September 2020. Revenue from gold was approximately $238.62 billion, while revenue from copper was around $343.36 million, given the average market price of the commodities.

NEM’s sales increased 17% year-over-year to $3.17 billion in the third quarter ended September 2020. The company demonstrated a strong liquidity position with its cash and cash equivalents balance increasing 74.8% from the year-ago value to $4.93 billion over this period.

Past and Expected Financial Performance

NEM’s revenue and EPS grew at a CAGR of 14.1% and 310.1%, respectively, over the past three years. The 3-year CAGR of its leveraged free cash flow has been 18.7%. The company’s EPS is expected to grow 112% in the current quarter, 97.7% in the current year, and 80.5% next year. Analysts expect NEM’s revenue to increase by 20.3% in the current quarter, 19% in the current year, and 21.5% next year.

GOLD’s revenue and EPS increased at a CAGR of 8.9% and 7.3% over the past three years, while leveraged free cash flow rose at a CAGR of 11% over this period. The consensus EPS estimates indicate 113.3% growth in the current quarter, 103.9% growth in the current year, and 40.4% next year. Revenue is expected to grow by 24.8% in the current quarter, 24.5% in the current year, and 9.3% next year.

Thus, GOLD has an edge over NEM here.

Profitability

GOLD’s revenue is 1.07 times what NEM generates. However, NEM is more profitable with a gross margin of 48.8% compared to GOLD’s 33.6%.

However, GOLD’s ROE and ROA of 22.3% and 6.1% compare favorably with NEM’s 18.6% and 3.7%, respectively.

Valuation

In terms of forward non-GAAP price/earnings, GOLD is currently trading at 26.44x, 4.1% more expensive than NEM, which is currently trading at 25.39x. GOLD is also more expensive in terms of forward PEG (2.91x versus 1.39x).

However, NEM’s trailing 12-month price/sales of 5.09x is 17.3% more expensive than GOLD’s 4.34x.

POWR Ratings

Both NEM and GOLD are rated “Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for both these stocks:

NEM has a “B” for Buy & Hold Grade and Peer Grade, and “C” for Trade Grade and Industry Rank. It is currently ranked #1 out of 30 stocks in the Miners – Gold industry.

GOLD also has a “B” for Buy & Hold Grade and Peer Grade and a “C” for Trade Grade and Industry Rank. It is currently ranked #2 in the same industry.

The Winner

Despite NEM being the largest mining company in the world with a higher market capitalization, GOLD is a better investment bet given its higher earnings and revenue growth potential. At a relatively premium valuation, investing in GOLD can help investors accrue higher capital gains compared to NEM. GOLD’s higher revenues are a huge plus point in this regard. GOLD’s mining operations in Africa, which has the largest gold reserves in the world, tilts the favor towards the company as it increases the company’s future earnings potential.

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NEM shares were trading at $65.36 per share on Wednesday afternoon, down $1.31 (-1.96%). Year-to-date, NEM has gained 52.08%, versus a 9.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...