Newmont (WKN: 853823), the world’s largest gold producer, has reported its latest quarterly figures, which are quite impressive. The reported earnings per share of $1.71 significantly exceeded the $1.44 anticipated by analysts. Year-on-year, net profit surged by 95% to $1.8 billion, and revenue increased to $5.27 billion.
Despite these very strong results, Newmont’s stock dropped by five percent within minutes of the results being published, falling to a low of $82.60. Although the price subsequently recovered slightly, the negative sentiment persisted until the close of trading.
This is remarkable, as profit increases of nearly 100% with a P/E ratio of 12 are typically considered a buy signal on the stock market. The reason for this initially surprising investor reaction is the ongoing market correction, which currently leads investors to find fault in even the most favorable situations.
Exploration Neglected over the Last Decade is the Industry’s Achilles’ Heel
Market participants were not troubled by Newmont’s figures but expressed concern about the company’s medium-term future. Long-term growth prospects are no longer viable for many investors, explained commodity analyst Tavi Costa. This highlights the most severe and significant vulnerability of the industry, as the omissions of the past ten years are now evident to all, and for Newmont & Co., there is only one way to remedy this deficiency in the short term.
The sharp rise in gold prices is a relatively recent phenomenon. It began in spring 2022 when central banks, in response to Western sanctions against Russia following the start of the Ukraine war, massively increased their consistent gold purchases. However, in the ten years prior, the gold price and the associated margins for gold producers were significantly lower.
This led to extensive cost-cutting across the entire industry, wherever possible. Consequently, not only Newmont but all other companies in the sector reduced their expenditures, with exploration being particularly affected. This strategy is often adopted in the commodity sector during crises, as the positive effects of savings are immediately reflected in financial statements, whereas the negative consequences only become apparent after a significant time lag.
Time is of the Essence, but Exploration is a Very Time-Consuming Business
Large gold producers like Newmont significantly reduced their exploration budgets during this period, and mid-sized companies followed suit. Young exploration companies were hit even harder. They lack stable cash flow and are therefore dependent on investors being willing to provide new venture capital for exploration.
However, this willingness was absent in the past decade, as investors preferred to invest in Bitcoin and other cryptocurrencies rather than providing funds for new drilling. As a consequence of this development, the past 15 years in the mining sector, with regard to neglected exploration, can only be considered lost years. Only now is money slowly flowing back into this sector, but it will take a long time until the gap can be closed again.
Not only the management of large mining corporations but also investors are aware of this. They are now severely punishing companies like Newmont for past mistakes, even though their own restraint significantly contributed to this situation arising in the first place. Whether this behavior is fair is debatable.
Expensive and Fast rather than Cheap and Slow
The fact is, however, that investors are now pressuring the industry’s heavyweights because growth prospects are not as favorable as the market desires. Companies like Newmont now have two fundamentally different options. They can either reinvest funds themselves and accelerate the exploration of their existing mines and undeveloped projects they already own. This path is undoubtedly the more cost-effective one. However, it has the disadvantage that it will take a significant amount of time to successfully pursue it.
Since Newmont’s management is aware of the market’s proverbial impatience, it can be assumed that they will opt for the second option: the acquisition of other companies and their projects. While this is significantly more expensive, it can be realized very quickly. The funds are available, as the high gold price currently provides large producers with high margins and generates substantial cash flow.
It therefore seems to be only a matter of time until the industry goes on a large-scale acquisition spree again. Which major will be the first to feel compelled to act is difficult to predict. It is much easier to identify potential acquisition targets. They will possess attractive projects in secure jurisdictions and will either be “unattached” or acquired by the partner with whom they are currently developing their project within a joint venture.
Many Investors Will not Miss this Opportunity
Newmont & Co.’s current predicament thus represents an opportunity for investors, which they themselves – at least in part – helped create through their behavior. Those who wish to profit from it are already focusing on attractive mine developers with projects large and appealing enough to interest companies like Newmont, Barrick, or Agnico Eagle Mines.
Goldinvest has been following some of these companies for quite some time. In the gold sector, Goliath Resources and Sitka Gold are project developers that have consistently attracted attention with exceptional drilling results for some time now. In the copper sector, Brixton Metals already has a financially strong partner, BHP, as a strategic investor, while Silver47 Exploration is still unattached but has three promising projects in the USA in Alaska, New Mexico, and Nevada.
