Is Newmont Mining worth taking an active bet?
The main reason to invest in a stock over a benchmark—that is, to favor active investing over merely replicating a benchmark portfolio—is to earn excess returns. Mackenzie Financial added Newmont Mining (NEM) to its portfolio, expecting NEM to generate superior returns compared to the benchmarks listed in the table below.
According to the table above, Newmont Mining’s stock price outperformed the benchmarks. This outperformance shows that the depreciating US dollar and increasing crude oil prices favor the company’s stock prices. According to the company’s 1Q15 earnings release, every $10 reduction in oil prices implies an expected $30 million improvement in Newmont’s attributable free cash flow. Similarly, every $0.05 favorable change in the Australian dollar results in a $60 million improvement in the company’s attributable free cash flow. Newmont produces close to one-third of its gold in Australia. So Newmont’s AISC[1. all-in sustaining cost] is gaining from favorable foreign exchange movements.
Gold companies also benefit from lower oil prices. In particular, companies that are unhedged benefit more, as most of them still have oil price assumption of $90 to $100 per barrel. For example, Barrick Gold’s (ABX) 2015, 2016, and 2017 fuel hedge exposure is 52%, 46%, and 42%, respectively. For Newmont Mining (NEM), 58%, 33%, and 12% of fuel exposure is hedged for 2015, 2016, and 2017, respectively. Goldcorp (GG) is less hedged, as only its Canadian operations are hedged, at 35% to 40% for 2015.
NEM versus ETFs
The VanEck Vectors Gold Miners Index’s (GDX) average year-to-date performance has been 3.47%. While NEM is included in this ETF’s top five holdings, its return so far in 2015 has been 43.28%. The year-to-date return on the GLD ETF has been 2.89%. Other miners in the industry include Barrick Gold (ABX) and Goldcorp (GG), which have year-to-date performances of 16.46% and 1.64%, respectively. Therefore, NEM performed quite well compared to its competitors.
Considering that Newmont outperformed all of these benchmarks, Mackenzie Financial’s bet on NEM seems wisely timed.