Friday, April 15, 2011

Newmont Mining's Suspiciously Low P/E

Despite gold going up, Newmont Mining's P/E ratio keeps sinking. For a stock that would be expected to benefit from gold's bull market, it's been a bit of a laggard. Its P/E is approaching single digits.
According to some analysts, Newmont is trading at a mere 11 times its estimated earnings this year and, at its recent share prices of $57 (U.S.), it has dipped below 10 times projected earnings for next year....

In previous bull runs, big gold miners frequently traded at double or even triple Newmont’s valuations. Investors paid up for the seniors and gave them high P/Es based on the thinking that the companies offered a liquid, leveraged play on bullion and held a treasure trove of wealth in the ground.

There are no damaged goods in Newmont’s profit aisle that would explain the cheap price; earnings were up a stunning 76 per cent to a new record last year.

So why the slump? One reason already given some time ago is that major gold producers are being valued like integrated oils. There's another, darker possibility.

One major exception to the low P/E rule applies to cyclical stocks. Cyclicals, whose earnings fluctuate with the business or a commodity cycle, tend to sport low P/E ratios when they top out. The stock lags because a future drop in earnings is being discounted. Their P/Es tend to be high or negative at the bottom of the cycle.

Gold isn't at its blow-off stage yet, but we may be seeing something of that sort being discounted. Not the end of the bull market, which is some time away, but perhaps a pullback. Summer is coming, and gold tends to fare poorly during summertime. Perhaps what's being discounted is a cost squeeze, which has in fact dogged major golds' earnings in this bull market.

A third possibility is investor skepticism, in which case Newmont is genuinely undervalued. Their revenues outstripping any cost squeeze would count as untoward undervaluation.

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