Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewingÂ 5 Undervalued Companies for the Enterprising Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Newmont Mining Corp (NEM) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Newmont Mining Corporation, is primarily a gold producer with operations and/or assets in the United States, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico. As of December 31, 2012, Newmont had attributable and probable gold reserves of 99.2 million ounces and an aggregate land position of approximately 29,000 square miles (75,000 square kilometers). Newmont is also engaged in the production of copper, principally through Batu Hijau in Indonesia and Boddington in Australia. Its operating segments include North America, South America, Asia Pacific and Africa. In February 2014, Klondex Mines Ltd closed the acquisition of the Midas mine and related ore milling facility located in the State of Nevada from a subsidiary of Newmont Mining Corp. In March 2014, Newmont Mining Corp sold its 5.4% equity interest in Paladin Energy Ltd through a block sale agreement with UBS Australia.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$4.56|
|Value Based on 0% Growth||$2.67|
|Market Implied Growth Rate||33.15%|
|Net Current Asset Value (NCAV)||-$19.59|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Newmont Mining Corp is unsuitable for either the Defensive Investor or the Enterprising Investor. Â For the Defensive Investor, the concerns are with the low current ratio, insufficient earnings growth or stability over the last ten years, and the high PEmg ratio. Â The Enterprising Investor is concerned with the high level of debt relative to its current assets along with the lack of earnings stability or growth over the five year period. Â Consequently, value investors seeking to follow the ModernGraham approach should explore other opportunities through a review of 5 Low PEmg Companies for the Defensive Investor while keeping in mind the 7 Key Tips to Value Investing. Â From a valuation side of things, the company appears significantly overvalued, having seen a drop in its EPSmg (normalized earnings) from $1.26 in 2009 to $0.31 for 2013. Â This demonstrated earnings history certainly does not support the market’s implied estimate of 33.15% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Newmont Mining Corp (NEM)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Newmont Mining Corp (NEM) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.