Which gold stock is a better buy?
Gold has long been viewed as a safe haven, which investors gravitate towards to store value in difficult economic times. Newmont Goldcorp Corporation (NEM) and Franco-Nevada Corporation (FNV), two of the world’s largest gold companies, have thrived since the start of the COVID-19 pandemic last year as investors turned to gold to protect their wealth and protect themselves from the economic ravages of the global public health crisis.
The yellow metal started 2021 with some weakness given the current improving economic outlook and rising long-term Treasury yields. But there is growing optimism about the resumption of the gold rally given the expected short-term economic weakness and increasing deficit public spending.
Both stocks have generated significant returns over the past five years. While NEM returned 164.4% over this period, FNV gained 156.7%. In terms of last year’s performance, NEM is a clear winner with returns of 36.2% versus 9.1% for FNV. But which of these titles is the best choice now? Let’s find out.
Company structure and latest movements
NEM is the world’s leading gold mining company and a producer of other precious and industrial metals, including copper, silver, zinc and lead. NEM has the largest gold reserve base in the metals industry, supported by its world-class ore deposits in prime locations. .
NEM and its joint venture partners recently took a key milestone by announcing the successful integration of the Alumbrera mine, plant and infrastructure with Yamana Gold’s Agua Rica Project (AUY) to create the Integrated Project MARA. In addition, the company completed two key projects at its Musselwhite mine in Canada last month, with the full commissioning of the mine’s conveyor system and the materials handling project.
FNV operates as a gold-focused royalty and broadcast rights company (not a mining company) with its largest and most diverse portfolio of cash flow-producing assets in the United States, Canada , Australia, Europe, Africa and internationally. It operates through two segments – Mining and Energy.
In September 2020, FNV amended its Sabodala gold purchase and sale agreement with Teranga Gold to compensate the company for the relocation of ore processing from Massawa. FNV also completed the acquisition of a 2% NSR on all mineral production from the Rio Baker claims of Gold Fields in Chile for $ 5 million in cash with contingent payments of up to $ 8 million.
Recent financial results
NEM is expected to release its results for the fourth quarter and the fiscal year ended December 31, 2020 on February 18. In the third quarter, NEM’s revenue increased 17% year-on-year to $ 3.17 billion, mainly due to higher average realized gold prices. NEM produced 1.5 million attributable ounces of gold during the quarter. Its non-GAAP EPS stood at $ 0.87, relatively stable from $ 0.86 a year ago.
In the third quarter, FNV generated record revenue of $ 279.8 million, an 18.6% year-over-year improvement. Regarding its turnover, 91.9% came from gold and gold equivalents while 8.1% came from energy operations. The company sold 134,817 ounces of gold equivalent, up 1.2% from the previous year quarter due to higher contributions from the Hemlo and Candelaria mines. Its EPS hit a record $ 0.81, up 51% year-on-year.
Here, NEM is in an advantageous position.
Past and expected financial performance
NEM’s revenue and EPS have grown at a CAGR of 15.3% and 168.1%, respectively, over the past three years. FNV’s revenue and EPS grew at a CAGR of 13.6% and 19.7%, respectively, during the same period.
Analysts expect NEM’s revenue to grow 22.8% in the current year. NEM’s EPS for the current year is expected to grow 63.2% year-on-year and at a rate of 45.7% annually over the next five years. By comparison, FNV’s EPS is expected to grow at a rate of 7.7% per year over the next five years.
NEM also has an advantage over FNV here.
NEM’s last 12 months income is more than 11 times that of FNV. But FNV is the most profitable with a net profit margin of 27.1% against 23.2% for NEM.
Additionally, NEM’s ROE and ROA of 10.48% and 4.38%, respectively, compare favorably to FNV’s 5.19% and 3.22%.
In terms of forward p / e, FNV is currently trading at 62.41x, which is 222% more expensive than NEM, which is currently trading at 19.38x. In addition, NEM is cheaper in terms of rolling 12-month p / s (4.32x vs. 23.65x).
In rolling 12-month price / cash flow terms, FNV’s 31.16x is 187% higher than NEM’s 10.87x.
NEM seems more affordable than FNV.
NEM has an overall rating of B, which is equivalent to a purchase in our proprietary POWR rating system. However, FNV has an overall rating of C which represents Neutral. POWR scores are calculated by considering 118 different factors, each factor being weighted to an optimal degree.
In terms of Momentum Grade, NEM and FNV both have A ratings, reflecting their potential to reach new highs relatively faster than their peers.
However, NEM has a value rating of C, given its lower p / e ratio than the industry. FNV’s D value rating is consistent with its stretched valuation multiples.
In addition, out of 48 stocks in the Miners – Gold industry, NEM is ranked 17th and FNV is ranked 23rd.
Beyond what I stated above, our POWR rating system also rated both NEM and FNV for growth, stability, sentiment and quality. Get all NEM ratings here. Also click here to view additional POWR odds for FNV.
Optimism over a vaccine-induced economic recovery has boosted investors’ risk appetite, forcing them to focus more on safe-haven assets over risky assets. However, as the global economy continues to be weak, the Fed is unlikely to change its accommodative stance in the near term, and gold is unlikely to face a bear market anytime soon. Therefore, we believe that NEM and FNV are good long term investments considering the global demand for gold, the strength of their market and the continued economic expansion. However, NEM appears to be a better buy based on the factors discussed here.
NEM recently released its five-year outlook, which reflects improved production and costs. The company announced its outlook for 2021 with a forecast attributable gold production of 6.5 million ounces. In addition, its attributable gold production is expected to be between 6.2 and 6.7 million ounces through 2023 and between 6.5 and 7 million ounces long term through 2025, with an improvement costs. NEM’s stronger financial position is one of the key factors that will help the stock perform better over the long term.
Click here to learn more about other publicly traded Gold Miner shares.
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NEM stock was trading at $ 60.44 per share on Monday afternoon, up $ 1.14 (+ 1.92%). Year-to-date, NEM has gained 0.92%, compared to a 4.24% increase in the benchmark S&P 500 over the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words drove him to become a financial journalist. He started his career as an equity analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial analysis and investment strategies. Following…