A Better Way to Get Gold Exposure

 | Apr 12, 2013 | 11:18 AM EDT
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We have no strong conviction about the direction of the price of gold over the next three months or even a year.

However, if you like gold or are looking to hedge your investments with a gold position at this point, we prefer Newmont Mining (NEM) to buying a gold exchange-traded fund. Gold ETFs have been the emerging way to own gold over the past decade and have dramatically outperformed gold-mining operators.

Over the last six years, the price of gold has doubled, yet over that time period, Newmont Mining's stock price has essentially been flat. Even in the 2008 financial crisis, Newmont's shares participated in the stock market correction while the price of gold drifted to new highs. To add insult to injury, as gold prices have declined 6.8% year to date, Newmont has led the charge down and is off by 16.5% year to date.

On the basis of the past six years' performance, there would be no reason to ever own a gold stock, since the entire gold-mining industry mirrored Newmont's performance.

However, we do not believe this will be the case going forward. Newmont's valuation level has significantly declined, whereby it is trading at 10.3x 2013 earnings, a significant discount to its historical level of 15x earnings. On the basis of net asset value, the company is trading around 1.1x its $36 NAV, compared with an historical average of 2x NAV.

Furthermore, to reward shareholders for a sluggish share price, Newmont instituted a novel dividend policy in 2011 of linking its dividend payouts to the price of gold. On the basis of first-quarter spot prices, Newmont sports an attractive dividend yield of 3.6%, compared with a sub-2% historical average. If prices rise, the payout will rise significantly from current levels. Even if prices fall, the dividend will still be at attractive levels. A gold ETF pays no dividend and also charges a management fee, so this is another attractive feature of directly owning Newmont's common shares.

One further key highlight is that the company recently installed a new CEO to refocus the operations on reducing costs and improving cash returns to shareholders. The board is listening, as investors have become impatient with excessive capital spending, spiraling costs and a dead stock price. Operating metrics and cash returns should improve in the coming years. Overall, Newmont's metrics are the best they have been in years.

While we don't have a conviction about the direction of gold, we do believe from current levels and the current state of the industry that Newmont should have good upside potential in the event of improving gold prices. So if you are bullish on gold or just want to put a portion of your portfolio in gold (and we would not make a significant gold bet), we believe an investment in Newmont is the optimal way to do it.

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