Portfolio manager Jeff Muhlenkamp highlighted Newmont as his single best trade as gold prices continue to rise.
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00:00Jeff Mullenkamp is portfolio manager at Mullenkamp & Company.
00:04Jeff, tell me, what's your single best trade?
00:07Well, I'll tell you what we like right now is a gold miner called Newmont Corp.
00:12So, Newmont just bought another gold miner, Newcrest, a little less than a year ago.
00:18And there are two reasons that I like the trade.
00:21One is, we've got kind of the typical, we just bought a company and we find some synergies
00:26and we're going to make some efficiencies happen in our new company.
00:30And that'll result in a more profitable company.
00:32So, you've got that going on.
00:34And I think that gets you to, you know, kind of a mid-single digit, maybe a high-single digit return all on its own.
00:42But you've also got some interesting things going on in the world in terms of the price of gold and the use of gold.
00:49And so, if gold becomes more valuable going forward than it has been in the recent past,
00:55then, you know, instead of a mid-single digit or a high-single digit return, you can expect something better than that.
01:01So, I think Newmont presents kind of a call option on the price of gold as we look at what's going on.
01:08And how much is your bullishness on Newmont tied to Newmont being a derivative or a beneficiary of the AI play?
01:17And I ask that only because I know that the CEO made some comments recently saying that, you know,
01:22demand for copper and other key metals, because they're needed for, you know, AI components,
01:28means that it's going to be greater demand and that the industry is going to need to meet that demand by consolidation and other factors.
01:36It doesn't depend on AI at all.
01:39I'm really focused on the price of gold and gold in terms of both a hedge against inflation and as almost a trading currency going forward,
01:52where it has not been that in the past.
01:54So, my thesis does not imply or depend on Newmont selling more copper or more expensive copper into the markets to support AI growth.
02:05That's not part of my thesis at all.
02:07So, how could interest rates then, if you're focusing more on Newmont, since it's the world's largest gold miner, right?
02:15Are you focusing on the price?
02:17How could interest rates and what's happening with interest rates impact the price of gold and thus impact your bullishness on Newmont?
02:26See, that's very interesting because historically gold did well when interest rates, when real interest rates were negative, right?
02:35So, adjusting interest rates for inflation, if that gave you a negative number, like we actually saw for most of the period from 2010 to 2020,
02:45that's when gold would do well.
02:47And historically, gold did poorly when real interest rates went from negative to positive,
02:53which we saw happen in 2022 when the Fed started raising short-term interest rates.
02:58And so, what everybody expected was that the price of gold was going to decline as real interest rates became more positive, but it didn't happen.
03:06And so, you've got to ask yourself, has something changed, you know, kind of around the world in terms of how investors are looking at gold
03:14and how other people are looking at gold besides investors, that that 40-year correlation,
03:21which appears to have inverted for the last year or two, is going to stay inverted going forward?
03:26And I suspect it will.
03:28You've had central banks, instead of accumulating treasuries for the last few years, have now started accumulating gold.
03:34You've had the U.S., as a result of the Ukraine war, clamp down on Russian holdings of treasuries,
03:41which means that a whole bunch of other countries are not going to be interested in dollar-denominated assets as a reserve
03:49if they fear that they might lose those if they get sideways with the U.S. government.
03:54So, there have been some shifts in terms of how people view gold and how people view treasuries over the last year or two
04:03that I think are going to persist going forward, and I think they're tailwinds for the price of gold.
04:08But that's a really intriguing question, and something I'm going to watch.
04:12If, in fact, the pricing load starts to decline as real interest rates continue to stay positive,
04:18then that is a definite negative for my thesis.
04:21That is a reversal of what we've seen the last two years.
04:23So, you've mentioned one negative or possible negative to your thesis.
04:28What else could go wrong with the stock?
04:30What are the major risk factors that could hit Newmont?
04:34Well, the primary risk factor, clearly, is the price of gold, right?
04:38I mean, almost all of the revenues come from gold.
04:41If the price of gold declines, it will hit their profitability.
04:44They're all in sustaining costs.
04:46In the last quarter, they said it was about $1,450 an ounce.
04:50The current spot price of gold is more like $2,300 an ounce.
04:54So, you've got a nice, fat cushion there.
04:57But if, in fact, the price of gold declines, they're going to become less and less profitable,
05:02even with that nice, low, all-in sustaining cost.
05:05So, that's clearly the big risk to the trade.
05:07I'm wondering, what's your time horizon in terms of your love of the stock?
05:12I mean, you mentioned the cost-cutting measures because of the merger.
05:16You mentioned gold prices and the bullishness there.
05:20So, how long are you looking to hold on to the stock?
05:23Or how long before you make another decision?
05:27I think the stock-specific benefits, right, in terms of the cost benefits,
05:34they anticipate that they're going to see their synergies by about 2026.
05:40So, you've probably got a year and a half, maybe two, of improved efficiency inside the company before that comes to fruition.
05:48And after that, you would want to see something else in terms of, you know,
05:52how is this company going to become more profitable?
05:55How is it going to grow its profits?
05:57I can't see it from here, but you've got probably a two-year time frame on that.
06:03On the increased use of gold internationally and, therefore, a rising price of gold,
06:10I don't know what, one, I don't know, you know, kind of when that kicks off again.
06:17So, we had a nice jump above $2,400 an ounce that we've pulled back a little bit.
06:22But you've had a nice breakout from kind of a three-year trading range in the last six months.
06:28It is conceivable to me that we see gold perform very well for the next decade.
06:34As you look at how indebted Western countries are, how indebted Japan is, how indebted the U.S. is,
06:41and if you think about, you know, how much would they have to devalue their currency in order to deal with their indebtedness,
06:49the last time that took about a decade, that was called the 70s.
06:53And while we saw it domestically as inflation, you could easily reframe that as a currency devaluation,
06:59which is probably a more useful way to think about it.
07:02It is entirely possible that Newmont looks really good as gold continues to rise for something like a decade or more.
07:10But that is really a political question.
07:13So, when you start thinking about, you know, when I look at the two U.S. candidates right now,
07:19or either of them talking about reducing government expenditures and getting their hands around the ballooning U.S. debt,
07:27they're really not.
07:29So, for the next, call it four years after the election, I don't see a big change in how the U.S. government spends
07:36and how it finances its spending, and therefore, I don't see kind of a change in that environment,
07:45a risk to the value of the dollar that I currently perceive and that Newmont is designed to take advantage of.
07:51So, probably your minimum time on that aspect of the investment is, it's probably good for four years,
07:58maybe as long as, you know, 10 or 15, but we'll see when the next election cycle comes around.
08:04We'll see what the political choices are on the table, and we'll see where the American border wants to go.
08:09So, you've mentioned gold a lot.
08:11I'm wondering, what are some of the other commodities you have your eyes on?
08:15Of course, because Newmont Mining also has its hand in copper mining as well.
08:21They do, but if I wanted to play copper, they would not be my first choice because the bulk of their revenues are coming out of gold.
08:28So, you know, they are involved in other commodities.
08:32The price of the company is not going to go up or down based on the price of copper.
08:36In my opinion, the price of Newmont is going to go up or down based on primarily the price of gold.
08:40If I wanted to play copper, I would probably look to something like Freeport McMorrin or something like that.
08:45You know, outside of Newmont, when you ask about what other commodities are of interest,
08:50oil is very much of interest to us, and we have some significant investments in oil-related companies,
08:56both producers of oil and natural gas, and then the servicers to those companies.
09:02But that's a different thesis and different companies involved in that.
09:06I don't expect Newmont to do anything for me there.
09:08All right, Jeff, one final question for you.
09:10So this is your single best trade. It's up 1% year-to-date, down 4% over the past 12 months.
09:17I was looking, the average Wall Street price target is around $63.
09:22That's about a 50% upside from where we are here.
09:25Just tell me, what numbers are you looking at to either push the buy button or push the sell button?
09:31So I've done the buying I want to do.
09:34If it dropped 15% or 20%, that might be a good opportunity to go scoop some up.
09:40To push the sell button, you know, if the market gives me a gift, if it gives me all the appreciation I expected,
09:48so let's say I expect it to double in three or four years, and it gives me that in six months or a year.
09:54Am I going to sell into that? I probably will, because the market gave me a gift.
09:58It gave me what I wanted much faster than I expected to get it.
10:03So, you know, a 50% rise over the next year, that seems reasonable to me.
10:10I would probably continue to hold through that, again, depending on those fundamental things that I talked about.
10:16So depending on what my view of the price of gold is, and depending on my view of how well the company is performing
10:23and what their prospects are going forward, because, you know, a year from now,
10:27Newmont's going to say, okay, well, we've done most of what we said we were going to do,
10:31and now we're looking three or four years out again.
10:34And I'm going to want to hear what they have to say about that three- to four-year outlook
10:37and what they plan on doing with all their retained earnings and how they intend to grow things.
10:42So, you know, it continues to be a dynamic thing.
10:46But, you know, if they doubled in a year, yeah, I'd probably lighten up.
10:4950%, I'll probably hold it.
10:51All right, Jeff Mullenkamp, Portfolio Manager at Mullenkamp & Company.
10:55His single best trade is Newmont Mining.
10:58Thank you for joining us.
11:01Thank you.