Speaking exclusively with TheStreet, Hedge fund manager Jeff Muhlenkamp highlighted Newmont (NEM) as his single best trade. Muhlenkamp described Newmont as a compelling investment with significant upside potential in the current economic climate. He also cited the company's strategic acquisition of Newcrest, its high market cap as well as the upward trend of gold prices.
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Full Video Transcript Below:
CONWAY GITTENS: Jeff Muhlenkamp is Portfolio Manager at Muhlenkamp & Company. Jeff, tell me, what's your single best trade?
JEFF MUHLENKAMP: Well, I'll tell you what we like right now, is a gold miner called Newmont Corp. So Newmont just bought another gold miner, Newcrest, a little less than a year ago. And there are two reasons I like the trade. One is you've got kind of the typical, we just bought a company and we find some synergies and we're going to make some efficiencies happen in our new company, and that'll result in a more profitable company.
So you've got that going on. And I think that gets you to a, you know, kind of a mid-single digit, maybe a high single digit return all on its own. But you've also got some interesting things going on in the world in terms of the price of gold and the use of gold. And so if gold becomes more valuable going forward than it has been in the recent past, then, you know, instead of a mid-single digit or high single digit return, you can expect something better than that. So I think Newmont presents kind of a call option on the price of gold as we look at what's going on. So that’s that's my take.
CONWAY GITTENS: And how much is your bullishness on Newmont tied to Newmont being a derivative or a beneficiary of the AI play? And I ask that only because I know that the CEO made some comments recently saying that, you know, the demand for copper and other key metals because they're needed for, you know, AI components means 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.
JEFF MUHLENKAMP: Doesn't depend on AI at all. I'm really focused on the price of gold and gold in terms of both a hedge against inflation and as a, almost a trading currency going forward where it has not been that in the past. So my thesis does not imply, or depend on, Newmont selling more copper or more expensive copper into the markets to support AI growth. That's not part of my thesis at all.
CONWAY GITTENS: So how could interest rates then, if you're focusing more on Newmont, since it's the world's largest gold miner right, and you're focusing on the price, how could interest rates and what's happening with interest rates impact the price of gold and thus impact your bullishness on Newmont?
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JEFF MUHLENKAMP: See, that's very interesting because historically gold did well when interest rates, when real interest rates were negative right. So 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, that's when gold would do well. And historically, gold did poorly when real interest rates went from negative to positive, which we saw happen in 2022 when the Fed started raising short term interest rates. And 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. And 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 and how other people are looking at Gold besides investors, that that 40 year correlation, which appears to have inverted for the last year or two, is going to stay inverted going forward. And I suspect it will.
You've had central banks, instead of accumulating treasuries for the last few years, have now started accumulating gold. You've had the US, as a result of the Ukraine war, clamped down on Russian holdings of treasuries, which means that a whole bunch of other countries are not going to be interested in dollar denominated assets as a reserve if they fear that they might lose those if they get sideways with the US government. So there have been some shifts in terms of how people view gold and how people view treasuries over the last year or two that I think are going to persist going forward. And I think they're tailwinds for the price of gold. But that's a really intriguing question and something I'm going to watch. You know, if in fact, the price of gold starts to decline as real interest rates continue to stay positive, then that is a definite negative for my thesis. That is a reversal of what we’ve seen in the last two years.
CONWAY GITTENS: So you've mentioned one negative or possible negative to your thesis. What else could go wrong with the stock, what are the major risk factors that could hit Newmont?
JEFF MUHLENKAMP: Well, the primary risk factor clearly is the price of gold. Right I mean, almost all of the revenues come from gold. If the price of gold declines, it will hit their profitability, their all in sustaining costs, and the last quarter, they said, was about $1,450 an ounce. The current spot price of gold is more like $2,300 an ounce, so you've got a nice fat cushion there. But if, in fact, the price of gold declines, they're going to become less and less profitable even with that nice low, all in sustaining cost. So that's clearly the big risk to the trade.
CONWAY GITTENS: I'm wondering what's your time horizon in terms of your love of the stock? I mean, you mentioned the cost cutting measures because of the merger. You mentioned gold prices and the bullishness there. So how long are you looking to hold on to the stock or how long before you make another decision?
JEFF MUHLENKAMP: I think the stock specific benefits, right, in terms of the cost benefits, they anticipate that they're going to see their synergies by about 2026. So you've probably got a year and a half, maybe two, of improved efficiency inside the company before that comes to fruition. And after that, you would want to see something else in terms of, you know, how is this company going to become more profitable, how is it going to grow its profits? I can't see it from here, but you've got probably a two year time frame on the increased use of gold internationally, and therefore a rising price of gold. I don't know what one I don't know, you know, kind of when that kicks off again. So we had a nice jump above $2,400 an ounce that we've pulled back a little bit. But you've had a nice breakout from kind of a three year trading range in the last six months. It is conceivable to me that we see gold perform very well for the next decade.
As you look at how indebted Western countries are, how indebted Japan is, how indebted the U.S. is, and if you think about, you know, how much would they have to devalue their currency in order to deal with their indebtedness? The last time that took about a decade, that was called the 70’s. And while we saw domestically as inflation, you could easily reframe that as a currency devaluation, which is probably a more useful way to think about it. So it is entirely possible that Newmont looks really good as gold continues to rise for something like a decade or more. But that is really a political question. So when you start thinking about, you know, when I look at the two U.S. candidates right now, are either of them talking about reducing government expenditures, and getting their hands around the ballooning US debt? They're really not.
So for the next, call it four years after the election, I don't see a big change in how the U.S. government spends and how it finances its spending. And therefore I don't see kind of a change in that environment, a risk to the value of the dollar that I currently perceive and that Newmont is designed to take advantage of. So probably your minimum time then on, on that aspect of the investment is, it's probably good for four years, maybe as long as, you know, 10 or 15. But we'll see when the next election cycle comes around. We'll see what the political choices are on the table and we'll see where the American border wants to go.
CONWAY GITTENS: So you've mentioned gold a lot. I'm wondering, what are some of the other commodities you have your eyes on? Of course, because Newmont Mining also has its hand in copper mining as well.
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JEFF MUHLENKAMP: They 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. So, you know, they are involved in other commodities, but they're not, the price of the company is not going to go up or down based on the price of copper. In my opinion, the price of Newmont is going to go up or down based on primarily the price of gold. If I wanted to play copper, I would probably look to something like Freeport-McMoRan, or something like that.
You know, outside of Newmont, when you ask about what other commodities are of interest, oil is very much of interest to us and we have some significant - investments in oil related companies, both producers of oil and natural gas, and then the servicers to those companies. But that's, that's a different thesis and different companies involved in that. That's, that's not, I don't expect Newmont to do anything for me there.
CONWAY GITTENS: All right, Jeff, one final question for you. So this is your single best trade. It's up 1% year to date, down 4% over the past 12 months. I was looking, the average Wall Street price target is around $63, that's about a 50% upside from where we are here. Just tell me, what numbers are you looking at to either push the buy button or push the sell button?
JEFF MUHLENKAMP: So I've done the buying I want to do. If it dropped 15 or 20%, that might be a good opportunity to go scoop some up. To push the sell button, you know, if the market gives me a gift, if it gives me all the appreciation appreciated, I expected. So let's say I expected to double in three or four years, and it gives me that in six months or a year. Am I going to sell into that? I probably will because the market gave me a gift. It gave me what I wanted much faster than I expected to get it. So, you know, a 50% rise over the next year, that seems reasonable to me. I would probably continue to hold through that again, depending on those fundamental things that I talked about.
So depending on what my view of the price of gold is, and depending on my view of how well the company is performing and what their prospects are going forward, because, you know, a year from now Newmont's going to say, OK, well we've done most of what we said we were going to do and now we're looking 3 and 4 years out again. And I'm going to want to hear what they have to say about that 3 to 4 year outlook and what they plan on doing with all their retained earnings and how they intend to grow things. So, you know, it continues to be a dynamic thing. But, you know, if they doubled in the year, yeah, I'd probably lighten up, 50% I'll probably hold it.
CONWAY GITTENS: All right. Jeff Muhlenkamp, Portfolio Manager at Muhlenkamp and Company. His single best trade is Newmont Mining. Thank you for joining us.
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