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Why I think Newcrest shares will run to $40

Anyone who’s even remotely interested in the stock market will tell you that the talk around the water cooler this week has been gold and everything gold. Gold bullion, gold miners, gold jewellery, goldfinger… you name it, it’s the talk of the town. The only things going up at the moment (especially after yesterday) have one thing in common – they all seem to have the Midas touch.

The ASX’s largest gold miner – Newcrest Mining Limited (ASX: NCM) is no different. Newcrest shares are at their highest levels since 2012 and closed yesterday at $35.98 – a stunning 40% bump since May alone. But I think there’s plenty of petrol left in Newcrest’s tank – and we could be seeing NCM shares at the $40 level before too long.

The road to $40

Of course, Newcrest has been here before. In 2010, Newcrest shares went above $40 for the first time ever, following the record-breaking price of gold at the time. Newcrest again edged above $40 in 2011 as the gold price (in US dollars) barrelled towards US$2,000 an ounce, although it didn’t quite get there. However, as the market fell back in love with shares over the subsequent years, the gold price fell, and Newcrest shares quickly followed – reaching a 12-year low of $7.26 in December 2013.

But let’s return to the present. Although the gold price is touching US$1,500/oz, it’s still a fair way from the highs of 2011. But in 2011, our dollar was at or above parity with the greenback, meaning that gold in Aussie dollars was cheaper than US dollars. It’s a very different situation today with our dollar buying around 68 US cents – meaning we now need to fork out more than $2,100 of our dollars to buy the same ounce of gold. And Newcrest, as an ASX-listed company, brings back its profits in Australian dollars. So here lies my belief that that Newcrest shares will head to $40.

Backing up the case, in its 2018 annual report, Newcrest stated that its gold reserves were sitting at roughly 62 million ounces (enough for 26 years of production at current levels) – worth $134 billion at today’s prices, which isn’t bad for a $27.65 billion company. This sheer level of gold lends further credence to a $40 share price, even if gold prices stay where they are for an extended period.

Foolish takeaway

Although I do think there is further upside in the Newcrest share price (I hope you gathered that so far), the experience that NCM shares had between 2011 and 2013 show that resource stocks are a volatile beast. It takes a brave investor to tame them, but it can be a lucrative venture all the same.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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