Are Newmont shares at a stretched valuation right now?

Here's my take on the current Newmont share price.

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It's been a very pleasant few months indeed for owners of Newmont Corporation (ASX: NEM) shares on the ASX.

Sure, the Newmont share price lost a hefty 1.61% on Tuesday and closed at $63.71.

But that still leaves this ASX gold stock up 5.25% over 2024 so far and up nearly a whopping 41% since the company hit a new 52-week low of $45.30 back in February.

A 41% rise over just a couple of months is no average move. In fact, a move like that would probably set off some alarm bells for many investors.

So today, let's discuss the Newmont share price valuation and whether this recent spike in value means this ASX 200 gold stock's valuation has become stretched.

Why have Newmont shares rocketed 41% since February?

The sharp appreciation in the Newmont share price since February can probably be explained by looking at one simple factor: the price of gold.

As a gold miner, Newmont's profitability highly depends on the price it can sell the gold it extracts. As with all mining companies, Newmont's costs are relatively fixed. That means that any rise in the price of the commodities it mines exponentially increases profits as that extra cash can flow to the company's bottom line.

As it happens, the price of gold has been ballooning over 2024, so far. At the start of the year, the precious metal was asking approximately US$2,077 per ounce. Today, that same ounce is selling for US$2,330. And that's after hitting a new all-time record high of US$2,431.55 earlier this month.

The gains in gold are even more pronounced in Australian dollar terms. The metal has risen from $3,038 an ounce in early January to over $3,760 earlier this month.

To demonstrate what this means for Newmont, let's look at this miner's costs. Over 2023, Newmont reported an all-in-sustaining cost (AISC) of US$1,444 per ounce. That essentially means that it costs Newmont US$1,444 for every ounce of gold it extracts, processes and sells.

At the start of 2024, this meant that Newmont was making a profit of US$633 for every ounce of gold mined and sold. But at gold's record high of US$2,431.55, Newmont's profit margin would have been US$987.55.

This means that although gold rose 17.1% between January and mid-April, Newmont's profitability shot up 56%.

So it's not too surprising to see Newmont's share price balloon the way it has in recent months.

Is the Newmont valuation stretched today?

Well, that's a hard question to answer. One would find it difficult to argue that Newmont shares are stretched right now. But that's only if we assume gold will stay at the historically elevated levels we have seen in recent months.

If gold stays around its current levels for at least the remainder of 2024, then its shares are probably still looking cheap today. That's considering the miner's 56% rise in profit margin per ounce of gold against its year-to-date gain of 5.6%.

However, if gold spends the rest of 2024 drifting lower, then today's Newmont share price might indeed be stretched.

Gold is an extremely difficult commodity to track, as its value tends to rise following disruptive or unexpected events.

My Fool colleague Bronwyn recently quoted some HSBC commodities experts on the price of gold, who stated this:

The role of geopolitical factors is particularly apparent for oil and gold prices recently. Price increases for these commodities have coincided with developments in the Russia-Ukraine and Israel-Hamas conflicts, and in the Red Sea.

If these conflicts deteriorate over the rest of the year, it will probably bode well for the gold price, which investors around the world view as a safe haven store of value. Conversely, if these issues are mitigated or resolved over the rest of the year, it could result in gold losing some or all of its recent gains.

Because of this uncertainty, predicting what will happen to the gold price (and thus, the Newmont share price) next is a very difficult task.

Foolish takeaway

I personally own Newmont shares. I'm not selling them right now on valuation concerns. But I'm also not buying any more. Gold does tend to be a cyclical commodity, and most of its past all-time highs have been followed by significant valuation slumps. I'm not saying that will happen this time. But I am looking to history to inform my investing decision here.

Motley Fool contributor Sebastian Bowen has positions in Newmont. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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