S&P/ASX 200 Index (ASX: XJO) gold stock Newmont Corp (ASX: NEM) is the world's number one gold producer.
The mining giant produces around six million ounces of gold a year, along with 150,000 tonnes of copper and some 230,000 tonnes of zinc.
But Newmont shares have underperformed the fast-rising gold price over the past 12 months.
Currently trading for US$2,712 per ounce, the gold price has surged 34% since this time last year, while shares in the ASX 200 gold stock are up a lesser 26% over this same time.
Here's why Newmont shares haven't enjoyed as much of a boost from the rising gold price as commodity analysts might have expected.
What headwinds have Newmont shares faced?
In Allan Gray's December 2024 quarterly commentary, chief investment officer Simon Mawhinney noted that the ASX 200 gold stock was one of the Allan Gray Australia Equity Fund's largest holdings.
The fund has owned Newmont shares since October 2023, when the global gold mining giant acquired ASX-listed Newcrest Mining, which the fund owned at the time.
"We have long been positive on gold prices, and we have been right," Mawhinney said. "But we have been wrong to assume the gold mining companies themselves would disproportionately benefit from these higher prices."
He cited three reasons that explain most of the underperformance of the Newmont share price.
First, operating costs have risen meaningfully.
Second, he said, "The capital expenditures required to extract ore reserves or convert ore resources to reserves have been greater than most foresaw."
And third, Mawhinney noted that Newmont's gold production per share has fallen from 2019 to 2024.
But that doesn't mean Allan Gray is selling the ASX 200 gold stock.
Four reasons this ASX 200 gold stock is attractive
"There are a number of redeeming features that attract us to Newmont," Mawhinney said.
The first reason Allan Gray remains bullish on the ASX 200 gold stock is the potential for costs to come down.
"Costs are elevated, and we believe they should fall from here," Mawhinney said.
He explained:
A number of production challenges and mine sequencing factors have seen a predominantly fixed cost base spread over lower ounces. At Lihir in Papua New Guinea, for example, Newmont expects ore grades to improve, and production should increase in future years.
Mines like Boddington in Australia and Penasquito in Mexico have been undertaking significant stripping campaigns to remove waste material. The cost of this overburden removal is fully reflected in AISCs despite it freeing up several years of future production.
The second reason Newmont shares could shine bright is reduced CAPEX and increased cash flow.
"Capital expenditure is elevated and should fall in the near term. With that, cash flows should increase." Mawhinney noted.
He added:
Newmont is undertaking a number of capital-intensive developments at the same time. We believe these should shore up the next 15 or so years of production, with significant cash harvesting around the corner.
The third reason Allan Gray is holding tight to its Newmont shares is the miner's diversified assets.
"Newmont is blessed with a diversified portfolio of very long-life tier-one assets," Mawhinney said. "Its portfolio of core assets has a reserve life of about 17 years, well above the average reserve life of the world's currently operating mines at about seven years."
The fourth reason the ASX 200 gold stock looks attractive is its price. Allan Gray estimates Newmont's enterprise value at US$55 billion.
According to Mawhinney:
At current gold prices, we think Newmont should make approximately US$1,000 per ounce in pre-tax profit spread across its over 7 million ounces per annum production base (including gold equivalent production from its co-products).
This means that the company should generate a 10% post-tax earnings yield. Once its elevated capital cycle is behind it, its free cash flow yield should exceed this.