Four Risks the Gold Rally Is Hiding at Newmont

Newmont's 58% operating margin looks extraordinary, and it is. But it's a function of gold prices rising faster than costs. All-in sustaining costs (AISC) across the gold mining industry have been rising at 8-12% annually — driven by diesel prices, labour shortages in remote mining regions, and equipment inflation. Newmont's AISC has followed the same trend.

Across three complete gold cycles — 2006-2013, 2016-2020, and 2020-present — the pattern is identical. Gold prices rise, margins expand, miners increase spending, and costs catch up within 18-24 months of the price peak. The margin compression that follows is always sharper than the expansion that preceded it. In the 2012-2015 downturn, Newmont's operating margin fell from 35% to under 10%. The current 58% margin will not persist.

Newmont's production in gold-equivalent ounces has been essentially flat for three years. The revenue growth is entirely a gold price story. That's a problem because it means Newmont is not growing its asset base at a rate that justifies the current multiple.

Capital expenditure has been rising — new mine development in Australia and Africa, the Cripple Creek expansion in Colorado, and sustaining capital across the existing portfolio. The last time Newmont increased capex meaningfully during a gold bull market was 2010-2012. The mines developed during that period underperformed their feasibility study projections by an average of 25%, and several were subsequently written down.

Mining capex overruns are the industry's original sin. Across three decades of data, initial capex estimates for new gold mines have been exceeded by 20-40% at least 60% of the time. Newmont is not immune to this pattern.

Newmont operates mines in Ghana, Suriname, Argentina, Papua New Guinea, and other jurisdictions where political and regulatory risk is non-trivial. The global trend toward resource nationalism — higher royalties, export taxes, windfall profit levies — accelerates during gold bull markets because governments see mining companies generating outsized profits.

Ghana increased its gold royalty rate in 2024. Argentina's provincial tax regimes remain unpredictable. Papua New Guinea's resource policies have shifted three times in the past decade. Each of these jurisdictional risks individually is small relative to Newmont's total portfolio. Collectively, they represent a margin haircut that the market isn't pricing at all.

The concentrated ownership risk is also worth flagging. Central bank gold buying — the primary driver of the current gold rally — is concentrated in a handful of countries (China, India, Turkey, Poland). If any of those central banks slows or reverses its buying programme, gold loses its most important marginal buyer.

Newmont at 18.9x trailing earnings is expensive by gold miner standards. The long-term average P/E for large gold miners is 12-15x. The current premium reflects the market pricing in sustained elevated gold prices — essentially assuming the geopolitical premium in gold is permanent.

But gold premiums driven by geopolitical fear are historically transient. The 2019 Iran drone strike spike, the 2020 COVID flight to safety, and the 2022 Russia-Ukraine surge all saw gold give back 10-20% within 6-12 months of the initial spike. If gold retreats from current levels by even 10%, Newmont's EPS drops to roughly $4.50-5.00, and the P/E at the current stock price expands to 24-27x — a level that's never been sustained for a gold miner.

The 0.85% dividend yield offers no margin of safety. Gold miners have historically attracted investors during downturns with 3-5% yields. At less than 1%, the dividend provides no floor.