Will This Strategy to Add Gold Exposure Hit the Mother Lode?
Here's how I plan to use covered call orders to accumulate a position in a huge gold miner.
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My portfolio has little exposure to gold outside a small position in A-Mark Precious Metals AMRK. With inflation remaining sticky, gold near all-time highs and the federal government engaging in deficit spending of six to seven percent of U.S. GDP even during an economic expansion, this is something I need to rectify.
Today, I will highlight how I plan to use a simple covered call strategy to either make a decent profit in Newmont Corp. NEM or accumulate some shares in this well-run miner at a lower entry price after the stock has had a decent run over the past couple of weeks.
Newmont is a large mining concern with a market cap of just under $50 billion. The stock currently trades right around $42.50 a share, which is where our strike price on our covered call orders is going to be. The current dividend yield is 2.35%.
The company is primarily a gold miner with all-in costs of $1,440 an ounce as of the first quarter. That is currently more than $900 an ounce lower than the trading level of the precious metal. In the first quarter, Newmont upped production to 1.7 million ounces from 1.3 million ounces in the same period a year ago.
The Colorado-based company also mines copper, silver, lead and zinc and is in the process of selling off some non-core assets to become more efficient and pay down debt. Management is also working to deliver synergies, reduce costs and improve free cash flow. In addtion, Newmont recently announced a $1 billion stock buyback authorization.
The company completed the huge acquisition of Newcrest Mining Limited late last year, creating the largest gold miner in the world with favorable mining jurisdictions in Africa, Australia, Latin America & Caribbean, North America, and Papua New Guinea. It also has significant exposure to copper which, famed billionaire Stanley Druckenmiller recently called one of his favorite assets. This was due to the long lead time needed to bring on new production on-line and copper’s uses in the production of electric vehicles, the grid, data centers and even munitions.
Despite the recent blip up in the stock price, NEM trades near the lower end of its EV/EBITDA multiple range over the past three decades. The current analyst consensus has Newmont earning just under $3.30 a share in 2024 and $3.75 a share in 2025, making the shares reasonably valued if not attractive, with a decent dividend yield.
Here is my plan to either make a decent return on NEM if it trades sideways or moves up, or to start to accumulate a longer-term position at lower entry points in the equity.
Option Strategy
Here is how one can initiate a position in NEM utilizing a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the December $42.50 call strikes, fashion a covered call order with a net debit in the $37.80 to $38.00 a share range (net stock price - option premium). Liquidity is more than solid with the options against this equity.
This strategy provides downside protection of just over 12% over the trade’s duration, which includes three quarterly dividend payouts of 25 cents a share. The position also provides return potential of 14% including dividends, even if the stock trades even over its just over seven-month option duration.
At the time of publication, Jensen was long AMRK and NEM.
