Newmont Investors Should Have Expected It

Shares of Newmont Mining (NYSE: NEM) have risen 120% over the past year. However, over that 52-week period, there was a 10% drawdown, a 20% drawdown, and a 25% drawdown. Those are dramatic declines, but nobody should be surprised. The stock is currently around 8% off from its 52-week high, but the rollercoaster ride isn't over. Here's why Newmont Mining is attractive and why some investors may still want to avoid it.

Newmont Mining is leveraged to gold

Newmont Mining is a large miner, as its name implies. It primarily produces gold, with modest exposure to silver, copper, lead, and zinc. These other metals are often found alongside gold and aren't a major source of revenue for the company. The big story is gold.

Image source: Getty Images.

Buying a gold miner is often preferable to buying gold bullion because a miner can grow its business over time, thereby increasing its gold production. An ounce of gold will always be an ounce of gold. That said, gold's price remains the driving force behind Newmont Mining's business results. So as gold prices rise, investors tend to push Newmont's stock price higher. And as gold prices fall, Wall Street reacts by pushing Newmont's stock price lower.

Gold is a volatile commodity

So while Newmont is an attractive way to add gold exposure to your portfolio, you still have to contend with the fact that gold is a volatile commodity. In fact, a gold miner like Newmont can actually be even more volatile than gold itself. That has been on clear display over the past year, as highlighted in the chart below.

NEM data by YCharts

Investor sentiment plays a big part in that story, since Wall Street has a habit of reacting in a highly emotional fashion over short periods of time. But there's also a business reason for it, since gold mining costs are fairly constant over time. If it costs $1,000 to mine an ounce of gold and gold prices are $1,500, a miner's profit would be $500. If gold increases 33% to $2,000, the miner's profit actually doubles to $1,000. That's obviously a simplified example, and it works in reverse as well, but it explains the industry's general dynamics.

This is not a new development; it's just the normal way the gold sector works. All in, once you understand the business, you shouldn't be surprised by the ups and downs in Newmont's stock price over the past year.

Know what you own

It is reasonable for an investor to add a modest exposure to gold to a diversified portfolio. Newmont is a decent way to do that. However, gold is a highly volatile commodity, and you don't avoid that risk when you buy Newmont or any other miner. In fact, you might even find that buying Newmont leaves you facing more volatility. Make sure you are ready for that before you invest in a gold miner like Newmont.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.