NEWMONT MINING CORP. $39 (New York symbol NEM; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 454.3 million; Market cap: $17.7 billion; Price to- sales ratio: 3.4; WSSF Rating: Average) is one of the world’s largest gold mining companies, with major operating gold mines in the United States, Canada, Australia, Peru, Bolivia and Ghana. Gold accounts for about 85% of Newmont’s revenue. The remaining 15% comes from copper, zinc and other metals. Most of Newmont’s copper comes from its 45% stake in the large Batu Hijau mining complex in Indonesia. Newmont reached its current size mainly through its 2002 acquisitions of Canada’s Franco-Nevada Mining Corp. and Australia’s Normandy Mining Ltd. As part of these acquisitions, Newmont inherited their hedging contracts, which let them lock in future delivery prices. However, Newmont prefers to sell its gold at the floating price. The company maximizes profit by adjusting production based on the prevailing price. Newmont eliminated all of those hedging contracts. That helped it take advantage of higher gold prices, and revenue grew from $3.2 billion in 2003 to $5.5 billion in 2007. Newmont also maximizes profits with low production costs. For example, it recently built an electrical power plant next to its mine in Nevada. This will lower its annual costs by $70 million to $80 million. Newmont also stands to gain from falling prices for fuel and building materials. Earnings rose from $0.99 a share (total $412 million) in 2003 to $1.15 a share ($513.5 million) in 2004, but fell to $0.90 a share ($404 million) in 2005. Newmont’s earnings improved to $1.40 a share ($632 million) in 2006. However, costs to unwind its gold hedges cut Newmont’s earnings in 2007 to $0.25 a share ($113 million). Cash flow per share rose from $2.21 in 2003 to $2.71 in 2004, but fell to $2.34 in 2005. Cash flow improved to $2.82 a share in 2006, but fell to $1.78 a share in 2007. The $0.40 dividend yields 1.0%.
New projects look promising
Newmont continues to build a strong portfolio of new properties to replace its current reserves. In early 2008, Newmont paid $1.35 billion for Canadian goldmining company Miramar Mining Corp. The purchase gave Newmont control over the Hope Bay project in northern Canada, which is one of the largest undeveloped gold deposits in North America. Newmont has slowed development of Hope Bay because of the current economic slowdown, but this property has strong long-term potential. Another big project that Newmont has high hopes for is Boddington, which will be Australia’s largest gold mine when it begins operating in mid-2009. Boddington’s reserves should last 20 years. Newmont now plans to buy the 33.3% of Boddington that it does not already own from AngloGold Ashanti Ltd. for $1.1 billion. Newmont will issue $1.2 billion of new common shares and notes to pay for this purchase. The new mine should increase Newmont’s annual production by 10%. Boddington’s operating costs will probably be less than the industry average for the first five years, so this investment should make an immediate contribution to Newmont’s earnings. The company also recently opened a new gold mill at its 51.35%-owned Yanacocha gold mine in Peru. This mine accounts for around 20% of Newmont’s total production. The new mill should eventually expand Yanacocha’s output by 10%, and improve overall efficiency. Newmont’s share of the gold mill’s construction costs was $180 million.
Strong balance sheet cuts risk
Newmont’s balance sheet is strong, so it can continue to make acquisitions and invest in new exploration projects. Long-term debt as of September 30, 2008 was $3.4 billion, or about 1.5 times its annual cash flow. The company has no sizeable debt maturities until 2011 and 2012, when an aggregate of $1.2 billion of debentures and notes are due. Newmont also held cash of $880 million or $1.94 a share. Shares of gold producers tend to be more volatile than gold prices. This mainly reflects the size of a company’s reserves against its valuation. Fluctuating production costs also add to the uncertainty. Gold prices fell 31%, from a record $1,021 an ounce in March 2008 to $700 an ounce in November 2008. However, Newmont’s shares fell 61%, from $54 to $21, during the same period. Gold has since gained 30%, to around $900 an ounce. That’s mainly because investors fear that low interest rates and government stimulus spending will spur inflation. Gold should continue to gain as the credit crisis makes it harder for gold companies to fund new projects and expand production.
Low-cost mines justify high p/e
The recent surge in gold prices helped push Newmont’s shares up to the current $39. The stock now trades at 21.1 times the $1.85 a share it probably earned in 2008. Newmont’s earnings in 2009 could slip to $1.75 a share, as higher production from Australia and Peru will probably not offset lower output at Newmont’s other mines. The stock now trades at 22.3 times the 2009 estimate. That’s high, but still reasonable in light of Newmont’s low-cost mines. Newmont Mining is a buy.
