In September 2011, gold hit an all-time high of $1,900.30 U.S. an ounce. It now trades at around $1,772.50. Gold could well regain its highs and move up even further over the longer term, although it will likely remain volatile. Higher prices would arise from investor fears that inflation or global political and economic instability will hurt key currencies, such as the euro or the U.S. dollar.
We feel that it’s okay to hold some gold or silver stocks as part of the Resources component of a well-balanced portfolio, but you’ll want to keep them to a reasonable part of that portfolio.
NEWMONT MINING CORP. (New York symbol NEM; www.newmont.com) is the world’s second-largest gold miner by production, behind Barrick Gold Corp. (New York symbol ABX). The company has major mines in the U.S., Australia and Peru. It gets about 90% of its revenue from gold. The remaining 10% comes from copper, zinc and other metals.
Newmont’s revenue rose 87.4%, from $5.5 billion in 2007 to $10.4 billion in 2011. When Newmont unwound its remaining gold hedges in 2007, it earned just $0.25 a share (or $113.0 million) that year. However, its earnings soared 1,861.1%, to $4.40 a share (or $2.2 billion), in 2011. Cash flow per share jumped 269.1%, from $1.78 in 2007 to $6.57 in 2011.
Newmont aims to raise its annual gold production to 7 million ounces by 2017. That’s roughly 37% higher than its expected 2012 production of 5.0 million to 5.2 million ounces.
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Gold stocks: Newmont dividend hikes linked to price of gold
To reach its higher production goals, the company will open several new mines over the next few years. These include its Akyem project in Ghana, which will produce 350,000 to 450,000 ounces of gold per year when it begins operating in late 2013. The Merian mine in Suriname could add a further 350,000 to 450,000 ounces to Newmont’s annual production in 2015.
The company also aims to open two more mines in 2017: the Long Canyon gold mine in Nevada (200,000 to 300,000 ounces a year); and its 51.35%-owned Minas Conga gold/copper mine in Peru (300,000 to 350,000 ounces a year).
Local farmers have held protests out of concern that Conga will contaminate water supplies. In response, Newmont will build four reservoirs that will provide more water for irrigation. These reservoirs will take two years to build, and will cost $95 million. Newmont has already invested around $800 million in Conga.
In the latest edition of Wall Street Stock Forecaster, we look at Newmont’s prospects for successfully opening its new mines over the next few years and whether its balance sheet and cash flow will support its ambitious growth plans. We conclude with our clear buy-hold-sell advice on the stock.
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The price of gold has trading near its highs in a climate of political and economic uncertainty. Do you see the price of gold breaking the $2,000 barrier in the near future? Does a rise in the price of gold encourage you to look at gold stocks for your portfolio? Let us know what you think.
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