Gold's Expensive, Newmont's Cheap

5/24/2010


  Recent Price
$56
  Dividend
$0.40
  Yield

0.7%

  P/E Ratio
16
  Shares (millions)
493
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$59.57 - $36.77

While gold prices have surged 90% since year-end 2006, shares of Newmont Mining ($56; NEM) still trade below their 2006 high of nearly $63 per share. Newmont generates more than 80% of its revenue from the sale of gold, and the metal’s recent strength has pushed earnings and cash flow sharply higher. As a result, the stock has seldom looked better under our “growth-at-a-good-price” approach.

The stock will be highly sensitive to movements in gold prices, especially since Newmont has removed its production hedges, exposing its results to price changes. But consensus profit-growth estimates of 26% for 2010 and 10% for 2011 don’t fully reflect the latest spurt in gold prices. Free cash flow has averaged $1 per share over the past three quarters, and Newmont’s recently strengthened balance sheet seems capable of sustaining continued modest production growth. Newmont is a Buy and a Long-Term Buy.

Business breakdown

Newmont operates mining projects in Peru (26% of 2009 revenue), the U.S. (25%), Indonesia (24%), Australia and New Zealand (16%), Ghana (7%), and Mexico (2%).

Capital expenditures are expected to range from $1.4 billion to $1.6 billion this year, with about 30% devoted to North America and another 30% to Asia and the Pacific. More than half of last year’s $1.8 billion in spending went toward the Boddington mine in Australia, which opened in November. Investments in Ghana should double Newmont’s production in the country after the Akyem mine goes online by 2014. Newmont also plans to begin extracting copper and gold from the Conga rock formation in Peru by 2015.

For 2010, Newmont expects to produce between 5.3 million and 5.5 million ounces of gold, versus 5.3 million last year. Copper production should surge at least 55% as two new mines ramp up. Based on Newmont’s most aggressive production goals for 2010, current gold reserves should last at least 16 years, and copper roughly 24 years.

However, Newmont continues to expand its mineral portfolio. Gold reserves rose 8% and copper 17% in 2009, when Newmont bought out its partner in the Boddington mine. The company started this year with its highest reserves of gold and copper since 2003.

Newmont’s most productive gold mines are located in Nevada. High labor costs help make the Nevada projects the company’s most expensive as well. Newmont’s gold is sold globally for use in jewelry, electronics, and dentistry, as well as for investment purposes. Most of Newmont’s copper comes from Australia and Indonesia.     

Conclusion

Operating and free cash flow have jumped in the past three quarters, and Newmont is generating much-improved rates of return on its assets and equity. Despite Newmont’s operating momentum, the stock earns a Quadrix Value score of 81.

Newmont shares trade below their three-, five-, and 10-year averages for price/earnings, price/sales, and price/cash
flow ratios. An annual report for Newmont Mining Corp. is available at 6363 South Fiddler’s Green Circle, Greenwood Village, Colorado 80111; (303) 863-7414, www.newmont.com.

NEWMONT MINING
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $1.11 vs. $0.42 + 45% $52.57 -

$42.80

19 - 15
Dec '09 1.14 vs. 0.27 + 90% 56.45 - 41.45 30 - 22
Sep '09 0.79 vs. 0.35 + 49% 48.00 - 36.77 33 - 25
Jun '09 0.43 vs.

0.40

+ 7% 49.84 - 37.54 35 - 26
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $7.71 $2.76 $0.40 $56.45
-
$34.40 20 - 12
2008 $6.20 $1.82 $0.40 57.55
-
21.17 32 - 12
2007 $5.53 $0.25 $0.40 56.35
-
38.01 225 - 152
2006 $4.99 $1.40 $0.40 62.72
-
39.84 45 - 28
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
97 97 81 88 80 55 60

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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