Newmont Rides Golden Wave

11/29/2010


  Recent Price
$61
  Dividend
$0.60
  Yield
1.0%
  P/E Ratio
16
  Shares (millions)
502
  Long-Term Debt as % of Capital
23%
  52-Week Price Range
$65.50 - $42.80

Currency concerns and dismal bond yields — among other factors — helped gold prices vault above $1,300 an ounce for the first time in September. Tagging along on that upswing is Newmont Mining ($61; NEM), the world's second-largest gold producer.

Operating mines on five continents, Newmont is the only gold pure-play in the S&P 500 Index. Shares continue to flirt with an all-time high set in September as Newmont realizes higher prices for both gold and copper. Newmont is a Focus List Buy and a Long-Term Buy.

Two turnaround stories

Gold was a terrible investment in the 1980s and '90s. The per-ounce price declined 51% from the end of 1980 through the end of 1999, and many of the famed gold vaults beneath New York City shut down. But investors have flocked to the perceived safety of gold in the past decade, so much so that J.P. Morgan ($39; JPM) has reopened one of its underground fortresses to store the precious metal. Gold appears headed to its 10th straight annual gain, the longest such streak since at least 1920.

Newmont experienced a similar rebirth when industry outsider Richard O'Brien became CEO in August 2007. O'Brien, a veteran of the utility sector, immediately sought to restore credibility with investors by shedding extraneous assets, reducing Newmont's reliance on commodity hedges, and reloading its production base.

His efforts have paid off. Last year, Newmont achieved its highest operating profit margin in 20 years and generated positive free cash flow for the first time since 2004. In the first nine months of 2010, Newmont has produced $1.18 billion in free cash, versus $488 million a year earlier.

In the first nine months of 2010, Newmont's sales advanced 35% and per-share profits jumped 65% to $2.68 excluding special items. Equity gold production rose 7%, while copper jumped 66%, lifted by the ramp-up of two mines.

Not since 2003 has Newmont started a year with higher reserves of gold and copper. That's significant because the rate of gold discoveries has been on the decline for 30 years. Large mines in Ghana and Peru should enter production in the next five years, and the company now plans to explore developing mines in China, Afghanistan, and other countries once dismissed for political reasons.

However, in November, Newmont lowered its 2010 production forecast and raised its estimate for operating costs. The grade of gold extracted from the Boddington mine in Australia, which opened last November, has disappointed Newmont. But the company has tapped just 2% of Boddington's reserves so far, so there's plenty of opportunity for the gold quality to improve.

Despite the stock's rally, Newmont shares trade at 16 times trailing earnings, 50% below their five-year average P/E. Wall Street sees per-share earnings slipping 5% to $1.08 in the December quarter. But for 2011, rising analyst estimates project 18% higher per-share profits on 8% revenue growth. An annual report for Newmont Mining Corp. is available at 6363 S. 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
Sep '10
1.08
vs.
0.79
+ 27%
65.50
-
54.30
19 - 15
Jun '10
0.77
vs.
0.43
+ 34%
62.62
-
50.86
20 - 16
Mar '10
0.83
vs.
0.40
+ 46%
52.57
-
42.80
19 - 16
Dec '09
1.14
vs.
0.27
+ 90%
56.45
-
41.45
30 - 22
           
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
96
89
84
95
89
36
40

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


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