Newmont Spins Gold Into Profits

9/19/2011


  Recent Price
$64
  Dividend
$1.20
  Yield
1.9%
  P/E Ratio
15
  Shares (millions)
501
  Long-Term Debt as % of Capital
18%
  52-Week Price Range
$66.61 - $50.05

Newmont Mining ($64; NEM) owes its name to Montana and New York, the states where founder Col. William Boyce Thompson was born and later made his fortune. Newmont originally served as a holding company for Thompson's sundry businesses, ranging from oil and gas to hats. But the company also held mining assets, which have represented the bulk of its business for the last 90 years, and today Newmont stands as the world's second-largest producer of gold.

Shares slumped after June-quarter results missed consensus estimates for both earnings and sales. Lower-grade stockpiles at mines in Indonesia and Nevada caused a drop in gold and copper production. Although average realized prices for both metals surged, so did costs, up 17% from the year-earlier quarter.

Since then, investors have sought shelter from the weak U.S. dollar and potential economic slowdown, pushing gold prices and Newmont shares to all-time highs. And earlier this month Newmont confirmed that it remains on track to meet its internal targets for 2011.

The stock is likely to fluctuate with gold prices, but we like Newmont's modest valuation and ability to cash in on high gold prices. Newmont is a Buy and a Long-Term Buy.

Business breakdown

Gold, commanding an average realized price of $1,440 per ounce in the first half of 2011, accounted for 85% of Newmont's revenue. Copper, which averaged $3.91 per pound, generated the remaining 15%. Gold surged as high as $1,895 early this month and currently trades near $1,820. Newmont has removed its hedges to take full advantage of the higher prices. The company says every $100 move in gold prices translates to a change of $0.70 per share in operating cash flow. Newmont's sensitivity to gold prices is reflected in analyst estimates for 2012 per-share profits, which range from $3.67 to $8.44.

The recent rise in gold prices suggests a dividend hike is imminent. In September, Newmont hinted that it would raise its dividend 33% to $0.40 per share in the December quarter. Since Newmont began linking its dividend to gold prices earlier this year, a pair of hikes has already doubled the quarterly payout.

It's worth remembering that should the trajectory of gold prices falter, so will the dividend. But the impending dividend increase would bump the yield to 2.5%; none of Newmont's gold-mining peers yields more than 0.9%.

Proven and probable reserves for both gold and copper have risen in each of the last two years. Management expects annual gold production to reach 7 million ounces by 2017, about 35% above its 2011 target, while copper production is seen doubling to 400 million pounds.

Conclusion

At 15 times trailing earnings, the shares trade 41% below their five-year average P/E ratio. The stock also trades at discounts of at least 24% to its five-year averages for price/operating cash flow and enterprise ratio. An annual report for Newmont Mining Corp. is available at 6363 S. Fiddler's Green Circle, Greenwood Village, CO 80111; (303) 863-7414, www.newmont.com.

NEWMONT MINING
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '11
0.90
vs.
0.77
+ 11%
60.45
-
51.10
15 - 13
Mar '11
1.03
vs.
0.83
+ 10%
62.21
-
50.05
16 - 13
Dec '10
1.15
vs.
1.14
+ 1%
65.17
-
57.31
17 - 15
Sep '10
1.07
vs.
0.79
+ 27%
65.50
-
54.30
19 - 15
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
9.54
3.82
0.50
65.50
-
42.80
17 - 11
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
68
59
88
87
96
87

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


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