NEWMONT MINING CORP. $61 (New York symbol NEM; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 494.8 million; Market cap: $30.2 billion; Price-to-sales ratio: 3.3; Dividend yield: 2.3%; TSINetwork Rating: Average; www.newmont.com) is one of the world’s largest gold-mining companies. It has major mines in the U.S., Australia and Peru.
Newmont gets about 90% of its revenue from gold. It gets the remaining 10% from copper, zinc and other metals. Most of Newmont’s copper comes from its 27.56% stake in the large Batu Hijau mining complex in Indonesia. Combined with financing arrangements the company has with other Batu Hijau shareholders, Newmont’s economic interest in this mine is effectively 44.56%.
The company prefers to sell its gold at the market price instead of through long-term hedging contracts that lock in prices. This policy has helped it take full advantage of rising gold prices: Newmont’s average realized gold price jumped 105.7%, from $594 an ounce in 2006 to $1,222 in 2010.
As a result, the company’s revenue rose 91.3%, from $5.0 billion in 2006 to $9.5 billion in 2010. Revenue will probably reach $10.8 billion in 2011.
Newmont unwound its remaining gold hedges in 2007. That caused its earnings to fall 82.1%, from $1.40 a share (or a total of $632.0 million) in 2006 to $0.25 a share (or $113.0 million) in 2007. However, earnings jumped 1,428.0%, to $3.82 a share (or $1.9 billion), in 2010.
Cash flow per share fell 36.9%, from $2.82 in 2006 to $1.78 in 2007, but rose 225.8%, to $5.80, in 2010.
Production to rise 35% in five years
Newmont aims to increase its annual gold production to 7 million ounces by 2017. That’s roughly 35% higher than its expected 2011 production of 5.1 million to 5.3 million ounces.
To that end, Newmont bought Fronteer Gold Inc. for $2.3 billion in April 2011. Fronteer’s main asset is its Long Canyon gold project in Nevada. Long Canyon is still in the development stage, but Newmont feels this property can produce 300,000 ounces of gold a year starting in 2017. Moreover, Long Canyon is near Newmont’s existing gold-processing operations in Nevada. That should help keep its operating costs down.
The company is also building new mines and expanding its existing properties. For example, it recently started building a mine in Ghana that should increase its overall production by 350,000 to 450,000 ounces a year. This new mine should start up by early 2014 and is expected to last 16 years. Newmont also plans to finish expanding its Tanami mine in Australia in 2014. That will add a further 60,000 to 90,000 ounces to its annual production.
Another project with strong long-term potential is Newmont’s 51.35%-owned Conga gold/copper mine in Peru. This mine could produce up to 350,000 ounces of gold per year.
Protests could delay new mine
To build the Conga mine, Newmont will have to divert water from four lakes and build reservoirs. This has sparked increasingly violent demonstrations that may force the company to redesign the project to reduce its impact on nearby areas. As a result, Newmont may have to push back the mine’s opening past its planned 2015 start-up date.
Newmont’s new projects will push up its production costs per ounce, at least initially. However, its costs should fall as it works out the inevitable problems that arise with all new mines.
The company’s strong balance sheet gives it plenty of room to keep building new mines. Its $3.7 billion of long-term debt is a low 12% of its market cap. It holds cash of $2.1 billion, or $4.31 a share.
The company will probably earn $4.45 a share in 2011. The stock trades at 13.7 times that estimate. It also trades at a reasonable 8.5 times Newmont’s projected cash flow of $7.15 a share.
In 2012, the company’s earnings could jump to $6.00 a share. The stock trades at just 10.2 times that figure. It also trades at 8.1 times Newmont’s likely 2012 cash flow of $7.50 a share.
Dividend-gold price link a nice bonus
The company now links future dividend hikes to the price of gold: it will raise the quarterly rate by $0.05 a share for each $100-per-ounce rise in its average selling price for gold in the preceding quarter.
As well, if gold prices exceed $1,700 an ounce, it will raise the quarterly dividend by an additional $0.025 a share, for a total increase of $0.075 a share. If gold prices rise above $2,000 an ounce, Newmont will raise the dividend by an additional $0.05 a share, for a total increase of $0.10 a share.
The company recently raised its quarterly dividend by 16.7%, to $0.35 a share from $0.30. The new annual rate of $1.40 yields 2.3%.
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