Inside Wall Street: Newmont for the next gold climb

Some gold bugs believe the current slide in bullion is an opportunity to buy.

By Gene Marcial Mar 22, 2012 10:53AM

Shares of gold mining companies were never able to catch up with the meteoric rise of bullion prices to record highs last year. And now that the metal has started heading south this year, shares of gold producers, such as Newmont Mining (NEM), Barrick Gold (ABX) and Goldcorp (GG), have been pushed back as well.


However, some gold bugs who are more inclined to buy gold stocks rather than the yellow bar regard the stocks' fall as an opportunity, rather than a setback. More than ever, they are inspired and encouraged to snap up shares of the mining companies. The stocks have pulled back so much that like a coiled spring they are ready to snap back up once gold prices heat up again. True, they have more distance to catch up, but catch-up they will, according to the gold bulls.


On top of the bulls' buy list: Newmont, one of the world's largest gold producers, operating gold mines in North America, South America, Asia/Pacific, and Africa. Newmont stock performed superbly and outperformed its major peers during gold's rapid ascent in 2011, rising to a 52-week high of $72.42 a share on Nov. 7, 2011. It has since scaled back and is currently trading at $53, not far from its 52-week low of $51.02. Some Newmont investors believe the stock will exceed its 52-week high in a year.


"We think gold and gold shares will be seen as attractive alternative investments," says Leo J. Larkin, analyst at S&P Capital IQ, who rates Newmont as a buy. With its production and dividend exposed to the spot gold price, Newmont appears "well positioned for a continued bull market in gold." The gap between consumption and production


As of Dec. 31, 2011, Newmont had total proven and probable gold reserves of 99.8 million ounces, up from 93.5 ounces. a year ago. Also a copper producer, Newmont's copper reserves at the end of 2011 totaled 9.7 billion pounds, up from 9.4 billion a year ago. But gold is Newmont's major product, accounting for 88% of total sales of $10.35 billion in 2011, and copper generating the remaining 12%.


Newmont's global footprint is extensive. Australia and New Zealand combined represented its largest market, where some 28% of Newmont's total sales were generated, followed by the U.S., which accounted for 26%, and Peru, with 19%, Indonesia 13%, Ghana 8%, and Mexico, 4%.


Newmont continues to be ambitious in expanding its production and markets. In April 2011, it announced a comprehensive plan to develop its current global portfolio of assets that would increase yearly gold by approximately 7 million ounces. and copper by 400 million pounds of copper by 2017.


Gold will remain in a bull market, says Larkin, in part because currency instability and concern about geopolitical developments in the Middle East will increase gold's role as a monetary reserve asset. The inflation factor is also a boon to gold prices.


Newmont is "attractively valued" at its current price, trading at just 10 times its 2012 operating profits of $5.41 a share, with a dividend yield of 2.60%, figures Larkin. With the current price-to-earnings ratio below its historical range, his price target of $76 a share translates to 14 times his 2012 earnings estimate. Newmont's operating profits in 2011 were $4.31 a share, excluding charges and unusual expenses of $3.31 a share.


"We see higher operating profits in 2012 mostly reflecting a projected gain in the average price of gold," as well the development of new mines, says Larkin. Revenues this year are expected to jump 15%, up from 8.6% in 2011. And Newmont's gold production is estimated to be flat compared to last year's at 5.2 million ounces.


At independent investment research firm Value Line, Newmont is favorably ranked for timeliness. "The company's gold-linked dividend policy seems to have caught investors' attention," says Value Line analyst Charles Clark. He expects Newmont to again raise the dividend this year, reflecting his estimate that bullion prices will average $1,700 an ounce this year.


Clark says Newmont shares are probably best considered for portfolio diversification purposes. Indeed, every portfolio should have a bit of gold in it as a hedge against currency instability, economic dislocations, or geopolitical problems that could unhinge the economy.


As a gold industry leader, Newmont stands out as one of the best, if not the best, investment bet for all of those reasons.

Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



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