The share prices of gold mining companies have not kept pace with the price of bullion - not too surprising given the sheer number of variables at play in mining projects and the often substantial time lag between spending the capital and seeing the return. Despite that, opting for physically backed exchange traded gold funds is not the only way to get exposure to the price of gold. Holding shares in well-established gold mining companies that have existing and prospective production streams and pay regular dividends can be a sensible, lower-risk alternative. On that logic, shares in New York-listed gold-mining giant Newmont Mining look interesting. Their price has lagged behind the average for the world's leading gold miners over the past year, largely as a result of non-operating issues. But this has opened up a relatively low-risk 'buying' opportunity, especially given the group's financial strength, its core production base and the flexibility afforded by its enormous land bank.
- Huge land bank
- Operational flexibility
- Gold as a safe-haven currency
- Falling cash costs
- Ongoing Peruvian dispute
- Dividend could be volatile
The anomaly between the price of gold miners' shares and the gold price has always existed, but has become more obvious because of gold's 149 per cent price increase over the past five years. Newmont's share price, like those of many gold miners, has trailed the price of the yellow metal markedly. But if, as we reckon, the gold price remains resilient for the foreseeable future, then Newmont is in a much stronger position than some of its rivals to respond to price incentives due to its land holdings, which cover around 31,500 square miles. This huge land bank allows Newmont to replenish its reserves at relatively low cost by exploiting existing 'brownfield' sites. It also gives the group a degree of flexibility - unlike some miners it can accelerate or defer projects depending on the price of gold.
Shares in Newmont fell towards their 12-month low at the end of May partly because investment bank Citigroup cut its target price as its analysts became bearish about the gold price. Nor did it help Newmont's price when it seemed that the company might have to mothball its proposed $5bn (£3.2bn) Minas Conga project in Peru due to environmental protests.
The dispute has been dragging on for nearly two years and, along with two mines under development in Ghana, the Minas Conga project was central to Newmont's growth plans for the next five years. But even if it is forced to revise these plans, the group will still be able to forge ahead with feasibility studies to develop the Hope Bay gold belt in the Canadian Arctic.
The delays at Minas Conga underline the fact that political issues often have a greater impact on Newmont than operational factors. However, with strong cash generation from its Australian mining assets and $2.5bn in an undrawn debt facility, the group has sufficient financial muscle to pursue other growth opportunities if necessary.
| NEWMONT MINING (NYSE: NEM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 5,068¢ | MARKET VALUE: | $25bn | |
| TOUCH: | 5,066-5,068¢ | 12-MONTH HIGH: | 7,242¢ | LOW: 4,295¢ |
| DIVIDEND YIELD: | 3.1% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 2,632¢ | NET DEBT: | 2% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 7.7 | 2.95 | 268 | 40 |
| 2010 | 9.5 | 4.00 | 469 | 50 |
| 2011 | 10.4 | 1.81 | 102 | 100 |
| 2012* | 10.3 | 3.40 | 393 | 134 |
| 2013* | 10.8 | 3.58 | 424 | 159 |
| % change | +4 | +5 | +8 | +19 |
Beta: 0.7 * JPMorgan Cazenove forecasts (profits & earnings not comparable with historic figures) £1 = $1.58 | ||||
Naturally, investing in gold shares still requires a view on the gold price. Resorting to more so-called quantitative easing (QE) in either or both the US and Europe could prompt a short-term surge. But some underlying factors are bullish, too. At $1,674 an ounce, the gold price is now slightly in advance of its rolling 12-month average, but increased demand for gold from the world's central banks, especially China's, could sustain the price. And gold will essentially function as a safe-haven currency while the outcome of so much QE remains uncertain.
After a downward earnings revision in August, Newmont shares now trade on a forward price/earnings ratio of 12. By comparison, the average for the gold-mining sector on the New York Stock Exchange is about 13.5. Analysts at broker JPMorgan Cazenove think the share price should be $66 by the end of the year, assuming a gold price of just $1,300. And, while Newmont recently trimmed its estimates for 2012's gold production to perhaps 5.1m ounces, it also substantially reduced its expected cash costs - a key operational objective.
