Newmont Mining Corp. 18 Nov 09

Aussie loses a second gold major. Exit stage right

Newmont CDIs were the only way of buying an exposure to the company in Australia. Newmont has said that it is unlikely to raise new capital in Australia and from this point of view the CDIs are redundant. Investors who wish to own Newmont can buy shares on the NYSE.

Following the date of suspension of ASX trading in Newmont CDIs, BNY Mellon Shareowner Services, will provide a facility for CDI holders to sell their underlying common stock on the NYSE during the period from 27 April 2010 to 27 July 2010 by sending in a Sale Instruction Form.

Holders of CDIs should note that they will not be able to trade their CDIs after 10, February 2010, the suspension date. The CDI’s will be delisted from the ASX on 17 February 2010.

A risk for Members is liquidity which will probably fall prior to delisting in Australia. If liquidity falls, CDI’s will attract a significant discount to the market price of shares on the NYSE.

There is another risk for holders of CDI’s. This is the 11 week period from 10 February 2010 to 27 April 2010. Over this period, CDI’s will be completely exposed to downward movements in Newmont’s share price.

The Australian listed CDIs have  performed in line with shares listed on the NYSE. However, Australian CDIs have been handicapped by the strong AUD.

Fat prophets gained initial exposure to Newmont via the Australasian report in 2002. Our last review of this stock was in September (Fat Mining 191).

Since our last coverage in September, NEM has gained substantially, from a low of $4.54 on the 28th October 2009 to a high of $5.70 this week. This move represents a gain of 25.50% over a two week period.

Given the recent strength, it is not surprising that momentum indicators, such as the RSI (Relative strength index) is signalling that the stock is currently over brought. Combined with overhead chart resistance at $5.74, we cannot rule out a temporary correction or period of consolidation in the near-term.

Recent news from Newmont

The last time we reviewed the company was in FAT-MIN-191 when we considered Newmont as a bellwether indicator of the gold industry. Newmont is the world’s second largest gold producer and a significant producer of copper.

The company is capable of generating very large operating cash flows like it did in 3Q09, when the company reported an operating cash flow of US$1.1bn. However the picture for the first nine months of 2009 is somewhat different. For the first three quarters Newmont reported an operating cash flow of US$1.9bn, but this amount was offset by capital and acquisition expenditures of around US$2.1bn. The net increase in debt for the period was US$552m.

At 30 September 2009, the balance sheet carried total debt of US$4.9bn versus US$3.2bn a year ago. Although debt was up, net debt has fallen significantly to US$1.9m versus US$2.8bn at 30 September 2008.

In terms of net income the company reported US$338m for the 3Q which was about double 3Q08. Net income for the nine months fell 10.6% to US$739m.

During the 3Q the company sold 1.3m oz of gold and 29,000t of copper. The cash cost of producing gold fell 13% to US$404 per ounce from a year ago. The cash cost is about 10% below the industry average. A significant by-product credit is generated from the production and sale of copper, notably at the Batu Hijau mine in Indonesia.

The Boddington mine in Western Australia produced its first copper and gold concentrate in August. Boddington is a very large mine with gold production expected to average around 1moz per annum for the first five years. Boddington has a long mine life of over 20 years.

Large scale production and by-product credits are expected to result in a cash cost of around US$300 per ounce, well below the industry average of around US$450 per ounce.

Consensus forecasts for the company have the stock trading on a PE of 22 times for this year and 17.5 times for 2010. The stock is trading at a discount to its peer group. The respective cash flow multiples are 10.9X and 9.4X. These multiples support the stock at fair value.

Newmont is sometimes cited as a likely candidate to bid for Newcrest.

The consensus forecasts show that Newcrest is trading on higher earnings multiples than Newmont. The stock is trading on a PER of around 31.0 times for 2009, and 28.0 times for 2010. Moreover, Newcrest is expensive on a cash flow multiple basis.

It therefore makes little sense for Newmont to bid for Newcrest.

With Newmont set to delist in Australia now is the time to lock in profits. However, we do not believe that Members should reduce their exposure to gold and we recommend a switch to Lihir Gold which was last reviewed in FAT-MIN-199.

Accordingly, we will remove the stock from the Portfolio and recommend the CDIs as a SELL for all Members.


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