It is crisis time in the Eurozone and elsewhere. Stock markets will crash at least as hard as in 2008 when Europe goes into recession. Gold is a crisis hedge, but it drops in a stock market crash also (just not a badly). And gold mining stocks are a great performing asset, but only after most of the stock market crisis has passed because the world is dominated by Keynesian economics. The financial media, government technocrats, and almost all PhD economists practice the voodoo economic religion of Keynesian economics. Keynesian investors flee stock markets in a panic and run to US government bonds. Bonds are bought in dollars. Demand for dollars increases, demand for gold drops. This is an opportunity of immense proportions if you keep your powder dry.
It is gold miners week at www.myhighdividendstocks.com, but not because gold miners are high dividend stocks. Most are no or low dividend stocks. However, gold mining stocks will offer some huge capital appreciation potential once the US and European stock markets crash again. Every central bank in the world is printing money (Dollars, Euros, Yen, Pounds, and Yuan) and the commodity gold is priced in fiat currencies, so as more money is printed the price of gold expressed in fiat currencies goes up. It really is that simple. Gold mining companies can increase their profit margins when the cost of extracting gold from the Earth’s crust goes up a little and the price of gold goes up a lot. But gold mining companies tend to be more volatile than the price of the underlying commodity. They amplify gold’s gains and losses as you will see below.
So what is the best price for several of the gold majors that offers capital preservation and maximum opportunity for capital appreciation with maybe some dividends thrown in for good measure? That’s what I hope to find out this week for you and I.
Next up is Newmont Mining (NEM)
Morningstar’s take: Newmont Mining is the world's second-largest gold producer. In 2010, the company had slightly below-average operating costs. However, we expect unit costs to increase materially in 2011, driven by lower production and increases for everything from energy to labor and royalties. The company has two major advanced-stage projects in its pipeline--Conga in Peru and Akyem in Ghana--but first production will not appear until 2013-15 at the earliest. Therefore, we believe Newmont will face slightly declining overall production for the next few years.
Newmont is the world's second-largest gold producer. In 2010, the firm produced 6.5 million ounces of gold (consolidated, equity: 5.4 million) and 600 million pounds of copper (consolidated, equity: 327 million). North America accounted for 30% of consolidated gold production, South America for 23%, Asia Pacific for 39%, and Africa for 8%. As of Dec. 31, 2010, Newmont had 92 million ounces of proven and probable gold equity reserves.
Price: $67.62
Shares: 494.82 million (504 million fully diluted)
Market capitalization: $33.44 billion
Bonds outstanding: $4.2 billion
The circle near 2019 is $900 million dollars for scale purposes.
DIVIDEND RECORD – Steady dividend payer since at least 1987. Last dividend cut was in 1997. Newmont appears to be a decent dividend grower since 2010.
Dividend: $0.35/quarter
Dividend Yield: 2.08% ($1.40 annual DIV/$67.62 share price)
Dividend Payout Ratio: ($1.40/$4.72 recent EPS)
EARNING POWER – Six year average adjusted earnings is $1.35 per share @ 504 million shares
(Earnings adjusted for changes in capitalization)
EPS Net Inc. Shares Adj EPS
2006 $1.75 $791 M 452 M $1.57
2007 ($4.17) ($1,886 M) 452 M ($3.74)
2008 $1.83 $831 M 455 M $1.65
2009 $2.66 $1,297 M 487 M $2.57
2010 $4.55 $2,277 M 500 M $4.52
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2011 Q1 $1.03 $514 M 501 M $1.02
2011 Q2 $0.77 $387 M 501 M $0.77
2011 Q3 $0.98 $493 M 504 M $0.98
2011 Q4 $1.38 E $682 M E 504 M $1.35 E
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2011 E $4.16 E $2,076 E 504 M $4.12 E
Estimates come from Reuters.com consensus for the next quarter
Six year average adjusted earnings per share is $1.35
Consider contrarian buying at $10.80 (8 times average adj EPS)
Consider value buying at $16.20 (12 times average adj EPS)
Consider speculative selling at $27.00 (20 time average adj EPS)
Newmont Mining is trading at 50 times average adjusted earnings. This stock’s price is highly speculative.
BALANCE SHEET – I don’t like the recent dip in Newmont’s shareholder equity. And the stock price is way too high compared to book value.
Book value per share: $27.50
Price to book value ratio: 2.45 (close to 1.0 or under is good)
Current ratio: 1.42 latest qtr (above 2.0 is good)
Quick ratio: 0.63 latest qtr (above 1.0 is good)
Debt to equity ratio: 0.26 (this is good)
CONCLUSION – Newmont Mining is a low dividend grower that is speculatively priced for its earning power. The company’s balance sheet is okay, but its hard to tell if it is deteriorating without in depth analysis. There is no need for this deeper analysis since the stock price is so speculative compared to earning power and price to book value per share.
Newmont bottomed in the $23.82 dollar range in October 2008 several months before the US stock market bottom in March of 2009. That represented the best investment entry into Newmont since late 2008. The gold price will go down at least half of the percentage of the stock market’s decline. This happened in 2008-2009. US stocks dropped about 50% and gold dropped about 25%. However, Newmont dropped even more than the broader market or gold. It dropped almost 60% from $59.87 in January 2006 down to $23.82 by October 2008. Don’t think that it happen again. Wait for another bottom near value territory at $16.20 per share. Newmont would be yielding about 8.6% if it keeps its new dividend rate at such a low price. The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.
DISCLOSURE – I don’t own Newmont Mining (NEM).
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