Dogged by rising production costs and a lack of corporate direction, Newmont Mining's ( NEM) stock has languished for the last two years. On Wednesday, the gold miner's shares settled at around $46, essentially where they were in the fall of 2005. That has badly lagged the performance of gold, which during the same period has seen its price jump more than 50%. But now there are signs of a nascent recovery that could turn investors bullish on a stock many had come to loathe. One observer, Doug Groh, senior research analyst at the New York-based $1.1 billion ( TGLDX) Tocqueville Gold fund, believes Newmont could head toward $80 a share. Tuesday's announcement that Newmont would acquire Canadian exploration and development firm Miramar Mining ( MNG) for $1.5 billion is but the latest sign that the sleeping giant stands a fighting chance of awakening. "These are the first steps as a fixer-upper," Groh says. "It's a work in progress, and there are more issues to be dealt with." In particular, the proposed acquisition, which has the approval of Miramar's board and senior management, gets to the issue of costs and reserves, the two persistently irksome problems for Newmont. Plus, it shows that Richard O'Brien, who was appointed president and CEO of the sluggish company earlier this year, means business. Gold miners are naturally dependent on the gold reserves they own. To simply stay constant each year, a company must at least replace the gold it has extracted from the ground with other reserves.
That's no easy task for Newmont, which is expected to produce up to 5.6 million ounces this year, or about 9% of the forecast global mined output for all firms. Notably, the Denver-based miner may not even replace the reserves it mined during 2007, a company spokesman says. "Newmont, like other large gold producers, is unable to replenish its own reserves through its own drilling
which means it needs to buy properties instead," says James Vail, portfolio manager at the ( LEXMX) ING Global Natural Resources fund in New York. That's where the proposed acquisition comes in. Although it won't add to Newmont's reserves yet, it has the potential to do so in the future, as the deposits are more fully identified. Miramar's main project is in the Hope Bay greenstone belt, an area on the Arctic coast in the Nunavut territory. Depending on how things develop, it could eventually help solve Newmont's problem of rising costs per ounce of production. Although some of the cost issues are associated with higher energy, equipment and personnel expenses, which all miners are facing, much is due to the ore grade. Newmont's announcement about Miramar suggests it has the potential to provide competitive operating costs, which should bode well for reversing the upward trend in per-ounce costs. For 2006, costs per ounce of gold sold at Newmont averaged $304, up almost 30% from $237 the prior year. Through the first half of this year, outlays skyrocketed to $427 per ounce. It's a trend that is frequently cited as a concern by money managers, and its reversal would be warmly welcomed.
In addition to the proposed Miramar acquisition, the company's new leader also has taken steps to eliminate some features of the company that weren't helping its cause. This past June, Newmont terminated its entire 1.85 million-ounce hedge book at a cost of $578 million. Previously, the presence of hedges meant that revenue from at least some of Newmont's output was capped -- directly at odds with what investors desired. The fact that it wasn't removed earlier is a prime example of behavior Tocqueville's Groh describes as "corporate arrogance." Ending the hedge book means Newmont's earnings will be more sensitive to changes in the price of gold, and it gets to the primary motivation of why most investors buy gold companies over the metal, that is, to get leveraged exposure to changes in the price of bullion. Newmont also announced its intention to get out of the merchant banking business, a segment of the firm not related to its core business of mining gold. With all these changes, and if Newmont can improve the efficiency of its existing operations, the stock could leap to $80 a share, says Groh. That's based on a multiple of 20 times estimated cash flow of $4 in 2009, compared with last year's figure of about $2.70.