Large Cap Gold Stocks (An Analysis of Newmont Mining)

On the subject of gold, Newmont Mining (NEM) reported its quarter and it was better than expected ($1.08 per share versus estimates of $0.95). Newmont raised its projections for cash costs a smidge as it has to pay royalties and the dollar is weaker while trimming its production outlook by 2%, which is a rounding error.

The stock was under pressure all day and lost just over 2%. One possibility for that weakness would be if the company were about to launch a major tender offer. The other might be continued worries over Boddington Gold Mine. The stock had been weak coming into today, with folks fearing serious production problems at Boddington, but that turned out not to be a legitimate concern (though the mine is still experiencing somewhat standard start-up growing pains).

As anyone who follows them knows, these various large-cap gold stocks take turns being either the runt of the litter or the alpha male. Newmont has been both, though the runt more often than the lead sled dog. However, to me, it seems to be quite cheap.

With about 92 million ounces of proven and probable reserves, you could acquire Newmont and own all of those reserves for something on the order of $320 an ounce, plus or minus. Granted, those reserve estimates could prove to be too low or too high, but my guess is too low is more likely, as rising prices often prove up marginal reserves.

In any case, once you own all of those assets you'll need to yank them out of the ground, and that will cost you a little under $500 an ounce, although over time that cost could go up. But if you add the two of those together, you could acquire Newmont's gold in the ground for about $820 an ounce, compared to the current price of gold above ground at $1,350 an ounce.

If You Don't "Mined," It Don't Matter

This is by no means a perfect analysis, because in the end, you'd have to pay reclamation costs (and ongoing drilling costs), and you'd need to be accruing those expenses now, though obviously they wouldn't be part of today's cash costs. And as I noted earlier, there's some chance that the mine lives would turn out to be longer than what's estimated in those 92 million ounces of proven and probable reserves. Also, if the price of copper and silver were to drop, those cash costs -- which are reduced due to the sales of other metals -- would increase. Nonetheless, I think it's a pretty fair way to view a "mature" mining stock.

For those interested in looking at Newmont as a going concern, it's probably selling at about 12 times next year's likely earnings, assuming the price of gold stays where it is (or goes higher, which is what I expect), and cash flow ought to be on the order of $7 or more per share. So it's not particularly expensive as a business that produces the world's money.

However, none of that means management won't do something stupid, like overpay for some potential acquisition, or that it can't get cheaper simply because folks have it in the doghouse. If there was a bubble in gold, as so many seem to think, I seriously doubt that you'd be able to buy one of the world's largest producers of the "mania" metal at such a reasonable price. I don't recall any massively cheap dot-com stocks or housing stocks in those prior bubbles, nor were there a lot of cheap stocks during the heyday of Japan's twin bubbles.

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