Newmont Mining: Shifting Gears Into a Growth Phase

| About: Newmont Mining (NEM)

Newmont Mining (NYSE:NEM) released first quarter earnings last week and first quarter revenues rose by 10% from a year ago to $2.5 billion dollars while operating cash flow increased by 36% to $989 million from $728 million a year ago.

Adjusted earnings per share rose by 25% to $1.04 per share against $0.83 in the same period a year ago.

Gold and copper production attributable to NEM for the quarter was 1.3 million ounces and 57 million pounds, respectfully.

The gold price linked dividend for the second quarter of 2011 was set at $0.20 per share based on an average realized gold price of $1,382 per ounce for the quarter. Should the gold price remain steady for the rest of the 2nd quarter it is likely that the third quarter dividend will rise to $0.25 per share.

Costs remain under control as the gold margin in the first quarter of 2011 rose by 31% to $825 from $630 a year ago. The copper margin rose from $2.56 in the first quarter of 2010 to $2.89 in the first quarter of 2011.

The balance sheet remains strong with more than $2 billion dollars in cash after the closing of the Fronteer Gold acquisition and approximately $1.8 billion in marketable securities.

Attributable production from operations in Nevada, totaled 433,000 ounces at costs attributable to sales of $643 per ounce during the quarter.

The Boddington mine in Australia, contributed 165,000 ounces of gold and 14 million pounds of copper attributable production to Newmont at costs of $596 per gold ounce and $2.19 per pound of copper.

The Ahafo mine in Ghana, contributed 186,000 ounces of gold production in the first quarter of 2011, an increase of 55% over a year ago. Applicable costs at Ahafo totaled $451 per ounce of gold.

One aspect that is not well reported from Newmont is the hedging program, which is successfully hedging volatility surrounding fuel and currency risks. For 2011, Newmont has hedged 17 million gallons of diesel at an average rate of $2.43 representing 55% of expected usage for 2011. Australian dollar contracts have successfully hedged risk related to the Australian dollar’s appreciation against the US dollar.

Operations in areas like Australia and Nevada are not subject to price controls on diesel and electricity, which holds down costs for other miners. Newmont’s successful hedging program helps mitigate the rise in costs coming from a falling dollar and rising oil prices.

Newmont Mining is shifting gears to a growth phase with the completion of the Fronteer Gold acquisition. Fronteer’s properties will benefit from their close proximity to Newmont’s Nevada, operations allowing for synergies and cost savings.

While the market waits to reap the benefit from the capital expenditures the gold-linked dividend puts a floor under the stock price.

As long as the average gold price remains in the $1450-1500 level investors are likely to see a dividend of $0.25 per share for the third quarter, which would equate to a 2% annualized yield should the stock price pull back to the $50 level.

Since the announcement NEM’s stock has risen from $50 to a technical resistance level surrounding the 200 day and 50 week moving averages. If NEM breaks out on strong volume look for a retest of old highs. A drop in NEM to the $50 level means an almost 2% annualized dividend yield should the average gold price in the second quarter stay close to $1500 - and a great buying opportunity for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied.