Newmont Mining (NEM) announced second quarter earnings last week of $1.06 per share against $0.78 per share in the second quarter of 2010. Revenue rose to $2.4 billion, up 11% from a year ago on the back of higher selling prices as year-over-year gold and copper production rose marginally.
The shift into growth mode continues as two development properties were given the green light to move forward, Conga in Peru and Tanami Shaft in Australia.
Conga holds 6.1 million ounces of gold reserves and 1.7 billion pounds of copper attributable to Newmont (51.35% interest) and is expected to open in late 2014/early 2015. Attributable capital costs will be $2-2.4 billion dollars. Copper revenue of $3 per pound appear to be enough to offset costs so that the gold will be mined for free.
The Tanami Shaft project will help expand development of the Callie and Auron ore bodies and extend the life of the mine by 5 years. Capex is expected to be in the range of $400-450 million dollars with a completion date of late 2014/early 2015.
A $136 million dollar liability was booked relating to a verdict from the Ontario Court of Appeal upholding a lower court’s ruling regarding Newmont Canada’s liability for a royalty related to a mine property purchased in 2004 from Barrick Gold (ABX).
The recent acquisition of a stake in Loncor Resources (LON) indicates that Newmont may be on the acquisition trail as the valuations of Central African mining stocks represent one of the remaining value areas for mid- to large-cap gold mining companies.
On July 27, Newmont surprised investors by raising the quarterly dividend by 50% to 30 cents per share for the third quarter. Last quarter management hinted at a five cent increase according to the gold-price-linked dividend if the average sales price came in in the upper 1400s per ounce.
According to the gold-price-linked dividend schedule, gold's move above $1,700 per ounce indicates a dividend increase of 10 cents to 40 cents per share.
At a stock price of $59 per share a $1.20 annualized dividend gives Newmont’s stock a dividend yield of 2.03%. A $1.60 annualized yield would give Newmont’s stock a dividend yield of 2.7%. Compare these yields with other major mining stocks like Barrick Gold, Yamana Gold (AUY), and Goldcorp (GG), whose dividend yields range from 0.85-1%. If gold holds above $1,700 per ounce and Newmont was to be valued at a 1.5% yield the stock price would be in the area of $106 per share. A 2% yield would equate to an $80 stock price.
There are many metrics that people use to value gold mining stocks. Some use ounces in the ground, adjusted operating cash flow, production growth, but Newmont is unique with its gold-price linked dividend. The response to calls by shareholders for a return of capital was to link the dividend to the gold price, which allows investors to share in the rising gold price.
For those worried that a sudden spike upward in the gold price will hurt future capex, the next quarter's dividend is computed on the current quarter's gold price, so Newmont will reap the revenue benefits before the dividend is increased.
Many gold stocks have moved sideways as investors have clamored for the return of capital as stock prices lagged bullion while margins increased. The gold-price-linked dividend allows investors to reap the rewards of a rising gold price while they wait for the new projects to come into production.
As I have said before the gold-price-linked dividend puts a floor underneath the stock price as value investors will see the high yielding stock in the gold sector and buy on a perceived undervaluation. During the recent sell-off Newmont’s stock price fell by less than 10% and has already moved above its July high.
Investors looking for a strong gold stock for the long-term would be advised to look at Newmont for long-term value and a strong dividend yield.
Disclosure: I am long NEM