Gold Rally Provides Two-Fold Benefit To Newmont Shareholders

Aug.25.11 | About: Newmont Mining (NEM)

Newmont Mining (NYSE:NEM) announced in April that it will link its dividends to the prevailing gold price. The recent turmoil in the equity markets has led a robust rally in the spot market gold price as investors have sold off risky assets. With the new dividend policy and the potential for greater profitability due to the higher gold price, we see significant upside to the company’s stock price. Newmont, primarily a gold miner, competes with other international gold producers like Barrick Gold Corporation (NYSE:ABX), AngloGold Ashanti Ltd. (NYSE:AU) and Goldcorp Inc. (NYSE:GG).

We currently have a $75.80 price estimate for Newmont’s stock, implying a 20% premium to the market price.

Gold price linked dividend will woo investors

The rally in gold benefits Newmont’s shareholders more than those of most other mining companies due to the dividend policy, whereby shareholders receive an additional 20 cents per share for every $100 increase in the spot gold price. The dividend scheme should continue to hold investor interest in the company, providing greater dividend payouts in addition to the potential capital gains.

(Chart created using Trefis' app)

Newmont may enjoy greater upside than gold

Gold recently traded up to an all-time high of over $1,900/ounce. Even so, continued uncertainty in the financial markets could fuel further demand. With the high spot price, Newmont is set to post robust results in the next quarter as well. As the company mines gold at a fixed price and sells it at the spot price, higher prices lead to greater profitability. Moreover, mining companies are looking to take advantage of gold’s run by increasing their production and moving fast toward completion of new projects. Higher production coupled with the higher gold price gives Newmont’s stock an edge relative to the gold ETF.

Disclosure: No positions