Newmont Mining (NEM) showcases the difficulties large scale miners have with respect to growing and maintaining production. As mentioned in my Barrick Gold (ABX) article, large mining companies need large scale deposits in order to maintain production profiles; this means large scale exploration efforts to find large deposits and large capital outlays to bring them into production.
To that effect, the problems with the Congo project in Peru typify the difficulties in bringing a world class asset into production. Outside of the massive amount of work required to move the project into the developmental and operational phases, one has to take into account the needs of the indigenous people.
Questions continue to surround the Batu Hijau mine in Indonesia where the Indonesian government is involved in an effort to take control of the project away from Newmont and Sumitomo. There has been a back and forth battle between parliament, the government, and the Indonesian constitutional court which is tarnishing the image of Indonesia in the eyes of foreign investors.
My biggest concern is that Newmont will not be able to meet their growth potential of 7 million ounces by 2017 as Congo was a large portion of that profile. It would not be surprising to see Newmont enter the market in the next year to purchase a company with an updated NI 43-101 showing a significant amount of gold (5 million+ ounces) and a current feasibility study outlining development costs for the mine. As we have seen with Yamana Gold's (AUY) purchase of Extorre Gold, juniors are weighing the options when it comes to building out their projects. With financing markets not an attractive option due to depressed share prices some may be willing to entertain offers if the prices are right. Newmont could conceivably use their stock as a currency to add one or more small development companies that have drilled out their property, produced an economic prefeasibility study, and can show that the property has upside.
Reaching down into the junior sector for an acquisition would benefit the junior markets and in many cases can be done with little dilutive effects on current shareholders. Any transaction would not only have to be accretive on the production side but help the cost side as well.
The gold price linked dividend will provide a floor for the stock but questions surrounding the future growth profile for Newmont will be key to stock price growth going forward.
The concerns over future growth and the quick rise in the stock price make the stock fairly valued in my eyes. The dividend yield of close to 2.45% is higher than peers Yamana Gold and Barrick Gold but in each case the stocks have a more attractive growth profile with somewhat less risk.
Disclosure: I am long AUY.