Newmont share price trails peers

Underperformance tied to coming vote in Peru, analyst says

Gargi Chakrabarty, Rocky Mountain News

Published May 31, 2006 at midnight

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Gold prices are surging to new highs, but shares of Newmont Mining Corp. - the world's No. 2 gold producer - are lagging behind its competitors.

In the past year, gold has jumped nearly 60 percent after touching a 26-year high of $728 an ounce on May 11. It currently is hovering around $650 an ounce on the New York Mercantile Exchange.

Denver's Newmont enjoyed the full extent of the price gains because it does not hedge or lock up gold production with future contracts.

Yet Newmont's share price has climbed only 41 percent in the past year, a lower rate than most of its peers, and is trading at about $50 a share after touching a 52-week high of $62.72 a share on Jan. 31. It closed at $51.40 on Tuesday.

By contrast, the Philadelphia Gold and Silver Index rose nearly 70 percent in the same period. The index includes major mining companies such as Barrick Gold, Anglo- Gold Ashanti, Gold Fields, Harmony, Kinross and Newmont.

"The main reason for Newmont being an underperformer in the sector is the Peruvian elections," said Patrick Chidley, an analyst with Barnard Jacob Mellet Securities. "Ollanta Humala is running for president, and if he is elected, people think Newmont might be negatively affected."

Newmont is the majority owner of Yanacocha in Peru, one of the world's biggest gold mines. Chidley said if Peruvian nationalist Humala comes to power, he may hit Newmont with higher taxes or make it harder to do business in the country. The election will be on Sunday.

In an interview with the Rocky Mountain News last month, Newmont Chief Executive Wayne Murdy blamed steep increases in energy and labor costs for the lack of expansion in profit margins and resulting flat share prices.

But margins are improving, and Newmont hopes that will translate into higher share prices. For instance, margins were $280 an ounce in the first quarter of 2006. In that quarter, Newmont more than doubled its net income to $209 million, or 46 cents a share, compared with $84 million, or 19 cents a share, in the first quarter of 2005.

Revenue rose to $1.15 billion from $945 million in the previous quarter.

"We believe that current gold stock valuations provide investors with one of the best buying opportunities in many years," said Newmont President Pierre Lassonde. "At current gold prices, Newmont is positioned to deliver margin growth of over 25 percent on increasing sales through the end of the year."

Lassonde predicts gold prices will reach the old highs of 1980s, when the precious metal sold for more than $1,000 an ounce when adjusted in 2006 dollars.

That remains to be seen, given that total demand for gold during the first quarter of 2006, 835 metric tons, was 16 percent lower than the first quarter of 2005, according to the World Gold Council.

The decline was due primarily to a slowdown in jewelry demand, particularly in Asia and the Middle East - a reaction to volatile gold prices. While demand fell in terms of tonnage, it actually rose 2 percent in terms of U.S. dollars, to $9.5 billion.

Demand for gold as an investment, on the other hand, rose a whopping 23 percent to 109 metric tons in the first quarter. In dollar terms, the increase was 59 percent. Most of the gold flowed into streetTracks Gold Shares, an exchange traded fund.

Marketed by State Street Global Markets, streetTracks Gold Shares is designed to reflect the performance of gold bullion. Each share represents one-tenth of an ounce of gold. Similar products have debuted in recent months.

"I don't think there is a bad way to invest in gold," said George Milling Stanley, WGC's intelligence analyst.

For instance, an investor can buy into an exchange traded fund or directly buy gold bullion, but direct purchases bring the extra cost of storage and insurance. An investor also can buy shares of a gold mining company such as Newmont or a royalty company such as Denver-based Royal Gold Inc.

Douglas Silver, founder of Denver-based International Royalty Corp., said a drawback of ETFs is that gains are taxed at 28 percent. Also, an ETF investor can benefit only from price increases, unlike, investors in a mining company who can benefit from successful explorations and developments as well.

Silver said for gold to touch $1,000 or more an ounce, the world really would have to be in bad shape. That's because gold prices move inversely to the U.S. dollar and are directly affected by economic and political instabilities.

"I don't want gold prices to go that high," Silver said. "I don't want the world to be that ugly."

chakrabartyg@RockyMountainNews.com or 303-892-2976

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