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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Wednesday, July 22, 2009

Newmont Earnings: A Positive Surprise for Q2?

Newmont Kicks Off Major Gold Producer Earnings Season This Week

Newmont Mining (NEM), the world’s second largest producer of gold, kicks off the quarterly earnings announcements for gold mining companies before the market opens on Thursday, July 23. Based on our analysis, the Gold Stock Strategist is expecting Newmont to report better than expected results.

Gold mining stocks are leveraged plays on the price of gold. Gold accounts for 83 percent and copper is 14 percent of Newmont’s revenue. Spot gold prices averaged $908 per ounce in the first quarter and $922 in the second quarter of 2009. Newmont’s realized gold price was $906 per ounce in the first quarter on sales of 1.27 million ounces of gold. The Company expects rising gold production for the rest of the year as they bring the Boddington project on line.

Spot copper prices averaged $1.43 per pound in the first quarter and $2.00 in the second quarter of 2009. Newmont’s realized price for copper was $1.50 per pound in the first quarter.

Newmont’s outlook for 2009 annual gold sales is 5.2 to 5.5 million ounces of gold for calendar year 2009 with costs applicable to sales (CAS) of $400 to $440 per ounce. The realized CAS in the first quarter of 2009 was $435 per ounce.

Boddington is the Future

Several of Newmont’s largest mines are considered mature and will likely experience declines in the number of ounces produced over time. The good news is that on June 25, Newmont Mining announced they have successfully completed the acquisition of the remaining 33 percent interest in the Boddington mine. Boddington is expected to add 1 million additional ounces of annual gold production equal to a 15 percent increase over 2009 Newmont gold production projections.

The Boddington mine is also expected to produce gold at a very low cost of about $300 per ounce for the first five years of operation. Boddington is a large, open pit mine in Western Australia, located 130 kilometers southeast of Perth. At the end of May 2009, Newmont reported that the Boddington project was 96% complete, with start-up expected in mid-2009 and a 12-month ramp-up schedule into full production.

Revenue and Earnings Per Share Expectations

Sharply higher prices for copper and slightly higher gold prices in the second quarter should provide a marginal lift to Newmont Mining’s revenue and earnings in the second quarter of 2009. The current analyst consensus estimates calls for revenues of $1.6 billion and $0.46 earnings per share (EPS) for the second quarter. The Gold Stock Strategist is forecasting revenues of $1.7 billion and EPS of $0.49. This would represent an improvement of 2 cents or a 4 percent increase in earnings per share from $0.47 per share for the quarter ending in June of 2008. This would also be an improvement of 5 cents or 11 percent higher than the last quarter’s earnings per share of $0.44 cents.

Share Performance and Valuation

Since the beginning of the year, Newmont Mining’s shares are up 3.8 percent from $40.70 at year end of 2008 to $42.25 as of yesterday. The stock has been as high as $49.74 a share this year.

Newmont’s shares are now trading at a forward price to earnings of about 16 times consensus 2010 earnings estimates. This is lower than the relative value of other large gold mining companies. The Company’s gold production is currently unhedged and its share price is correlated with the price of gold. Newmont's shares could be a real bargain at this level if the price of gold stays above $1,000 an ounce and Newmont can maintain or reduce operating costs from current levels. Newmont pays a quarterly dividend of 10 cents per share.

Gold Producer Earnings Summary

Next week, seven other first and second tier gold mining companies will announce earnings including Agnico-Eagle (AEM), AngloGold Ashanti (AU), Barrick Gold Corp. (ABX), Buenaventura (BVN), Eldorado Gold (EGO), Kinross Gold (KGC), and Randgold (GOLD). The table below highlights gold mining company earnings report dates, first quarter EPS, and a consensus average of EPS estimates by analysts for the second quarter 2009.

Disclosure: No positions

Tuesday, July 14, 2009

ATW and Kinbauri Combining

Kinbauri Gold Corp. (KINBF) and ATW Gold Corp. (ATWGF) announced this morning they are combining the two companies at an exchange ratio of 1.35 ATW shares per Kinbauri share, an exchange equal to C$0.85 per Kinbauri share. This share price equals a premium of 55% over the closing price of Kinbauri shares on July 10, 2009 and a 115% premium over the closing price of Kinbauri shares on May 8, 2009 before the Orvana hostile bid offer of C$0.55 per share.

For investors who haven't been following the Kinbauri drama, Toronto mining company Orvana Minerals Corp. initiated a hostile takeover attempt on Kinbauri Gold Corp. on May 25 and just yesterday extended its offer of C55 cents per share to July 24.

The hostile bid was complicated by a Kinbauri dispute with former partner, Montreal-based Glen Eagle Resources Corporation.

Kinbauri was running into a cash on hand crisis. The Orvana offer was one way to provide Kinbauri with liquidity.

As a marginal Kinbauri shareholder, I like the ATW Ventures offer because it offers a higher premium than the Orvana deal. But importantly, I believe ATW Ventures is a well run company and a good fit for Kinbauri over the long term.

ATW Ventures, an Australian gold miner, went into production in March of this year.

Here are the features of ATW Ventures before the Kinbauri deal that are attractive.

1. ATW reported C$8.5 million cash on hand in June.

2. ATW has positive operating cash flow.

3. ATW has a projected doubling of production from 2009 (25k oz. au) to 2010 (50k oz. au) and eventually ramping up to 130k per year.

4. Recent estimates of cash costs equal to roughly US$450 per ounce.

5. Gold resources of 1.3 million ounces with potential "blue sky" upside at the Burnakura and Gullewa gold mines.

Kinbauri provides ATW with the following:

1. 2.7 million ounces of gold resource and 76 million pounds of copper or 0.5k oz. gold equivalent at 3 mines in Spain with significant "blue sky" resource expansion potential.

2. Near term production in 2010 at an eventual annualized rate of 145k gold equivalence and US$355 per ounce cash cost.

3. Additional gold, platinum, and palladium exploration claims in North America.

The "new" ATW Ventures will have about 150 thousand common shares issued and outstanding. Former Kinbauri shareholders will own 53.5% of the issued and outstanding common shares of the combined company.

Congratulations to both ATW Ventures and Kinbauri shareholders.


The Gold Stock Strategist

Errata: The 115% is the premium over the Kinbauri price before the Orvana bid, not over the Orvana bid of $0.55 and has been corrected in the text.

Disclosure: I own shares in Kinbauri Gold.


Thursday, July 2, 2009

How Do Gold Miners Stack Up Mid-Year 2009?

There are several ways to value large gold producers. One of the conventional methods is to use “price to earnings” ratio calculations, commonly referred to as “PE”. This method of analysis is the one of the most basic valuation techniques. Lower PE ratios suggest a company is undervalued relative to competitors. PE ratios are best used as a “first cut” in due diligence to see how the market is valuing gold mining companies relative to others in the industry.

As the table below (sorted by 2010 PE ratios) shows, current PE levels in 2010 for 14 major and mid tier gold producers elegantly break down into two groups—those above a 20 PE and those below.

Three out of five of the most undervalued companies based on PE ratio are South African gold miners. This is not surprising because of higher operational risk and political risk involved with mining in South Africa. There continue to be miner deaths reported this year in South Africa and investors are still stinging from power generation disruptions last year.

Peruvian gold and silver miner Buenaventura (BVN) is relatively undervalued. The Company closed its hedge book back in February 2008, stumbled on low grade ore at their Yanacocha project, and reported negative earnings in Q4 2008. More recently, work stoppages and protesters at their Orcopampa mine have stalled production. An operationally smooth second half of 2009 would help boost Buenaventura share prices going into 2010.

Lihir Gold (LIHR), an Australian gold miner, is also relatively undervalued using PE ratios. This is probably in large part due to a long history of operational challenges at their world class Lihir Island mine (below sea level) in Papua-New Guinea.

The two largest gold producers in the world, Barrick Gold (ABX) and Newmont Mining (NEM) are surprisingly relatively undervalued for conservative investment plays in the gold mining industry. It remains curious that Barrick and Newmont are lagging in PE valuation. Both companies are projected to increase production at a faster rate than other gold miners listed above with the exception of Agnico-Eagle (AEM) and Randgold (GOLD). Fast growing mid-tier gold miners like Agnico-Eagle and Randgold appear to have gotten a little ahead of themselves relative to other company valuations based on PE ratios for 2010.

Goldcorp (GG) is in a slower growth phase going into 2010 than in past years. It has several world class mines throughout North and South America. Goldcorp is also the most overvalued company in the table with a projected PE ratio of 44 for 2010. Of course, longer run investors like Goldcorp’s aggressive plans to expand gold production by about 50 percent over the next few years.

Kinross Gold (KGC) Kinross has producing mines in Russia, Chile, Brazil, Nevada, Alaska, and Washington State. The Russian mine is high grade. Investors are concerned about political risk in Russia. Kinross is in a consolidation phase after considerable growth in production and with $800 million cash on hand is probably looking to make an acquisition to expand its production profile. The share price has had a nice run recently, driving Kinross’ PE valuation higher.

Mid tier producer Yamana Gold (AUY) is coming off the heels of a sale of three high cost mines to Aura Minerals (ORAUF) in early June. Yamana received over US$200 million and may have sold the properties below market value. Despite the controversy, Yamana increased their “war chest” by 200 percent with this deal. The Company is rumored to be on the lookout for acquisitions with a lower cost profile than the assets just sold. The share price could lag until an acquisition is announced. That is unless, of course, a larger gold producer decides to add Yamana’s mostly Brazilian assets to its portfolio of properties.

Companies to watch closely are the high cash cost miners like Harmony Gold (HMY), IAMGOLD (IAG), Gold Fields (GFI), Anglo-Gold Ashanti (AU), and Randgold. These companies will likely have higher earnings growth than the other miners if the price of gold jumps above $1,000 an ounce in the second half of this year. Higher cash costs translate into greater leverage to changes in the price of gold. Companies with higher cash costs per ounce have higher cash flow growth rates than companies with lower operational costs when the price of gold rises. Likewise, high cost producer cash flow suffers more than low cost producers when the price of gold declines.

El Dorado Gold (EGO) has the lowest cash costs of all the companies in the table at about $270 per ounce. As a result, El Dorado has higher quality earnings because it is less sensitive to the price of gold. El Dorado’s producing mines are in Turkey and China and present some political risk. Nevertheless, investors who like low cost producers find El Dorado attractive. That may be one reason why it has a 26 forward PE ratio for 2010.

We have seen a recent price run up over the past couple of weeks for many gold mining stocks. Despite this run up in share prices, several companies are sporting PE ratios under 20 for 2009 and 2010. A rise in the price of gold over $1,000 an ounce in the second half of 2009 would move the share prices higher for many large gold producers.

Second quarter earnings season is upon us. Keep your eyes on the larger gold producers. Companies that beat expectations this quarter by driving down operational costs could show significantly higher share prices in the second half of 2009 and into 2010.

Disclosure: No positions

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