NEM – Newmont Mining Corp: Linked to the Price of Gold and Milk

By CrossProfit

04/05/2007

Gold seems to go up with the price of oil. Some say that as paper currencies inherently devalue over time, the only true currency that maintains value over time is gold. Gold is not really a currency in the true sense of the word. Gold is a commodity or asset like oil and real estate.

Over 70% of global production is consumed in the manufacture of jewelry and supports the commodity venue. Less than 30% is earmarked for bullion feeding the asset class.

Newmont is the world’s second largest gold producer. Like oil, there is limited gold on the planet. There hasn’t been a major discovery recently and some existing mines are beginning to show their age producing less gold every year. It’s amazing how everyone talks about peak oil, whether they believe in it or not, but very few mention peak gold.

$1000 per ounce gold can only become a reality if rampant inflation takes hold. As paper currencies lose worth, investors would flock to bullion reversing the consumption to asset ratio, thus driving up the price. Unless there is an inflation catalyst, gold should maintain its current long term uptrend, roughly one and half times inflation, including food and energy. Should oil drop below $45 (unlikely), gold would go along for the ride and so would Newmont.

Any up or down-tick in asset class demand affects prices substantially. Since 1996 consumption has been growing at a meager 1.5% a year.

NEM’s performance is very much linked to the price of copper and gold. Production yields in Peru are declining. Though NEM holds vast reserves in Nevada, NEM plans to increase production starting in 2008. 2007 is scheduled for a production decline.

In the first half of 2007 profits should be stagnant on lower production, assuming average gold prices maintain their 6.5% gain over 2006. In the second half of 2007 we anticipate that gold prices will climb another 3% – 5.5%. Yes, this means that we expect 2007 inflation, including food and energy, to come in between 4.75% and 6%. The recent 9% price hike for milk is just the beginning. Core inflation should remain tame for the remainder of 2007. It is food and energy that Newmont is keeping an eye on.

Estimated EPS for 2007 is $1.86

Disclosure: No conflicts, consensus at CrossProfit.com.

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