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The Outlook for Gold and the Dollar Make Newmont Mining Corp. (NYSE: NEM) a "Buy"

Sunday, July 17, 2011 10:03

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Newmont Mining Corp. (NYSE: NEM) is one of the largest mining companies in the world. And like Goldcorp Inc. (NYSE: GG), which I discussed last week, it stands to profit handsomely from any additional monetary stimulus enacted over the next few months.

So let’s buy Newmont Mining Corp. (**), and hold on for as long as Federal Reserve Chairman Ben S. Bernanke is allowed to debase the U.S. dollar to help his friends in the banking industry.

Gold is hitting record-high levels in almost every fiat currency.

This bull market move up in gold hasn’t gone unnoticed, either. There is a major buyer of gold future calls in the options market. The buyer of these calls is an extremely deep-pocketed buyer.

The size of this trade and the potential profits would be staggering if the price of gold breaks above $1,600 an ounce. I have seen estimates of $100 billion profit potential.

I honestly believe that only a central bank or one of the largest hedge funds has the capital and mandate to take this kind of risk.

If this trade starts to come into the money, and it is nearly there now, I expect that the senior gold producers will find a real market bid.

So let’s talk about Newmont.

Going for the Gold with Newmont Mining Corp.

Here’s a quick breakdown of the company:

Newmont has 93.5 million ounces of proven and probable gold reserves.
It has consolidated production of 6.4 million ounces of gold (5.4 million attributable ounces).
It has 9.4 billion pounds of proven and probable copper reserves.
It generated nearly $10 billion in revenue and gross profit of $6 billion in the last trailing 12 months.
And its assets are globally diversified.

Now let’s take a closer look.

Newmont has built up a basket of reserves equal to 93.5 million ounces. To put this into context, Goldcorp’s reserves are 60 million ounces, while Barrick Gold Corp. (NYSE: ABX) – the world’s largest producer of gold – has reserves of 140 million ounces.

Newmont produced 5.4 million attributable ounces last year. That helped the company generate a record amount of net cash from continuing operations – $3.2 billion, up 109% from 2009.

Another thing I like about Newmont is its hidden copper production. Newmont produced 600 million pounds of copper (327 million attributable pounds) last year on a consolidated basis.

Finally there’s Newmont’s global diversification. In all, the company has the rights to 27,458 square miles of land on five separate continents. And it generates production from eight different countries, including the United States, Peru, Indonesia, Ghana, Canada, New Zealand, and Mexico.

Newmont stock closed Friday at $57.38. It is down about 6% in the last 52 weeks, while the rest of the market is up about 20% or so. This is pretty unusual when you consider that gold is setting all-time highs, and the company is generating huge amounts of cash flow.

Still, that means the stock is trading at a nice discount to its 52-week highs, giving patient investors a nice chance to get in at a good price. The company also offers a forward annual dividend rate of 1.5%, which is better than what you can get in a money market fund.

Newmont may be one of the market’s ugly ducklings right now, but there’s a good chance of the stock turning into the proverbial swan.

Action to Take: Buy Newmont Mining Corp. (NYSE: NEM) (**).

Newmont has been out of favor this year, but with the rise in gold prices and Fed Chairman Bernanke’s recent comments, it should start to get some attention pretty soon.

Newmont is due for its moment in the sun. The stock has put in what appears to be a bottom lately, and is starting a small uptrend. Let’s look to pick up half of our position at market, and look to put the other half on once the company reports second-quarter earnings on July 29.

(**) Special Note of Disclosure: Jack Barnes has no interest in Newmont Mining Corp.

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company’s fund-information department – just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its “Armchair Investors Who Beat the Pros” competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He’s now the author of the popular blog, “Confessions of a Macro Contrarian,” and his “Buy, Sell or Hold” column appears in Money Morning on Mondays.

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