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Newmont Looks Like a Pot of Gold
03/26/2007 12:00 am EST
Mark Skousen, editor of Hedge Fund Trader Alert, reports some speculation about a merger between two big gold producers, but says Newmont could be a big winner either way.
But even if Barrick doesn't, Newmont still belongs in your hedge portfolio. Here's why.
For starters, Newmont is the bluest of blue-chip gold companies. Newmont has proven and probable reserves of 95 million ounces, with operations in the United States, Canada, Australia and Mexico. The company does not hedge its gold production, either--allowing us to benefit fully from a rise in the price of gold.
In addition, Newmont's earnings are superb. The gold mining company's net income jumped more than threefold in the fourth quarter of 2006, with profits of $223 million on revenue of $1.46 billion.
Bear in mind, this surge in earnings came in the wake of lower, not higher, production. Gold sales dipped to two million ounces in the fourth of quarter 2006, from 2.4 million ounces for the same quarter a year ago. But Newmont's average selling price rose 31% to $619 an ounce from $472 an ounce from a year ago.
However, Newmont has pulled back to the mid-$40 range, after trading up to nearly $60 last spring. Why? Because the price of gold has backed off lately.
But the longer-term trend is still upwards. Today, gold sells for just more than $650 an ounce. The price averaged $600 last year and $445 in 2005. Higher average gold prices will lead to still higher profits at Newmont.
Then there's the takeover potential. Newmont used to be the world's biggest gold producer, but Barrick took over the top spot when it acquired Placer Dome a year ago. Barrick intends to continue growing through acquisitions. And Newmont would be the biggest acquisition target of them all.
Both companies are reluctant to comment on a potential deal. But if it comes to fruition--and I believe it may-- it would be the biggest ever.
So pick up Newmont Mining (NYSE: NEM) at market today. (The stock closed at $43.54 Friday.) And place a sell stop at $33 for protection. If you prefer to play this one more aggressively, try the September $47.50 calls (NEM-IW).
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