Newmont: Limited capital access, tight physical demand will mean higher gold prices

Newmont is optimistic that the tightness in the physical demand for gold, along with the difficulty of trying to buy gold in the marketplace, should translate to higher gold prices.

RENO, NV - 

"Our company and our industry are currently operating in an unprecedented macro-business environment consisting of extreme commodity price volatility, uncertainty, mass portfolio liquidation, global inflation, and limited, if any, access to capital," Newmont Mining President and CEO Richard O'Brien told analysts Wednesday.

In a conference call to discuss third-quarter financial results, Newmont Executive Vice President and CFO Russell Ball said, "In the short term-up to two years-we're in a very volatile market where cash is king. Unfortunately gold is getting sold along with everything else."

Meanwhile, O'Brien noted, "Physical demand for gold is very tight. Coins are becoming less and less available. We have heard that there are people who are trying to borrow gold in the marketplace and finding that it's difficult to come by. That physical demand should translate to higher gold prices."

"Commodity prices are extremely volatile, and, we would argue, not reflective of the long-term fundamentals that typically drive commodity prices, our share price. Also we believe that those commodity prices are undervalued even in the short term," he said.

O'Brien also suggested that the U.S. dollar will decline relative to Asian currencies as the U.S. government continues to inject liquidity into the market at unprecedented rates. "That will be good for gold price."

Newmont's analysis suggests a better overall outlook for gold prices as existing mine production continues to decline. With the credit crisis ongoing, fewer new gold mining projects will be developed, further squeezing gold supply.

"We believe this will be exacerbated by tightening exploration budgets and new gold discoveries have already become hard to find," O Brien advised.

As precious metals related portfolios are sold off, Newmont intends to continue monitoring the industry for what O'Brien called "opportunistic acquisitions."

Fortunately, Newmont does not currently need to go to the market to raise capital, thanks to $1.9 billion in cash and marketable securities, as well as $700 million remaining from a $2 billion revolving credit facility. "Our liquidity profile provides sufficient capacity to repay our debt for the next several years as well as sufficient capital to complete Boddington," O'Brien said.

Nevertheless, O'Brien said Newmont is currently reviewing its project pipeline, having placed three of the company's largest projects Conga, Hope Bay and Akyem under review. 

O'Brien also announced that project capex for the Boddington with AngloGold Ashanti in Australia has increased from the originally projected range of $1.4 billion to $1.6 billion to a newly estimated $1.7 billion to $1.9 billion. The project schedule has already been extended three months due to inadequate resources. Boddington is expected to be Australia's largest gold producer after it achieves project start-up in mid-2009.

During a question-and-answer session, O'Brien stressed to analysts that the company cannot predict where Batu Hijau arbitration proceedings, which begin on December 1, are headed. Newmont's Contract of Work with the Indonesian government required the company to divest 10% of PT Newmont Neusa Tengarra, which operates the copper and gold mine, to local governments.

However, CFO Ball suggested that it is difficult for anyone to raise $400 million for a 10% non-controlling interest in PT Newmont Neusa Tengarra in the current global financial crisis. This situation could make Newmont's offer to finance local governments' stake in the company more compelling, he advised.

FINANCIAL

For the third quarter of 2008, Newmont reported a net income of $196 million or 43-cents per share, a decline of more than half of the $397 million (88-cents/sh) net income reported during third-quarter 2007.

For the first nine months of this year, Newmont report a net income of $843 million or $1.86 per share, up from the loss of $1.6 billion (negative $3.54/sh) report during the same period of 2007.

Despite the lower than projected income for the third quarter of 2008, Newmont is maintaining its original 2008 guidance of between 5.1 million and 5.4 million with costs ranging between $425 and $450 per ounce.

The company's third quarter costs were impacted by higher than anticipated costs in Nevada, at Batu Hijau and Kori Kollo in Bolivia, offset by lower than expected costs in Australia, at Yanacocha and at Ahafo.

The highest per ounce costs during the third quarter were reported at Batu Hijau with 12 million ounces of gold and 20 million pounds of copper, respectively at $718 per ounce and $1.98 per pound. Average cost in the Australia/New Zealand region were 312,000 ounces of gold at $570/oz while Nevada mines reported 544,000 equity ounces at $497/oz costs. Ghana's Ahafo reported 141,000 ounces at $402/oz, while Yanacocha produced 225,000 ounces at $362/oz. 

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