The gold rush continues apace — it recently hit an all-time high of $1,500 an ounce. In fact, the metal hit a record every day last week.
Several powerful forces are driving the price of gold. There are growing signs of global inflation, especially in emerging markets. Next, investors are concerned about the stability of the financial system. Standard & Poor’s recently reduced the outlook on U.S. government debt, with the possibility of lowering the triple-A credit rating. There are also worries about sovereign debt defaults in countries like Ireland, Spain, Greece and Portugal.
No doubt, gold miners have been big beneficiaries of the gold frenzy. Take Newmont Mining (NYSE:NEM), which is the world’s second-largest gold producer. In its latest quarter, the company generated a profit of $514 million, with revenues up 10%.
What might be in store for investors? Let’s take a look at the pros and cons:
Pros
A powerhouse. Newmont has a diverse set of properties across the world. Its main deposits are in the U.S., Australia/New Zealand, Peru, Indonesia, Ghana and Mexico. Besides having strong gold reserves, the company also has ample copper deposits, which also has been increasing at a rapid clip.
Production growth. Mining companies need to constantly look for new reserves. As for Newmont, it projects that its production will go from 5.1 million-5.3 million ounces of gold in 2010 to 7 million ounces by 2017.
A gold-price-linked dividend. As Newmont continues to generate large cash flows, it realizes it must do something to reward shareholders. To this end, the company has instituted a program to base its dividend on the gold price. Essentially, it will increase by 20 cents for every $100 increase in the price of gold.
Cons
Geopolitical risks. Newmont has extensive operations in Indonesia. While it is a great source of profit, the country has experienced various financial crises over the years. There are also occasional outbreaks of violence and terrorism. Thus, Newmont faces risks of having its interests reduced — or even terminated.
At the same time, the company could face political problems in Peru.
Cost pressures. It’s extremely expensive to operate gold mines. Some of the big items include infrastructure development, water, energy and labor. However, these costs have been steadily rising.
The gold price. Some believe that it’s mostly speculation that is driving the gold market. Keep in mind that during the early 1980s, the market imploded and the precious metal remained depressed for about two decades.
In other words, if inflation moderates — and the global economy remains stable — then there may not be a need for investors to hold onto large amounts of gold.
Verdict
Newmont is a high-quality operation, with a global footprint. It understands how to deal with complex political environments and make investments that have strong returns.
Of course, the success of the company will ultimately be based on the price of gold. And, while it is it all-time highs, it still has room on the upside. The world is going through volatile times and investors will likely move into gold as a safe haven.
Given these factors, the pros outweigh the cons on Newmont’s stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
