Newmont Mining Corporation

Newmont Mining Corporation (ticker symbol: NEM) is a U.S. based gold mining company, one of the largest gold producers in the world. It is the only gold sector company represented in the Standard & Poor's 500 Index.

Definition

Newmont Mining Corporation (ticker symbol: NEM) is a U.S. based gold mining company, one of the largest gold producers in the world. Its operations include USA (Nevada), Peru, Australia, New Zealand, Canada and other countries. Apart from gold it also mines other metals, most notably silver and copper. It employs or collaborates with over 34 000 people all over the world and is the only company from the gold sector represented in the Standard & Poor’s 500 Index.

Newmont Mining Corporation - History

The company was founded in 1916 and has been publicly traded on the New York Stock Exchange since 1940. At first focused primarily on the North American gold fields, Newmont Mining gradually acquired interests overseas. Since major restructuring in 1987 the company has been able to gain influence in the metals market. In 2002 it became the largest gold producer in the world until it lost this position to Barrick Gold Corporation in 2006. It remains one of the key players. After the acquisition of a Canadian mining company, Fronteer Gold Inc., in 2011 for approximately $2.3 billion, Newmont Mining holds the title of the world’s second-largest gold producer (after Barrick Gold).

As of December 31, 2010, the company’s gold reserves were estimated at 93.5 million ounces. If gold were worth $1 500 an ounce, these reserves would be worth approximately $140 billion. The total assets of the company were estimated at over $25 billion and the net income in 2010 amounted to $3.1 billion. All of this shows the scale of Newmont Mining’s operations and confirms its position as one of the leading companies in the gold mining sector.

All this points to the fact that both the performance of Newmont Mining and the price of its shares may be important from a precious metals investor’s point of view. Obviously, one should remember that the price of gold influences the price of Newmont Mining’s shares, not the other way around, but the actions of this company might be important for precious metals investors even if they do not plan to buy its shares.

Hedging

As the price of gold may strongly influence the revenues of gold producers some of them decide to hedge their output. This means that they would not benefit from the rise in price of gold, however they would also not suffer losses because of a decline in the gold market. Newmont Mining’s policy is quite the opposite. Throughout the early 2000’s the company was limiting the hedging of its gold production and in 2007 it fully abandoned hedging. This “no hedging” policy suggests that a gold bull market might drive Newmont Mining’s revenues and therefore its stock prices to higher levels. On the other hand, declines in the price of gold or a gold bear market might have a negative impact on Newmont Mining’s revenues and stock prices.

The Relationship between Newmont Mining and the HUI Index

Newmont Mining (NEM) is one of the top 3 component companies of the AMEX Gold Bugs Index (HUI). As of December 2010 NEM accounted for more than 8% of the HUI’s entire weight. In the past, Newmont Mining’s stock used to track the HUI very closely – they traded in the same direction most of the time and during the 2003 rally the changes in the price of Newmont Mining’s stock could explain over 90% of the moves of the HUI. This implies that during that period Newmont Mining tracked the HUI with an effectiveness of 90%.

However, as the bull market matured, the relationship between NEM and the HUI began to weaken. As a result, during the first quarter of 2011 the moves of NEM could account for only about 2% of the movements in the HUI. Consequently, NEM can no longer be considered as a true proxy for the HUI Index and for the whole gold stock sector.