For intrepid precious-metals investors wondering when rising gold and silver prices would finally translate into palpable increases in cash flow, that excruciating wait is over.
Witnessed first in lower-cost rival Goldcorp (NYSE: GG ) after the third quarter of 2009, fourth-quarter results from Newmont Mining (NYSE: NEM ) offer further confirmation that the golden breakout above $1,000 per ounce ushered in a new chapter of profitability for miners.
Newmont scored $1 billion in net cash flow in the fourth quarter, more than one-third its 2009 total of $2.9 billion. The full-year figure marks a 109% improvement over 2008, but fourth-quarter cash flow leapt a full 323%. A full 40% of Newmont's 2009 net income came in the fourth quarter, though a chunk of that imbalance relates to production from the new Boddington mine in Australia.
Notwithstanding the anticipated production surge from Boddington in the second half, Newmont's cash flow flood is also a function of an expanding operating profit margin on the coattails of gold's new price range. Fellow titan Barrick Gold (NYSE: ABX ) reported similar strength with cash flow of $921 million. Silver miners like Hecla Mining (NYSE: HL ) and Silvercorp Metals (NYSE: SVM ) have also located the cash flow spigot now that silver prices have moved firmly into the teens.
As I pointed out in this discussion of IAMGOLD (NYSE: IAG ) , I have watched with consternation for years as precious-metals mining shares have lagged the performance of gold bullion by a considerable margin. I have always viewed this underperformance as temporary, and I believe that cash flow will ultimately provide the catalyst to send mining shares racing to close the gap.
Back in 2008, when metal prices and all-in production costs converged, physical gold through proxies like the SPDR Gold Trust (NYSE: GLD ) exchange-traded fund proved the more profitable play. With profit margins clearly expanding into the comfort zone, I suggest that the tide has turned to favor mining equities for the medium term.
I still consider Goldcorp the purest nugget among the larger-cap gold miners, but those favoring Newmont have plenty of cause for excitement. During 2009, Newmont grew gold reserves net of production by 8% to 91.8 million ounces. After increasing cash reserves 639% to an awe-inspiring $3.22 billion, the company is beautifully positioned to fund organic growth while pursuing strategic acquisitions. Thanks to the relative underperformance by miners thus far, I believe that value-laden opportunities for acquisitive growth will turn Newmont's cash flow into shareholder gold.
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