Newmont Mining Corp: The Rise of a Gold Titan

Newmont Mining Corp (NEM 0.75%) is best known as a gold miner today, although it also produces copper. It's been in both industries for a long time, but Newmont didn't start off as a gold or copper mining concern. And it's been involved in many things through its roughly 100-year history. Although the markets always look to the future, it's interesting how Newmont's future is tied to its past.

In the beginning
Newmont Mining traces its roots back to 1916, when Colonel William Boyce Thompson created the Newmont Company. It was an entity he used to buy mining businesses. The next year, it entered the gold space by acquiring "a founding 25 percent interest in Anglo American Corporation of South Africa." Newmont has been involved in gold ever since.

Newmont reincorporated in 1921, which is its official "birth date," according to the company. Adding the word "Mining" to the name in 2015, it sold its first shares to the public. However, it wasn't anything like the Newmont that exists today. At that point in its history, it was more like a mutual fund than a mining company, buying stock in mining and oil companies.

Notably, it first entered the copper space in 1928 with the purchase of Magma Copper, a company that Thompson had founded in 1910. It was one of the world's largest copper producers and was located in Arizona. By the time the Great Depression hit, Newmont had assembled a large portfolio of mining and oil assets in the United States and Africa. The company had its hands in gold, copper, oil, lead, and zinc, among others. Clearly, in its early days, Newmont was much more than a gold miner.

Source: Franklin D. Roosevelt Presidential Library and Museum, via Wikimedia Commons.

However, the company attributes its survival through the Great Depression to its gold assets. Largely because of "President Roosevelt's decision to increase the fixed gold price from $20 per ounce to $35." This helps to explain why gold has always been the key player within the company's changing portfolio mix. That said, the company didn't come through the Depression unscathed. It was forced to cut its dividend, trim salaries, and even eliminated the salary of the CEO.

After hitting stock price highs in 1929, Newmont's shares plumbed all time lows in 1932 as the economic slump reduced demand for the very commodities Newmont, and the companies in which it was invested, offered. This type of demand and price sensitivity is something that defines Newmont even today. While the company clearly has years of experience surviving through lean times, it's important for investors to remember that lean times will follow good times, and vice versa. It's just how the commodities game is played.

The band plays on
Having survived one of the worst financial periods in U.S. history, Newmont went on something of an acquisition spree. Through joint ventures and acquisitions, the company expanded its footprint in core areas like gold, but it also found itself involved in iron, nickel, lithium, cement, and originally via the acquisition of Peabody Coal with a consortium of others, the largest U.S. coal miner. Its portfolio included 28 different products with properties across the world.

The miner was also involved in some key research and development activities, including refining copper for use in the auto industry and the discovery of submicroscopic gold in the Carlin Trend in Nevada. The company's mine in the Carlin Trend would be the first to produce 1 million ounces a year in the United States and, according to Newmont, would become "the foundation of Newmont's rise in the gold market."

Less than the sum of its parts
In the 1980s, however, something dramatic happened that, to this day, defines Newmont Mining. At that point, the company had little debt and a sprawling collection of mining and mineral assets. Consolidated Gold Fields (ConsGold), T. Boone Pickens, Minorco, Hanson Industries, and Sir James Goldsmith all tried to take the company over or force it to break up. Essentially, they all believed Newmont's parts were actually worth more than Newmont itself.

Newmont mining was able to survive the onslaught, but there was a cost. While fending off the so-called corporate raiders, the company paid out a special dividend of $2.2 billion ($33 per share). Much of that distribution was funded with debt. To pay off the debt, Newmont started to sell assets. By the early 1990s, Newmont Mining had sold off all of its assets outside of the gold arena, including its copper properties. It was, at that point, just a gold company.

2000 on...
As the new century began, however, Newmont reentered the copper space via the opening of its copper and gold mine in Batu Hijau, Indonesia. And via other expansion moves, including acquisitions, the company briefly became the world's largest gold miner: from 2002 to 2006. Although the company produces other commodities as byproducts, its main interests are now focused around gold (roughly 90% of 2014 sales) and copper. A result, largely, of the takeover battles it once fought.

Source: Andrzej Barabasz, via Wikimedia Commons.

The company celebrated its 90th anniversary in 2011 and continues to be a dominant force in the global gold industry. Its assets span the world, but the core continues to be its operations in the United States, which are located close to each other and have relatively low operating costs. Many of Newmont's other assets outside of the United States are less cost effective to run, which isn't a problem when gold prices are high, but it can be a notable headwind when gold prices are relatively low.

And that's a big focus for Newmont today. Gold's price has fallen after it hit an all-time high of around $1,900 per ounce in the early part of this decade. That's put pressure on Newmont to better manage costs. Which, in turn, has left the company with less money to put into developing new reserves. Production between 2015 and 2017 is expected to be flat to slightly higher as new projects offset declines at older mines. Costs, meanwhile, are expected to remain fairly constant because of cost containment initiatives.

So, the major factor influence Newmont's top and bottom lines will be gold prices. And that's doubly true because Newmont no longer hedges its gold exposure. So, it will feel the impact of rising and falling gold prices more keenly than competitors that lock in prices to reduce their commodity exposure. That said, Newmont was also the first gold company to institute a dividend that was linked to the price of gold. That allows investors to benefit from growing dividend distributions when gold rises via a predetermined formula. Of course, the opposite is true, too. When gold's price falls, dividends will shrink. Investors are, quite literally, winning and losing with Newmont.

We aren't doomed to repeat history, but if you don't know about what has happened, you may not have the proper context to understand what is currently happening. Today Newmont is tied at the hip to gold and has made decisions that leverage it, and its shareholders, to rising and falling gold prices. This miner's history is long and storied, but the real gemstone in the tale is how you'll benefit from an investment if gold prices move higher.