Newmont Tarnished

I hate saying so, but NewmontMining (NYSE: NEM  ) -- a staple in my home state of Colorado -- leaves a lot to be desired.

At first blush, fourth-quarter sales were decent. During Q4, Newmont sold 2.4 million ounces of gold, up 5.6% from the year-ago period. 2005 was a different story, however. Newmont's full-year sales slipped 3.1% to $8.6 million ounces.

What's more, Newmont's small revenue gains came at the expense of margins. (Check the Q4 numbers here.) That weakness became especially obvious in earnings and cash flow. Full-year income from continuing operations dropped almost 18%, to $0.84 per stub. Comparable earnings were somewhat better during the quarter, with Newmont's adjusted earnings per share improving to $0.35, versus $0.28 in last year's Q4. But both figures exclude heavy charges for goodwill, asset write-downs, and estimates for reclamation (whatever that means). Add them back in, and Newmont was down for the quarter as well. Finally, cash flow from operations dropped a breathtaking 20% year over year, turning free cash flow negative during 2005.

Most troubling in all this: Gold prices were actually up during the quarter. Newmont's sales averaged $472 an ounce, up from $436 an ounce a year ago. If Newmont had trouble meeting estimates under such favorable conditions, I'd shudder to think of the outcome if and when gold is no longer the apple of investors' eyes.

For now, Newmont sees little in the way of a turnaround. It's forecasting that total consolidated gold sales will drop for a third straight year in 2006, to 8 million ounces. That's nearly a 600,000-ounce decline, after this year's 200,000-ounce decline.

Fellow Fool Jeremy MacNealy, who I had the pleasure of meeting in person earlier this month, has it right: If you really must get into gold, there are many well-diversified gold funds, including streetTRACKS Gold (AMEX: GLD  ) and iShares COMEX Gold (AMEX: IAU  ) . Either would add safety through diversification for investors still captivated by all that glitters. Considering Newmont's results, that safety seems to be worth paying for.

A glittering gathering of related Foolishness awaits you:

Fool contributorTim Beyerswas never much for gold or jewelry of any kind. He still isn't. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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