In a time of spiraling gold prices, it oughtn't come as a surprise that one of the largest gold mining companies in the world, Newmont Mining
Newmont expects that it will mine 7 million ounces of gold for this year with cash costs of $230-235 per ounce. For this quarter the company produced 1.73 million ounces at a cash cost of $233. The number of ounces was down 16% from a year ago; however, the average selling price for each ounce, at $404, was up 10%. Net those numbers out, and you have a 2% decline in gold revenues, but Newmont's overall top line increased 32% to $1.16 billion. The difference came in its base metal production, mainly copper.
Bill Fleckenstein of Fleckenstein Capital noted in a report yesterday that Newmont is going to remain a good corporate proxy for ownership of physical gold, though the degree to which both the fuel and base metal factors had an impact on revenues surprised him. Note also the confirming results that came out of copper and other base metals giant Phelps Dodge
There were two elements in this quarterly report that are quite noteworthy. The first of these is that Newmont, which uses an estimated 2.5 million barrels of fuel each year, entered into a Canadian oil sands trust position that essentially gives Newmont a hedge on oil at $27 for the next 50 years. With oil prices currently above $50, the ability to buy oil hedged to nearly half the price comes out to be a substantial advantage for the company. Most investors do not realize just how much fuel prices impact mining companies -- they are quite energy intensive, so hedging the right direction can make or break a company from a profitability standpoint. Newmont's president, Pierre Lassonde, was fairly clear about why Newmont took the route of tying up so much capital in an oil sands trust that is just ramping up production: "We take the view that oil prices are not coming back under $30, ever."
The second element is Lassonde's economic commentary. One would expect companies whose performances are levered toward the price of a certain commodity to be publicly bullish about that commodity -- another form of talking up one's book. Newmont's management team has been noteworthy in its discretion here in the past. This conference call, though, Lassonde spelled out exactly why he felt that the price of gold was almost certainly to remain high: He believes that the fiscal imbalances in the U.S. and in Europe will continue to place pressure on their currencies, and he considers gold to be another currency. He also noted that on a recent trip to the Middle East he saw that the petrodollars that in the last big oil boom had been invested back into the U.S. dollars are now being recycled into anything but -- local real estate, euro, gold, or other currencies. Such lower demand for dollars makes it unlikely in his view that any shock in gold prices would be to the downside in the upcoming year.
Is Lassonde right? By saying that the fiscal imbalance in the U.S. market is starting to negatively impact the economy and the desirability of the U.S. dollar, he joins people like Morgan Stanley
Bill Mann owns shares in Berkshire Hathaway. The Motley Fool is investors writing for other investors.