Gold Mining
Essay by Paul • July 17, 2011 • Case Study • 336 Words (2 Pages) • 1,439 Views
Gold mining is a highly capital-intensive business, requiring large sums of money to explore for deposits and construct mines once deposits have been discovered. Since the early part of this century, mining costs have increased dramatically due to rapidly rising costs for energy and building materials.
Risks in gold mining are numerous, and long-term survival and profitability require deep pockets. Global gold production is dominated by a relatively small number of large producers such as Anglogold Ashanti Ltd., Barrick Gold, Gold Fields Limited, Freeport McMoRan Copper & Gold, Harmony Gold, and RioTinto. The industry is also comprised of a small number of exploration companies and small- to mid-size gold producers. Absent the discovery of a large deposit, few of the exploration and small- to mid-size companies
become major producers due to the lack of financing. Despite a generally rising gold price, global mine production of gold rose at a compound annual rate of just 0.2% from 1999 through 2010. This was the result of reduced exploration spending during the 1990s and the absence of large mines coming on stream to offset depletion of existing mines.
Normally mining stocks are triple plays where you can have 3 ways to make money: 1- price appreciation of the underlying commodity, 2 - earnings from the mining operations and 3 - nice dividends.
In the case of NEM this year's earnings are expected to be about $4.26 per share & cash flow expected to be $3.50 per share. That means the cash dividend of $.80 looks pretty secure now and for several years in the future but at today's share price of around $57 the dividend gives you a 1.40% yield.
With Beta of 0.35, NEM could be a good low volatility hedge for any existing portfolio.
Why should we own NEM?
Price appreciation of the underlying gold and copper reserves
Profits from the mining operations
100% Break out technical buy signal with $64 target
Very high investor sentiment
Wall Street buy recommendations based on increases of sales and earnings.
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