Newmont Mining Sees Costs Rise

Newmont Mining Corp. (NEM) is one of the world’s largest unhedged gold producers. Gold prices are skyrocketing due to higher demand, U.S. trade/budget/currency issues, and global instability. Declining grades are pushing up mining costs, prompting the company to reduce expenditure. As a result, we rate the shares a Hold, with a target of $47.50 due to high valuation and declining grade quality, despite the improving fundamentals.

Newmont Mining plans to focus on completing the construction of Boddington in Australia. Development of the Boddington project was approximately 77% complete at the end of second quarter 2008, with mill start-up expected in late 2008 or early 2009. The company completed the construction of Yanacocha gold mill in Peru during the second quarter of 2008. The gold mill started in March 2008 and commercial production began in the second quarter of 2008. Equity gold production from the mill is currently expected to average 200,000-250,000 oz per annum.

The cost-cutting initiatives of the company are primarily focused on energy and total about $100 million. The 200 Mw Nevada electricity plant, which started commercial production in the second quarter of 2008, should save at least $70 $80 million annually. The lower cost of self-generated electricity, when compared with projected future market prices in the region, is expected to reduce Nevada’s costs applicable to sales by approximately $25 per ounce.

However, Newmont’s direct mining costs are increasing due to increases in royalties, equipment maintenance, waste removal, pit dewatering, labor and fuel costs. The company’s non-mining costs are also increasing due to legal expenses for environmental degradation lawsuits, mainly in Nevada, Peru and Indonesia and government claims.

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