Newmont Mining Corporation (NYSE:NEM) is one of the world’s largest gold producers. The company produces gold from operations in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand, and Mexico. In 2007, Newmont was the first gold producer to become apart of the Dow Jones Sustainability World Index. Despite the surge in gold (NYSE:GLD) prices this year, equity gold plays such as Newmont have lagged in returns. Newmont’s CEO, Richard O’Brien is looking for alternative ways to increase value for shareholders.
Earlier this year, Newmont made a popular move with shareholders by linking its dividend to the price of gold. Each quarterly dividend will be determined as a function of Newmont’s average realized gold sales price for the preceding quarter. The Company’s quarterly dividend will increase at a rate of $0.05 per share for each $100 per ounce rise in the average realized gold sales price for the preceding quarter. Newmont’s second quarter 2011 average realized gold price sales price was $1,501, which led to the miner announcing a 50% increase to its third quarter dividend, compared to the second quarter dividend. It is the third dividend increase in the past twelve months.
Now, with miner shares lagging bullion prices, Newmont’s CEO made an announcement regarding the spread gold and equity prices. Richard O’Brien said, “Over time, should we see this disparity between rising gold prices and equities trailing, at some point we may consider a share buyback.” O’Brien does not have a specific price target in mind, but would like to reward shareholders for their patience. Although price appreciation and dividends are the most common ways to provide returns to shareholders, share repurchases are often seen as a positive sign for a company. One can easily argue that share repurchase programs alter P/E ratios favorably (same earnings + fewer shares = higher EPS), but it all depends on the big picture and long-term fundamentals of a company.
As the chart below shows, there is a growing disconnect between gold prices and the miners (NYSE:GDXJ). Even though share repurchases are sometimes viewed as a way to simply improve financial ratios, in the case of gold miners, it appears that a repurchase program may prove to be a good use of capital as the market undervalues gold equities. Last September, gold prices were near $1300 per ounce and shares of Newmont were trading near $64. Fast forward to this September, and gold is over $1800 per ounce (38% increase), but shares of Newmont are still hanging around $64.
Investors looking to hold precious metals in their portfolio may want to consider gold plays such as AngloGold (NYSE:AU), Newmont Mining (NYSE:NEM), or Market Vectors Jr Gold Miners ETF (NYSE:GDXJ). Hot silver plays include First Majestic Silver (NYSE:AG), Endeavour Silver (NYSE:EXK), and Global X Silver Miners ETF (NYSE:SIL).
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Disclosure: Long AGQ