Newmont Mining (NEM) warns investors, share price rises
Today's Financial News - Posted October 30, 2008
If you are going to invest in the mining industry, you had better have nerves of steel. Companies like Newmont Mining (NYSE:NEM) are reporting drastically slashed earnings, yet share price is on the rise.
By Andrew Snyder
Baltimore – (TFN): It is a confusing market for the world’s miners. Commodity prices are dropping, global demand is slowing, and earnings have been slashed. Yet the valuations of some of the world’s most prominent miners have increased by double-digit proportions over the past few days.
After yesterday’s dismal earnings announcement, it would not be surprising to see shares of Newmont Mining (NYSE:NEM) deep into negative territory today. After all, the company announced a decline of net earnings of over 51%.
Even worse was the statement made yesterday by the company’s CEO, Richard O’Brien.
“Our company and our industry are currently operating in an unprecedented macro-business environment consisting of extreme commodity price volatility, uncertainty, mass portfolio liquidation, global inflation, and limited, if any, access to capital,” he told us. It is not the kind of rosy picture that screams for your investment dollars.
Even so, shares of Newmont rose on the company’s third-quarter earnings report and have been on the rise ever since.
Investors scratch their heads
There are two reasons for the continued surge in price. First, like I have said countless times over the past month, shares of just about everything have been greatly oversold and are selling at dirt-cheap prices because of it.
As investors bailed out of the market and forced liquidations kicked in, companies across all industries saw their valuations drop drastically below where they should be. Even discounting a severe recession, the prices we saw over the last two weeks were simply ridiculous.
The other reason Newmont is on the rise over the past few days is because of the market’s belief that, just as equity prices are too cheap, so are commodity prices.
O’Brien said it himself: “We believe that commodity prices are undervalued even in the short term.”
For investors bullish on the commodities industry, this is a good time to do some buying. Shares remain at discounted levels and many experts believe commodity prices will rise from today’s values.
The folks buying shares of Newmont today are certainly buying shares on the expectation that gold and copper prices are on the rise. I am inclined to believe, at least on the short-term, they are correct.
Hedging your bets
There has been a lot of demand over the past few weeks for physical possession of gold bullion. Fortunately for gold bugs, the supply is quickly getting scarce. In the short-term, there will be no remedy to the gold industry’s supply shortages.
With the credit industry in a virtual lockdown and development budgets getting slashed across many mining operations, the amount of new gold hitting the market over the next few months will be dramatically lower than demand. That is why, when I created my recent gold hedge, I created a position that will profit from this short-term phenomenon.
Like I said, traders are smart for grabbing shares of Newmont at these deeply discounted prices. The near-term shortage in gold supply will give traders a profitable position.
But this is not an investment for long-term, buy-and-hold investors. Eventually, a new supply of gold will hit the market and prices will once again be on the downswing.
As oil prices drop and the economy slows, fewer investors will use gold as a hedge against strong inflation. Within the next year or eighteen months, there will be an overly large supply of gold on the market.
That is exactly why I created my gold hedge. No matter what gold does, you can make money.
Over the next year or so, gold prices will rise and fall. Companies like Newmont Mining will remain volatile. But at prices like we are seeing this week, short-term investors can afford volatility.
Next Article: Time to short the Canadian dollar
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