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February 27, 2006

Newmont Disappoints

Newmont Mining shares got walloped to the tune of 6% after reporting disappointing earnings this morning. Their report was disappointing not only for traders who have recently piled into the shares blindly, but also for longer-term bulls who were looking for a punch for the shares, given the rapid rise in gold's price since summer. Newmont's conference call to discuss the report will not occur until after this post is written, but let's take a look at the information we have so far and what it might mean for Newmont traders going forward.

For the 4th quarter, Newmont sold metal at an average price of $472 per ounce. Gold spent most of the 4th quarter above the $472 level, so why the low average sales price? Primarily because of the rapid rise in the metal's price during the quarter. Newmont, like every other producer, sells its gold via futures markets. Much of Newmont's sales prices were locked in at lower levels before the 4th quarter started, so its average price for the 4th quarter was a little lower than the average spot price. This inversion is typical when gold's price is rising rapidly. The good news is Newmont spent much of the 4th quarter selling at higher prices for Q1 2006, and is likely to report an average price well over $500 in their next quarterly report.

I am curious to compare Newmont's average selling price to that of other producers. One of my primary attractions to Newmont is their practice of not hedging. Many producers hedge (sell forward and/or buy put options) to help stabilize quarterly profits. However, hedging does not maximize profits. It only adds costs and lowers revenue, especially in a bull market.

Newmont partly blamed the earnings shortfall on energy costs. Those who follow the company closely are familiar with their purchase of Canadian oil sands several years ago. The oil sands purchase should theoretically hedge Newmont's energy-related production costs. During their conference call, I hope to learn more about to what extent the oil sands hedge was effective in 2005. Energy companies had their own cost-control challenges last year due to scarcity of heavy-equipment resources, so NEM shareholders may have to wait longer to reap the benefits of this energy hedge.

Newmont also recorded some write-offs related to mine sales and closures. While write-offs are non-cash expenses, Newmont would have nevertheless disappointed without the deductions. After hacking through what information is available, it seems that the earnings miss can be boiled down to higher energy costs in combination with a lower number of ounces sold. Given higher gold prices this quarter, along with flat energy prices, we could see an earnings surprise delivered with the next report. With or without prospects of such a surprise, the sell-off in NEM shares provides an opportunity to build positions for those of us who wish to do so.

A couple other observations for the day... traders instigated a rally in Intel shares this morning, which held for most of the afternoon, but then the shares were dropped like a hot potato into the close. By a wide margin, most of Intel's volume for the day came during the last 12 minutes of trading while the stock was being dropped. Such behavior is certainly not healthy, and I am considering adding to my bets against Intel in the next couple of trading days.

The housing sector was weak today, and my favorite short on this theme, Building Materials Holding, shed $3.40. This morning's new homes sales report was damaging to the sector, and it seems the homeys are firmly within the grasp of bear claws at this point. For the technicians out there, I highlighted BMHC in my new stock charts section this weekend.

Disclosure: Long NEM Calls; Short INTC, BMHC; Long INTC Puts


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