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February 22, 2007

Something New at Newmont

Newmont Mining shareholders received a gift to which they are unaccustomed: a positive surprise on an earnings call. Newmont's net income rose 146% during 2006, supported by a whopping 260% earnings gain in Q4. The gains were a product of increased earnings leverage to gold price, meaning that Newmont's cash margin per ounce of gold increased at a faster rate than the price of gold. NEM shares were treated to a nearly 2% rise while gold remained flat.

Newmont management sang a familiar tune during their call, saying that overall production would decline slightly in 2007. However, the opening of new mines, along with a higher gold price, enabled the company to increase their reserve figure by 52.5 million ounces... about 10 years worth of production at current output levels.

Long-time Newmont bulls such as myself have traded the shares primarily due to a faith in management ability. While the news out of the company has not always been desirable, it has at least been straightforward, thereby enabling investors to make informed decisions. Such honesty reaffirmed my belief that when the news turned positive for the company, it would do so in a big way. Today's report appears to represent an important shift in that tide, and I now look forward to more positive reports out of NEM in coming quarters.

Even more encouraging for NEM fans, the shares popped above an important resistance level:

stock chart

The high volume displayed over the last two days should support price, so lets see if NEM can go and get itself very overbought from here.

Toll Brothers also reported today and surprised Goldilocks by once again lowering the bar for a bottom in housing. The biggest cheerleader for housing, Robert Toll, was morosely blunt with his statement that, "There are too many soft markets at this stage in the selling season to call a general upturn in the new home market." Nevertheless, there are unabashed bottom-callers myopically screaming for an end to the trouble. The facts that home prices are still falling and that every industry CEO flatly states that no bottom is in sight does not deter them. I suppose they are the same people who buying this market.

Along those lines, in an important development in the sub-prime market, Moody's threatened to cut the loan service ratings of five lenders. CDOs backed by sub-prime paper have been tumbling in price, putting a lot of pressure on the institutions holding or guaranteeing the debt. While this deterioration has been developing for some time, it is only now beginning to make headlines. The important point of this action is that the credit cycle may be turning. As lenders tuck their tails between their legs, liquidity could dry up like a sponge in the Arizona sun, and the game will be over for those feasting on money flow.

Disclosure: Long NEM Calls


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