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Newmont Mining On The Rise

09/26/11 09:44:44 AM
by Billy Williams

Newmont Mining is setting up to a breakout of a multiyear resistance level.

Security:   NEM
Position:   Buy

Around the world, investible securities and commodities have been hit hard as both traders and investors look to limit risk exposure or raise cash on recent news by the Fed that "Operation Twist" is the strategy of choice by Fed chief Ben Bernanke to deal with a myriad of problems including, but not limited to, nagging US unemployment, slow economic growth, and staving off fears of a European debt crisis that is likely to wash up on American shores. As a result, the response to the Federal Reserve's new easing policy is to unwind trades that benefited from a weak dollar and the prospect of higher inflation.

The flow of capital is fleeing a newly devalued Swiss franc and euro for more stability and, for the moment, that is the US dollar. The dollar will benefit from this flight away from a devalued Europe and into the dollar but, in the long run, the long-term secular bear market that the dollar finds itself in will resume resulting in a downward spiral for the dollar. With inflation rapidly gaining ground due to the Fed printing more money both from the recent announcement and the Presidential election cycle, which is marked by increased printing, gold and other hard-commodities are likely to find support and rise from the recent decline.

FIGURE 1: NEM. NEM has been in a contracted price range for almost 25 years, but a secular gold bull market may be the catalyst to drive NEM higher as a stock leader.
Graphic provided by:
While there is much talk about investing in gold, silver, and other precious metals in the form of bullion, there are other choices to take advantage of the exposure to precious metals in the form of futures, options, exchange traded funds (ETFs), and equities. All of these investments have their pros and cons, but one company is both uniquely positioned to take advantage of the rise in metals as well as possessing a stellar balance sheet and solid technical support in its price action.

Newmont Mining (NEM), together with its subsidiaries, engages in the acquisition, exploration, and production of gold and copper properties (Figure 1). The company's assets or operations are located in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand, and Mexico. As of December 31, 2009, it had proven and probable gold reserves of approximately 93.5 million equity ounces which at $1,700 an ounce for gold gives it the potential gold stockpile of $159 billion.

Currently, NEM has a book value of $28.99 that has been steadily on the rise for at least the last five years, a solid indicator of real growth that is a common theme among high-performing stocks before they get ready to take off. In addition, it has a 21% return on equity, a profit margin of 22.51%, sits on $2 billion in cash, and has a Graham number of 27 (total stockholder equity/number of outstanding shares).

NEM is fundamentally sound while sitting in a plumb position within an industry that is likely to benefit from the rising cost of precious metals but also has compelling technical factors that are likely to help its shares push higher.

Specifically, NEM is at a 52-week price high where it has experienced overhead resistance around the $60 to $65 price level where it has been stuck below it for the last 16 years. However, with rising demand for precious metals, particularly gold, NEM could now be setting up for a breakout to the upside that could be maintained for some time as the commodity market rallies higher.

NEM has recently traded above the $65 level, but it was quickly rejected. Look for it to trade above $71 and then go on to challenge its former price high from 1987 at the $82 price, which it should reach fairly quickly once it passes $71. While NEM is locked within a tight multiyear range, if external factors like explosive demand for gold and silver suddenly materialize, then that could be the catalyst to take NEM much higher in the years to come.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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