What's new?

Despite the gold price holding up relatively well in the bear market (even in US dollar terms), gold stocks have been caught in the equity market downdraft. As a result, gold companies have markedly underperformed the gold price. This is the continuation of a multi-year trend where physical gold has actually outperformed gold stocks.

In recent weeks though, gold stocks, as measured by the North American gold index known as HUI, have begun to move higher while bullion remains in a volatile trading range about the $US800 mark. While still early days, this may be the precursor to a sustained period of strong performance by gold equities relative to physical gold. This is to be expected. After all, investors need to be rewarded for taking the risk of allocating funds to goldminers rather than just holding bullion. Such rewards have not been forthcoming for nearly four years now, which is why new gold supply from mines continues to decline. This brings us to Newmont Mining, the world's second-largest goldminer. Newmont's share-price performance has been poor in recent years. The saving grace for investors is that the weakness in the Australian dollar has mitigated against much of the recent price pressures. (Newmont's primary listing is in the US and is therefore priced in US dollars.)

The outlook

After a number of lean years, we anticipate 2009 may bring more joy for Newmont shareholders. There are a number of reasons for this. Most obviously, we think gold prices will move higher in 2009. This bullish argument is best encapsulated by simply looking at the interest rate settings of the world's big central banks. Like gold, short-term cash will soon pay no interest. Unlike gold, cash is simply paper, which can be produced and devalued at the whim of an unelected central banker.

More specifically, Newmont has a major new asset coming into production next year, the 66.67 per cent-owned Boddington gold project in Western Australia. Start-up production is expected by early to mid-2009. Newmont expects the first five-year production average to be 600,000-700,000 ounces. Also, operating cost pressures should begin to abate next year. Oil prices, as well as commodity and labour costs in general, have pulled back significantly in the past few months.

Price

During the past five years, Newmont's share price (in Australian dollar terms) has performed poorly despite a strong gold price. Notwithstanding a sharp drop in recent months though, the stock price has held up relatively well given the unprecedented falls across the mining sector.

Worth buying?

Based on past performance, Newmont is certainly not worth buying. But as investors undoubtedly know, the past is no guide to the future. We think the headwinds Newmont has faced in recent years are finally beginning to dissipate. While the stock may not begin to noticeably improve until gold starts heading sustainably higher, we think there is a strong likelihood this will occur in early 2009. A small portfolio allocation is therefore warranted.