St. LOUIS () -- Late yesterday, Newmont [NYSE:NEM], the world's second largest gold producer, joined the world's other top producers in a surprising move to close out forward gold sales - the last of the major producers to join the trend.
In his first order of business as Newmont Mining's new CEO, Richard O'Brien said the company eliminated its entire portfolio of forward sales contracts in June, covering 1.85 million ounces of gold at cost of $578 million. As a result, the company will post a pre-tax loss of $531 million.
Newmont had originally committed to deliver 1.85 million ounces of gold in 2008, 2009 and 2011 at prices ranging between $381 an ounce and $392 an ounce. The average gold price in June was $655.71/oz.
In addition, Newmont has decided to dispose of its merchant banking segment, taking a non-cash impairment charge of $1.7 billion in the second quarter of 2007. Alternatives for the business include a public offering and/or a private sale.
"With the elimination of our gold hedge book, we have renewed our commitment to maximizing gold price leverage for our shareholders," O'Brien said in a press release.
Omar Jabara, director of media relations for Newmont, told RI that the strategic nature of this decision is to "focus our efforts on our core business: gold."
"By becoming the largest un-hedged gold company in the world, Newmont gives investors full leverage to the gold price," he said.
Many producers increased forward sales when gold touched a 20-year low in 1999 to hedge against further declines in prices. But as gold's rally enters its seventh year, producers have been rapidly unwinding forward sales, translating into decreased gold supply or a rise in demand in the market.
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According to last quarter's edition of "," co-developed by Mitsui Global Precious Metals and Virtual Metals, gold hedging was reduced by 3.9 million ounces to 36.7 million ounces in Q1.
The world's largest gold producer, Barrick Gold [NYSE:ABX; TSX:ABX], its first quarterly loss in five years last quarter as it spent more than half a billion dollars to exit its gold hedging contracts. The company bought back about 1.3 million ounces of gold, reducing its net income by $557 million.
The world's third largest gold producer AngloGold Ashanti [NYSE:AU] cut its position by 600,000 ounces as part of its continued restructuring last quarter while reporting earnings of $97 million. AngloGold's remaining hedge position is currently just over 9.5 million ounces but is scheduled for a 50% reduction by 2009.
Gold Fields [NYSE:GFI], the world's No. 4 gold producer, closed out the remaining 700,000 ounces of the recently acquired Western Areas' hedge book. Gold Fields' to $52 million or 8 cents per share this quarter, compared to $104 million or 20 cents during the previous quarter.
Newmont did not close out any hedges in Q1 and was not expected to eliminate its hedge book prior to the scheduled closure timeline over the next three years.
Matthew Turner, commodities analyst with Virtual Metals, told Resource Investor that Newmont's decision was a "bit of a surprise just because the market wasn't particularly concerned about Newmont's book." He said the decision was a matter of "pure speculation."
"I'd imagine they did it when the price dipped to $640/oz in June, and saw that as a good opportunity to close out at a relatively low price. ... It's relatively cheap compared with some of the other dehedges we've seen, and it does mean they can now say they are 'unhedged'."
Dennis Gartman, editor of the Gartman Letter, said that for a short while, NEM shares will bounce relative to spot gold on this news as "the stock market likes it."
Shares of Newmont gained as much as 2.6% to $40.60 in after-hours trading yesterday. Today, NEM is up another $2.21 or 5.5% at $41.79.
But Analyst Patrick Chidley forecasts Newmont will post a "very poor second quarter" because the charges should outweigh results.
Newmont has been trading at 52-week lows in the last week after slumping to a 22-month low in June. The company said the cost of selling gold probably will jump 32% this year.
Gartman said that like all other gold mining companies, Newmont shares have very seriously under-performed the gold ETF over the past several years, "and why shouldn't it?"
"We have maintained all the while that the gold ETF has been a much better 'investment' than have gold mining shares, for the bet there is pure while the bet on mining shares incurs the additional concerns over mining operations, strikes, added expenses et al," he said.
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Mark O'Byrne, director at Gold & Silver Investments Ltd., said in market report that Newmont "obviously believes" gold prices are going higher with its decision to eliminate its hedges.
"This is a real 'vote of confidence' for the outlook for the gold market and will likely lead to the continuation of producers eliminating their hedge books," he said.
O'Byrne believes that gold prices are bottoming here prior to the next rally in this secular gold bull market.
"Continuing weakness in the U.S. dollar and near record oil prices with increasing geopolitical instability in Nigeria should provide support to spot gold at its 200-day moving average at $640.90," he noted.
James Moore, analyst for TheBullionDesk.com, said for the moment gold still remains within the boundaries of its recent down-channel, "with resistance around $665 capping the market" and support around the 200-day MA and the psychological $640 level.
Likewise, Gartman said "we remain upon the sidelines, but our bullish enthusiasm is beginning to increase as spot gold falls back below $650."
According to the Gold Monitor, gold should be about $638 today, "which is also not 'inspiring'." The report estimates a probability weighted average of $677/oz in Q3 and $691/oz in Q4. In 2008, the probability weighted average for all four quarters is placed at $733/oz.
"Our near-term bias is neutral and our long-term bias is bullish," said Martin Murenbeeld, chief economist of the Dundee Group of Companies, publisher of the Gold Monitor. "We are in the summer doldrums - the 'dog days' of summer - and while volatility cannot be discounted we may not see much action until September."
Gold futures closed up $4.20 at $654.80 an ounce on the New York Mercantile Exchange today, a gain of $3.90 for the week.
