TORONTO (CP) -- Analysts are praising Newmont Mining Corp.'s [NYSE:NEM] decision to set a new course for the company by splitting off its merchant banking division, a move which one adviser says will increase the value of both business units.
Newmont Mining Corp. of Canada's battered shares [TSX:NMC] rose about 5.6 per cent Friday after its parent firm announced late Thursday it will focus on developing its core gold assets and wind up the Newmont Capital division, through either a public offering or private sales. It will also eliminate its entire gold-price hedging position and post more than US$2 billion in accounting charges.
The Canadian subsidiary's shares rose C$2.32 to C$44.09 on the Toronto Stock Exchange Friday afternoon, while shares in the parent firm, Denver-based Newmont Mining Corp., were up 5.8 per cent to US$2.30 to US$41.88 on the New York Stock Exchange.
Both companies' share prices hit 52-week lows last week and remain far below their highs established in early 2006.
Barry Cooper, a CIBC precious metals analyst, said he increased his price target by C$2, to C$45 a share, based on his expectations of increased cash flow in 2008 due to the elimination of the pre-sold gold contracts, which were priced below operating costs.
Cooper said the breakup of Newmont will make both companies more valuable.
''We think the two entities are worth more split up,'' Cooper wrote in a note to investors Friday. He estimates Newmont Capital on its own could be worth C$2.90 to C$3.65 per share.
''Valuing Newmont Capital, however, is challenging due not only to the uniqueness of asset class but also because the makeup of the company is not known,'' Cooper said.
He said he expects Newmont Capital's assets are heavily weighted in oil and gas and would include: gold royalties (mostly Goldstrike), which would be almost gone within four years; oil and gas royalties; 31 million shares of Canadian Oil Sands Trust [TSX:COS.UN]; base metal royalties; an iron ore deposit in Guinea; a thermal and metallurgical coal deposit in Australia and a gas field in the high Arctic.
''We suspect that the company's holdings in Shore Gold Inc. [TSX:SGF] as well their 40 per cent equity position in the Shore Gold Star Diamond project could also form part of Newmont Capital.''
On the other hand, Cooper speculated Newmont may want to hang on to that project, given the lack of big projects available in the precious metals sector.
BMO analyst Heather Douglas values Newmont Capital's equity assets at C$1.5 billion, with stakes in Canadian Oil Sands, worth C$950 million; Gabriel Resources, worth C$210 million; as well as Shore Gold, Oxiana and Miramar. She estimates the value of royalties at C$1.4 billion, mostly from its Goldstrike mine royalty and from its oil and gas division.
The decision by newly appointed CEO Richard O'Brien to discontinue the merchant banking unit was a must, said analyst Victor Flores, of HSBC in New York.
''It's a positive first step that the new CEO has taken to turn this company around,'' Flores said. ''This is the first step of a long road for Newmont.''
Although Newmont Capital has been profitable and made some savvy investments over the years, such as buying early into Gabriel Resources Ltd. [TSX:GBU] and Miramar Mining Corp. [TSX:MAE], the unit has not helped the mining division produce more gold, Flores said.
''Newmont Capital, as profitable as it might be, has become a distraction,'' Flores said. ''Newmont has a declining production profile and poor share performance. Their job is to turn that around.''
By winding up the merchant banking division, it can redeploy the cash into improving its asset base, which includes mines in Western Australia and Peru which are very mature. The company is also struggling to keep costs under control in Nevada, he said.
''I think it had to be done ... It's perhaps a day late and a dollar short,'' Flores said.
The Canadian subsidiary has seen its shares plummet on the TSX from a 52-week high of C$64.43 to as low as C$40.76.
(c) The Canadian Press 2007
