>Lassonde on gold and Newmont`s future - 500 Beiträge pro Seite

[peter.wedemeier1]

>Lassonde on gold and Newmont`s future


By: Tim Wood

Posted: 2002/07/07 Sun 00:00 | © Miningweb 1997-2002
MININGWEB: There was a lot of criticism about the premium Newmont paid to win Normandy, especially considering a lot of it was Franco-Nevada`s cash. Can Newmont make a return on the deal if gold sinks back below $300?

PIERRE LASSONDE: Price is what you pay, value is what you get. If you compare the purchase price per reserve ounce that Newmont paid, it compares very favorably with past transactions and, more importantly, with the current market value per reserve ounce, as reflected in the current Placer Dome offer to AurionGold shareholders. We believe that a significant portion of Normandy`s value resides in it`s strong "project pipeline" and large land position in Australia, Indonesia and Ghana. These assets are by their nature intrinsically difficult for outsiders unfamiliar with the details to value.

In addition, we are extremely pleased with the integration efforts to date. We are seeing evidence of synergistic savings in excess of the low end of our $70 million to $80 million estimates for the first year.

This is just the beginning and when the market looks back at this deal in years to come, it will recognize that this was a deal that made strategic sense and delivered value for our shareholders.

MININGWEB: A number of our readers, in comments on articles and e-mails to the editors, have expressed frustration about the decision not to close out the Normandy hedge book, which seemed the clear intention during the bidding. How do you address investors concerned that Newmont went back on its word about creating not only the largest gold producer, but also the biggest unhedged pure play?

PIERRE LASSONDE: Make no mistake, Tim, Newmont is committed to a "no-hedging" philosophy as our belief in gold`s intrinsic value as a store of wealth is unwavering. In addition, our shareholders have made it quite clear that they want Newmont to be an unhedged company so that they can participate in any gold price rally. That`s what we are currently working to achieve.

During the bidding for Normandy, we said we would unwind the hedge book in a systematic and orderly manner so as to minimize the cost to our shareholders and the disruption in the market. After all, closing out the hedge book we inherited of 7.55 million committed ounces is no easy task, even in a market as liquid as the gold market. We don`t want to spike the gold price by closing out the book and then watch the price retreat – we would go from "hero to zero" in pretty short order.

You will recall that the merger only became effective in mid-February. After the merger was completed, we immediately implemented a proactive program to reduce and simplify the hedge book. During the last 45 days of the first quarter we reduced the hedge book by approximately 250,000 ounces, to 7.3 million committed ounces, and significantly reduced the floating lease rate exposure in the book.For the remaining three-quarters of 2002, we expect to deliver a minimum of one million committed ounces, which would leave a hedge book of no larger than 6.3 million committed ounces at year-end. To put this in perspective, this would represent just nine months of production for Newmont.

One important distinction that needs to be made in regard to the Normandy hedge book is that the hedge book is denominated in Australian dollars. As a result, the hedge book serves as a currency hedge for us in the near term because of operating costs that are Australian dollar-denominated.

When we closed this transaction the Australian dollar was worth US$0.52. The Australian dollar is currently worth around US$0.57. If you look at historic trends, the Australian dollar, even at current levels, looks undervalued. So, it becomes a game of trade-offs – a rising gold price puts the book further under water, but a strengthening Australian dollar does the opposite.

The hedge book is far more sensitive to changes in the Australian dollar exchange rate than changes in the gold price; for example, a US 1c change in exchange rate equates to an approximate US$48 million non-cash, mark-to-market change in the hedge book, whereas a US$1 increase in the gold price changes the hedge book by US$9 million. So you can see, it is not simply a case of writing a check and closing it out!

To summarize, our ultimate goal remains the closeout of the hedge positions in an orderly and timely manner, while looking for opportunities to accelerate delivery into, or closure of, the book. We are simply not going to tip our hand to the market and will report on our progress at the end of every quarter. Make no mistake, we have a non-hedging philosophy and are going to be 100 percent unhedged as soon as we can.

Let me add that Newmont is now the largest precious metal royalty company through the Franco-Nevada asset base. Using our combined resources, we will continue to increase our royalty stream to provide a cushion for future down cycles in the gold price. Based on 10.5 months of consolidated results for 2002, our third-party royalty revenues should be at least $35 million. The royalty business provides Newmont with stable cash flows and is a feature that really distinquishes Newmont from its competitors.

MININGWEB: Franco had an exceptional investment record. Are you confident that the wealth creation you and Seymour Schulich engineered there can be repeated in a company that, by its size and extractive focus, must have a performance handicap?

PIERRE LASSONDE: I see scale as one of Newmont`s competitive advantages. Size brings us economies of scale in our operations, it brings us access to cheaper capital and, more importantly, the size of our land position brings us opportunities that are unmatched by any of our competitors. Newmont controls over sixty million acres – to put that in perspective, Tim, it is roughly the size of the UK – in some of the most prospective mining districts in the world. This land position provides us with our foundation for creating value. Another important aspect of size is the pool of exceptional talent a company like Newmont has. People are always the most important assets and Newmont has on-board some of the best people in the industry.

Seymour and I are both confident that the new Newmont has the assets, both physical, but more importantly, the people to continue to generate value going forward. That`s why we did the deal and that`s why we both sit on the Newmont Board.



MININGWEB: Nearly everything Franco touched has been a winner – the unrealised interest in Gold Fields, the debt to equity conversion in Echo Bay, the huge return on the Normandy stake, to name a few, and the only clear central theme appears to be value. What did Franco see in those opportunities that other companies didn`t? Are those opportunities still there and, if so, how are they flagged?

PIERRE LASSONDE: Thanks for the compliment, Tim. At Newmont (as we were at Franco-Nevada) we are focused solely on creating value for our shareholders. The Franco-Nevada philosophy was not to do deals for the sake of doing deals – we wanted to do one smart deal every couple of years and not do any dumb deals. It sounds simple, but it required a tremendous effort, focus and in many cases, restraint. Franco-Nevada`s strong balance sheet and low-cost royalty income stream allowed us to write checks when others couldn`t take a long-term view of the market. This allowed us to see opportunities during hard times that others didn`t. That is what we are going to do at Newmont.

I believe there are still many opportunities out there and despite the recent consolidation, the industry remains extremely fragmented. The new Newmont is in an even better position than Franco was to benefit from these opportunities because we have integrated the best resources of Franco and Normandy into Newmont. Newmont has a strong balance sheet, low-cost core assets, the largest land position in the world`s best gold districts and the global skill sets for creating value with every ounce.

MININGWEB: Speculation about industry consolidation remains as intense as ever. Is Newmont a buyer or seller in this climate?

PIERRE LASSONDE: As we said before, we believe that consolidation is good for the industry. We are the largest producer, but yet account for less than 10% of total global production so the consolidation process has a ways to go. I believe that greater consolidation will improve how capital is allocated across the industry, and will also improve producer discipline on the production side.

Newmont is, and will continue to be, a consolidator in this industry - not just for the sake of consolidation, but where consolidation is value accretive to our shareholders. However, we have a large portfolio of "non-core" assets that we continue to evaluate. Where projects don`t meet our strategic criteria, we will be sellers to extract the best value for our shareholders. You will recall that we recently disposed of our minority stake in Aber Diamonds, Lihir Mining and more recently our support of the new Kinross combination through our 45% equity stake in Echo Bay and the sale of our half share of the TVX Newmont Americas joint venture. We are focused on our core districts and operations – Nevada, Yanacocha, Australia and Batu Hijau in Indonesia – as we believe our size and scale gives us a competitive advantage in these regions.

Fractional ownership of deposits has lead to duplication of processing facilities and infrastructure that has, in general, not been in shareholder`s best interests. What I believe you will see more of is consolidation/unitization at the district level. Whether it be the Halloway-Timmins trend in Canada, the Carlin or Getchell trends in Nevada, or the Kalgoorlie or Tanami belts in Australia, I think you are going to see more consolidation at the camp level so that deposits can be mined and processed by the most economic means possible.

MININGWEB: Do you agree that the value derived from M&A activity will trail that from raw exploration success in a higher price environment?

PIERRE LASSONDE: I think it is impossible to make such a sweeping generalization. Both exploration and mergers, if they are done for the proper reasons and at the right price, can add value. At Newmont, exploration is one of our core competencies and we have an excellent track record in finding and replacing reserves. Over the past twelve years, our historic cost of finding an ounce of gold has averaged approximately $15 and this created tremendous shareholder wealth. One of our goals this year is to replace reserves after production of approximately 7.5 million ounces. However, Newmont has also used mergers and acquisitions when they have made sense, as evidenced by the recent three-way merger.

This is a cyclical business of high and low price periods, but remember that mining projects are generally long-lived assets. What we focus on is the quality of those assets to generate profitable returns in the long-run.

MININGWEB: Industry talk is that a super merger is on the cards that would create a single producer boasting 15 million ounces or more of output a year. How would Newmont respond to losing the coveted number one slot?

PIERRE LASSONDE: To be honest, being the number one producer is not the slot we covet most. What we covet most is being the number one producer of shareholder wealth. Remember, Seymour and I are two of the largest shareholders in Newmont and we intend to continue increasing the value of our shareholding.

MININGWEB: Are investors being blinded by consolidation for consolidation`s sake? Early indications are that the enlarged companies have not realised the savings and synergies predicted.

PIERRE LASSONDE: I can`t speak for other companies in the industry. Although it is still early in the transformation process after our recent merger, we are already seeing synergies from the three-way merger that will help us achieve more than $70 million in savings by year-end 2002. The integration of the three companies is proceeding smoothly. In addition, if you look back at Newmont `s earlier mergers, namely with Sante Fe in 1997 and Battle Mountain in 2001, we exceeded our initial synergy estimates, with synergies realized in excess of $125 million a year. Integrating acquired companies is something that Newmont has traditionally done very successfully.

MININGWEB: Miners have been accused of being little more than factory managers who only know how to cut costs. How does the industry move from price taking to price making? What is your position on gold marketing?

PIERRE LASSONDE: I think this criticism is unjustified. We are in a cyclical business where, with the exception perhaps of hedging, we as producers are price takers. The only way we can improve margins is to cut costs, and as we have seen over the past five-year bear market, the average industry-wide "cash cost" of production has decreased considerably. This is all positive.

In regard to hedging, which is a subject we could spend weeks discussing, let me start by saying that the industry has been it`s own worst enemy, which is why Newmont has a firm non-hedging philosophy. The use of hedging and other derivative instruments has served to depress the gold price and has made hedging a self-fulfilling prophecy. However, all the gold that has been borrowed and sold forward has to be repaid to the central banks – it is a zero sum game, after all – and what you have seen this year in the gold price is partly attributable to the numerous reports of hedge buybacks and delivery into hedge books, thus removing supply from the market.

As a leader in the gold industry, we support the World Gold Council`s marketing efforts and believe that they will help to increase demand for gold. Remember that gold has a dual personality – as a store of wealth and as jewellery. We have seen the impact this year of the higher investment demand, particularly from Japan, and we look forward to improving jewellery demand as the marketing program bears fruit.



MININGWEB: Considerable attention has been focused on the impact of the more than $2 billion in goodwill arising from Franco and Normandy. Can Newmont be profitable when the inevitable write-down comes early next year so that the return on equity is kept healthy?

PIERRE LASSONDE: Newmont recognized approximately $2.5 billion in goodwill during the first quarter to reflect the excess of the purchase price paid over the "fair value" of the assets acquired. The recognition of goodwill was required as the transaction was accounted for under new Purchase Accounting rules, as required by US GAAP. You will recall that the vast majority of previous mergers in North America were accounted for using the Pooling of Interests method of accounting, which did not result in the recognition of goodwill.

For all of us, the application of the revised Purchase Accounting in the mining industry is something new. Having said that, we spent a considerable amount of time working with our outside accountants and independent mining industry consultants to ensure that goodwill has been fairly presented in our accounts. We will, as required by US GAAP, evaluate the carrying value of goodwill on an annual basis in order to ensure that there has been no impairment that would require a write-down (remember that under Purchase Accounting goodwill is no longer amortized). We do not currently believe that a write-down is "inevitable", but will continue to evaluate the assets going forward and will advise accordingly.

MININGWEB: What metrics do you think precious metal investors should be focusing on to discriminate in their stock picking?

PIERRE LASSONDE: This industry has a number of metrics that are reported and comparing numbers from one company to the next is not always easy. In my opinion, the most important "metric" is management – look at management`s track record and it will tell you a great deal about the likely future of the company.

In addition, I think "Total Cash Costs" and "Total Production Costs" numbers are extremely important, along with the amount of "Cash Flow Generated by Operations", as reported on the company`s cash flow statement. Other key metrics include reserves and mineralized material not in reserves, not only in aggregate, but also considering where the reserves are located from a geo-political perspective.

More recently, increasing focus is being placed on calculating the "option value" attributable to a company`s reserves. This metric, which is not quite as easy to calculate as those described above, is essentially the value of a long-dated call on higher gold prices owned by the company as a result of having ounces in the ground that can be brought into production. I encourage all readers to review this approach to valuing gold mining equities because it is able to provide one of the most accurate valuation models and best explains the "valuation gap" between traditional discounted cash-flow analysis of gold assets and the premium at which these generally trade. One of the most insightful articles in this regard was authored by Barry Cooper from CIBC World Markets and is titled "Eureka! A Better Valuation Method" (February 1, 2002).

One final metric that I encourage investors to look at is liquidity. You want to invest in a stock that is liquid and marketable so that you can get in and out of the stock when you want to without having a material impact on it`s price. As you know, Tim, Newmont is the most liquid of all gold stocks.

MININGWEB: Franco`s reputation and success was built on market timing. Can you give Miningweb readers an idea of what you and Seymour saw in the gold cycle that triggered deals such as the Midas swap and the bid for Gold Fields?

PIERRE LASSONDE: I couldn`t disagree with you more on this statement. Seymour and I created value the old fashion way … buying $2 bills for $1, and then having the patience to wait until everyone else recognized the value we saw. Often times value is to be had at the bottom of cycles when everyone thinks that the sun will never rise again. It takes some fortitude to act in these circumstances, but cycles are just that, and gold has certainly proven that over the last thirty years.

Also, we were never in a hurry to do a deal for the sake of doing a deal. We were more than happy to sit on surplus cash until we found the type of investment we were looking for, and when we found it, we were able to write a check. In bad times, cash is king.

In our 1999 Franco-Nevada annual report we talked about the eventual demise of the Dot.com bubble. We said that the values were totally out of step with reality and that it was only a question of time. In our 2000 annual report our theme was the US dollar. Like the Dot.com we warned that it was over-valued and that it too would have to deflate. It was not a question of if, but rather, when. This was based on simple fund flow analysis - every day the USA has to attract $1.3 billion in currency to cover it`s current account deficit. How long will the rest of the world continue to support this gross over-spending?
The US dollar exchange rate is the key variable currently driving the gold price. In the 1985-1988 period, the dollar depreciated by 33% against a basket of currencies, at a time when the current account deficit was less than 3%. During the same period, the price of gold went up 66% from approximately $300 to $500 an ounce. Today the current account deficit is closer to 5% of GDP. Our bet is that gold will be going up a lot more than just the $50 an ounce seen in the last six months.

A few weeks ago, Goldman Sachs issued a report on the twin current account/trade deficit and the US dollar. One of their conclusions was that if the USA wanted to reduce its trade balance by just 50% the dollar would have to drop by 43% in value and stay there for a minimum of two years. Where do you think gold will go under this scenario? Our view – much higher. We are in a multi-year bull market in gold and the biggest mistake people will make will be to sell too early. The early stages of every bull market is characterized by the climbing of the proverbial "wall of worry". That`s where we are and higher is where we think we are going!

MININGWEB: You recently returned from a European marketing tour for Newmont. What did you tell investors there about the gold price going forward? Are they buying it?

PIERRE LASSONDE: Wayne Murdy and I spent a week in Europe last month and the interest by funds and institutional investors was incredible, particularly amongst the "generalist" funds that in the past might not have had much exposure to gold. In the seventeen years I have been visiting Europe, this was without doubt the most interest I have seen. They were receptive to the message that Newmont is the best choice for investors looking for portfolio diversification and gold price exposure.

We told the Europeans what I have been saying to you - that the fundamentals are in place for a sustained bull market in gold. If you look at where we are in this cycle versus previous ones, this bull market has still got plenty of legs under it. The gold price increase to date of approximately $50 from the $271 per ounce average price in 2001 has been, at least historically speaking, off a very low base. This industry needs $320 to $325 to earn its cost of capital. It is a sobering thought, and this industry is not yet out of the woods.


MININGWEB: How long before current industry discipline is broken by the temptation of higher prices and marginal projects are rushed to production?

PIERRE LASSONDE: As discussed earlier, the industry needs $320 to $325 gold to earn its cost of capital. We are a long way from prices being at levels that support increases in production. In addition, after the numerous "false starts" and price spikes evidenced in the last five years, I think it is going to take a sustained period of higher prices before we see significant investment in new projects, particularly for "Greenfield" type projects. I think it is fair to say that $251.80 gold sobered up a lot of people in the industry, and one thing we do have as producers, is long memories. Enough capital has been destroyed in the past by poor capital allocation decisions. We, as an industry, can`t let that happen again.

Further, gold production is expected to decline by about 2-4% a year through 2010. Most "marginal" projects have already been factored into the supply and demand balance. In addition, with exploration expenditure levels at record lows during the last five years, there are very few projects of any size that are "sitting on the shelf" waiting to be developed. What we are seeing now is the logical result of the exploration budget cuts over the last five years - a dearth of new projects awaiting development.

In addition, today`s regulatory environment means that the permitting and approval process can add years before a project can be brought into production. Add to this the engineering time and long lead times for major procurement items and you have a supply curve that is pretty inelastic in the short term (up to five years).

I don`t loose any sleep about producers being able to suddenly increase production, given the higher prices of late. In fact, as you know, most producers were guilty of "high grading" deposits during the lean price years and the low hanging fruit has already been picked, so to speak.

MININGWEB: For the man in the street who wants to ride this gold bull, what do you recommend – holding physical like coins; equities; gold mutuals; digital gold; gold debt instruments; or buying directly into ore bodies? Which is safest plus offers the best return, in your opinion?

PIERRE LASSONDE: I have always been partial to equities, and in particular equities of companies that are unhedged, as they provide the exposure to higher prices that investors are looking for. That was why we initially sought to merge with Gold Fields and then later with Newmont. I really believe that our company will be one of the best performing gold stocks over the next two to three year time period because of the quality of our physical assets and the people we have post-merger.

If you are an investor that is looking to get some gold exposure for your portfolio and are unable to devote the time necessary to researching the different companies in the sector, then a diversified mutual fund (unit trust) makes sense. There are a number of excellent fund managers in this sector and information about their holdings and performance is readily available.

MININGWEB: Are central banks going to be permanently weak stewards of bullion?

PIERRE LASSONDE: Firstly, I don`t agree with the notion of the central bankers being "weak stewards" of bullion. In fact, quite the opposite – one of the four clauses in the statement issued by the central banks from Washington on September 26, 1999, was, "Gold will remain an important element of global monetary reserves".

The total central bank holdings as at March 2002 were 32,348 tonnes (as reported by the IMF) – of this, more than 69% is held by just six countries/institutions (the United States, Germany, the IMF, France, Italy and Switzerland. This is significant because all six are either signatories to the Washington Accord, or in the case of the IMF and the US Federal Reserve, have given either implicit support in the case of the IMF, or tacit acknowledgement in the case of the Federal Reserve, which had previously stated that it would not sell or lease gold.

The Washington Agreement is now halfway through its five-year course. There is no doubt that the agreement has been a success – not only for the producers, but also for investors and the central banks themselves. I firmly believe that it is in the interests of all market participants that the Washington Agreement be renewed beyond September 26, 2004.

Interestingly, what is often overlooked is the fact that some central banks have added to their gold reserves in recent years. China, for example, increased its formal gold reserves by 105 tonnes in December 2002 alone, and yet gold reserves are just a tiny fraction of the country`s huge foreign exchange reserves. The same holds true for Japan and Taiwan.

Central bank sales and purchases are always going to be a part of this market. What the Washington Agreement provides is an orderly framework for these disposals to take place and this something the market can understand. I believe that the market "overhang" from central bank sales has been overblown in the past due to the uncertainty, something that was for the most part removed by the Washington Agreement.

Tim,

It`s always a pleasure to talk to you and more importantly to read your daily comments. Your website is always the first one I read in the morning.

[peter.wedemeier1]

>CIBC`s new gold stock valuation method


By: Tim Wood

Posted: 2002/07/09 Tue 15:59 | © Miningweb 1997-2002
NEW YORK ­­ CIBC World Markets` Barry Cooper gold team at is winning plaudits for an option pricing model that explains the gap between conventional equity valuation metrics and how gold stocks actually trade.

Newmont president Pierre Lassonde referred to the 64-page report in an interview with Miningweb, recommending that investors: "Review this approach to valuing gold mining equities because it is able to provide one of the most accurate valuation models and best explains the "valuation gap" between traditional discounted cash-flow analysis of gold assets and the premium at which these generally trade."

BMO Nesbitt-Burns produced good research showing the close correlation between discounted cash flow and stock prices, but it works best only when an unrealistic negative discount rate (a firm`s cost of capital) is applied. Nevertheless, when BMO research boss Geoff Stanley presented the data in November last year, his models were anticipating a $300 gold price; quite correctly as it turned out.

Not good enough for Cooper though, who will present his study, first released in February, at Australia`s August Diggers and Dealers Conference. The study is described as the "First attempt to quantify the valuation gap in gold equities." The conclusion is that the: "Market appears to ascribe a bullion option value to gold equities in addition to their NAV."

The CIBC model: "Predicted share prices to within 10% of market values 78% of the time within the last six months without using artificially high gold prices or low discount rates." No wonder the report is entitled, Eureka!

The model uses the Black-Scholes option pricing method, well known as the way executive compensation is calculated and reported in annual reports. Black-Scholes refers to the Canadian Nobel economists, Myron Scholes and Fischer Black, who figured out option pricing using research from half a century earlier. But their model was cumbersome and costly to compute.

Financial engineer Robert Merton made the breakthrough, valuing options on the fly so that trading risk could be managed in real-time. He and Scholes went on to co-found the now infamous Long Term Capital Management, which went bust after betting the wrong way on gold, among other securities.

LCTM notwithstanding, option pricing continues to be used in the gold derivative business and Cooper says it can be applied to valuing gold companies. The research focused on Barrick and Homestake, but picks Goldcorp as the best candidate for option pricing.

The bad news for DIY investors is that this is not the sort of thing you do on the back of a cigarette box while watching football. But this may be all gold bugs need to know: "Using option pricing methods, we see current market prices rising by perhaps as much as 25% without the aid of improved gold prices." That was spot on in February.

The thesis

The CIBC gold equity option pricing model assumes that stock prices derive from net asset value which is "calculated at the risk-adjusted cost of capital and spot gold prices rather than at long-term gold prices and low discount rates."

The NAV carries an option value – "the right to participate in future gold price swings". These are "long-dated, in-the-money options that carry significant option value in excess of the NAV."

Stripping out the jargon, that means gold producers` stock prices are largely determined by the gold the can lay their hands on in future – the quantity and quality of reserves, the mining rate, grades, ounces not smothered by hedging and so on.

Gold is a monetary asset, so you are assured of its value even when it is trapped in geological lock-box. All you`re unsure of is how much time, effort and money it will take to mine, refine and sell the gold. At a very simple level, that is why reserve ounces in working mines attract a higher value than those in startups or dying operations.

It was precisely this logic that IAMGOLD chief executive Todd Bruce relied on to justify the company`s January decision to hold gold rather than dollars: "when you turn your gold into paper you block that option pricing exposure and the market is not going to pay the same multiple."

The net effect is a rehabilitation of the Greenspan bull market swearword, "momentum". Cooper writes: "We argue that sentiment, perhaps better described as anticipated momentum, plays a big role in determining where gold shares will trade, even in the medium term."

This makes reserve statements all the more critical and it is now high time that the industry agreed on a single global standard; not only to quantify reserves, but to clarify where the line gets drawn in terms of "economic reserves".

NAVer say die

Using Barrick as a guinea pig, the CIBC research shows that the best approximation of the ABX prices comes when you apply a zero discount rate and spot gold. That is plainly a fudge; it sorta works, but for all the wrong reasons considering that a discount rate of 15% is probably more appropriate in emerging markets where bandits and bandoliers are more common than boardrooms and bonuses.

Cooper says investors are buying three things when they fork out for gold shares, the NAV and two call options – one on reserves and the other on firm`s ability to replace and add to mined ounces.

That is why gold shares carry valuation multiples out of kilter with run-of-the mill industrial issues. Consequently, when investors appear to be paying over the odds for gold shares, they premium is for a "call option on bullion with a strike price that is equivalent to the cost of extracting the gold from the ground."

The model works well in plugging the gaps on how acquisition and merger prices are arrived at; demonstrating how apparent NAV premiums are really discounts relative to the option components.

Hedging is not an option

There is evidence that the market snubs hedged ounces; there is no ascribed optionality. Applied to Barrick, the CIBC study shows that at a gold price of $290 an ounce, the potential lost value for the hedge book amounts to a whopping $2.50 a share.

That easily explains why the hedged producers have had such a tough time keeping up with unhedged stocks. The effect is increasingly severe the higher the gold price rises because the value of the call on free ounces rises geometrically.

As Lassonde said, it is research that every gold investor should digest. Unfortunately, applying the model in the absence of a comprehensive company databank is a mission, even if you can plug in one of the ubiquitous Black-Scholes spreadsheets floating about on the Internet.

It is inevitable that industry optionality metrics will become more generic as CIBC`s methodology gains acceptance, and which can be used for rough-and-ready appraisals. But the complexity and variability means that it`s best left to professionals. Don`t try this at home, kids!

[peter.wedemeier1]

Mining News
Wed, 11 Sep 2002, 3:10am EST
Newmont President Pierre Lassonde Comments on Gold, Profits
By Frederic Tomesco


Montreal, Sept. 10 (Bloomberg) -- Following are comments by Pierre Lassonde, president of Newmont Mining Corp., on the outlook for gold prices and the company`s future earnings and asset sales. He was speaking to reporters after an award presentation in Montreal.

Denver-based Newmont became the world`s biggest gold producer earlier this year when it paid about $7 billion for Franco-Nevada Mining Corp. of Canada and Normandy Mining Ltd. of Australia.

On how he expects gold to fare in the next two years:

``Political events are always a bit of an influence on gold, but at the end of the day they don`t stay there for very long. The reality of gold right now is that it`s in an up trend, and the reason is because the U.S. dollar is going down against a basket of currencies. That we`ve been saying for a year and a half, and we think it will continue for the next two to three years.``

On Newmont`s policy on hedging:

``At Franco-Nevada, we had a very firm policy against hedging. We have never done any hedging and we believe that it`s been detrimental to this industry. We`ve never changed our policy. With Newmont, we inherited the Normandy hedge book through the merger, and we have been very busy undoing the hedge book, as we have stated at Newmont that our policy going forward is to be an non-hedged company.``

On Newmont`s priorities:

``Newmont is the world`s largest gold miner. We are the gold company and we will continue to be for the foreseeable future. Our target is to put more money into exploration, and not only replace our 8 million ounces of production a year, but start again growing a year or two from now. We`re going to continue to grow in the gold business. That is our future.

``Newmont had a pretty heavy balance sheet, and we`ve been repairing that very quickly. We`ve already repaid this year, in one quarter alone, over $400 million of debt. We`re down to 21 percent net debt, and by the end of next year, we hope to be down to 10 percent.``

On Newmont`s earnings for the rest of 2002:

``We started the year with a loss, the second quarter was slightly positive, but the next two quarters are going to be very significant. The momentum is there.

``Some of it is definitely (because of) the gold price. The timing has been incredibly good. But at the same time we believe that the gold price is in a rising trend, so you prepare yourself to take maximum advantage of it. That`s what we`re doing.``

On the savings Newmont expects to achieve from the purchase of Franco-Nevada and Normandy:

``In synergies alone, we will have achieved over $75 million of synergies by the end of the year. That`s per year. Next year, we think we`ll be between $80 million and $90 million a year. And those are real savings.``

On future cost-cutting measures:

``We want to rationalize some of the camps that we have. Take the Carlin Trend in Nevada. We have 11 different operations there, Barrick (Gold Corp.) and Placer (Dome Inc.) have a number of operations. It`s over-capitalized. There`s too much money in that place, too many people for what is being produced.

``We want to sit down with our neighbors and ask: Do we need four concentrators? Do we need two roasters? How do we eliminate one and make everybody more money?

``It`s the same thing in Australia at the Kalgoorlie gold mines: We`re 50-50 with Barrick, but we`re not making any money. Let`s sit down and see how we can maximize this operation.

``Rationalization is one of the goals that we have for the next two years. There`s also a few assets that we will probably put up for sale. There are assets that Newmont and Normandy have that really don`t have a role.

``We`ve already sold for over $400 million of non-core assets. (The company`s) Newmont Capital (unit) alone will have dealt with almost $1 billion in assets that are non-core by the end of this year.``

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