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Thursday, September 28, 2006

Analyzing Newmont Mining's (NEM) Recent Cut Back of Expectations & Contemplating NEM's Future

By Yaser Anwar, CSC of Equity Investment Ideas

NEM cut back sales expectations for 06 and said it anticipates further declines until new projects come on line in 08 and 09.

NEM trimmed its 06 gold sales expectations to a range of 5.6 million ounces to 5.8 million ounces from a previously estimated range of 5.9 million ounces to 6.2 million ounces.

NEM blamed the shortfall on the dispute over its interest in a joint venture in Uzbekistan, lower production in Ghana due to nationwide power shortages, and the expected sale of its Holloway mine in Canada.

Last month, An Uzbek court declared bankrupt Newmont's local joint venture, likely ending the NEM's gold operations in Uzbekistan. Newmont has accused Uzbek authorities of trying to seize its part of the venture and said it plans to challenge the Uzbek government's action through international arbitration.

About 35% of NEM's equity gold sales in 05 came from the US, 27% from Peru, 25% from Australia/New Zealand, 6% from Indonesia, and 7% from other operations. As of the last reporting date: approximately 54% of NEM's total long-lived assets were located in the US, with the balance located in Peru, Australia, Indonesia, Ghana, Canada, Mexico, Bolivia, Turkey and Uzbekistan.

For 07, NEM expects gold sales of between 5.2 million ounces and 5.6 million ounces, again as the result of the joint venture issue and lower production from its Yanacocha operations in Peru. Costs related to sales next year are also expected to increase 20 to 25%, NEM said, mostly from higher costs at Yanacocha.

NEM said it doesn't expect an increase in gold sales until its operations in Nevada, Ghana and Australia reach full production in 08 and 09.

Global gold production is dominated by a relatively small number of large producers such as Anglogold Ashanti Ltd, Barrick Gold, Gold Fields Limited, Freeport McMoran Copper & Gold, Harmony Gold, Newmont Mining, and Rio Tinto. The industry is also comprised of a small number of exploration companies and small to mid-size gold producers.

NEM also said that an anticipated gain of $295 million in the 3rd Q related to the sale of an oil property in Canada and the divestiture of a project in Indonesia would be partially offset by the $94 million in costs related to the Uzbekistan venture.

YTD through September 22, the S&P Gold Index fell 17.3%, which compared to a 5.5% increase for the S&P 1500 Stock Index and a 12.1% rise in spot gold. Predicated on my expectation for less rapidly rising costs for energy and raw materials along with higher revenue per ounce, investors can look for increased operating profits and operating earnings of around $1.80-83 level in 06.

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