Investors were pleased Friday with Newmont Mining's decision to eliminate forward-sales contracts and a merchant banking unit, sending the giant gold producer's stock up 5.4%.
The Denver-based Newmont, one of the world's largest gold mining companies, eliminated all of its forward-sales gold contracts and is discontinuing its merchant banking division in the next year.
The moves will allow Newmont to focus more on its core mining operations such as improving performance and cost structure, Chief Executive Officer Richard O'Brien said in Thursday's announcement.
Analysts believe the decision will benefit Newmont and its investors in the long term. "If prices continue to go higher like we think, they'll stand to make more money," Argus Research analyst Bill Selesky said Friday. "The company feels a little bit more bullish."
Under the forward-sales contracts, Newmont had 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, according to a Securities and Exchange Commission filing on Friday. It spent $578 million to close out the contracts as of June 30.
Gold prices were $655.40 an ounce at midday Friday on the New York Mercantile Exchange.
Companies typically enter into forward-sales contracts to protect themselves in case of a price drop. They reduce the contracts when they believe prices will increase, Selesky said.
Newmont has hired financial and legal advisers to assist with the merchant banking segment's closure, which will occur over the next year.
Executives are considering a number of options, including a public offering or private sales transaction involving the royalty and equity portfolio.
In the second quarter, Newmont will record a $531 million pretax loss as a result of the eliminated hedge position and a $1.7 billion non-cash charge related to the closing of the banking business.
Selesky said he believes the changes have been anticipated by Wall Street.
Newmont has a number of mining operations around the world, including Nevada, Indonesia, Ghana, Peru and Australia.