Nemont Mining the largest mining company in the world last week announced it will take a one time charge of over $571,000,000.00. Now how can they do that? They said that they unwounnd their hedged positions to stop the losses.
It took five years of sustained increases in the price of gold, but Newmont Mining Corp. (NEM) has finally decided to call a halt to its bets that gold prices won't continue to rise.

After the close of trading on July 5, Newmont said it had eliminated its entire 1.85 million ounce hedge position on its gold production and that it was discontinuing its merchant banking business as a separate unit.

The Denver company spent $578 million in June to buy back all of its price-capped forward sales contracts, for which it will take a pre-tax loss of roughly $531 million, after reversing $47 million in deferred revenue that was recognized previously.

Newmont is shutting down its merchant bank operations as it sells portions of its royalty and equity portfolio, which will allow it to focus on improving gold production. It expects to incur a non-cash impairment charge of about $1.7 billion, which will be reported as part of its discontinued operations in the second quarter.

Relative to other gold producers, Newmont has historically been one of those with the least amount of hedges. But it has arrived at its decision to jettison its entire hedge book fairly late in the game, two to three years after lifting hedges became an industry trend, said Victor Flores, senior analyst at HSBC Securities USA Inc. Other producers who had much larger hedge positions have been much more aggressive in reducing them in the past few years, he said.

Five years ago, when prices were depressed around $270 per ounce amid relentless selling of reserves into the market by central banks, the industry had a greater need to sell production forward at fixed prices. In a news release, the company said it was re-committing to enabling its shareholders to benefit from the uptrend in gold prices.

Considering how little of its production Newmont had hedged – less than half a year's worth of production and just 2% of its 90 million ounces in gold reserves – Flores called the move more cosmetic than anything else.

He said it was an effort by Richard O'Brien, who became Newmont's president and chief executive on July 1, to jumpstart the company, "a fairly safe way to put a bit of zing in the stock," which has lagged recently.

The central problem that O'Brien needs to address is the company's declining production profile, Flores said.

"They haven't developed enough of their own properties to keep the production profile flat to growing, as opposed to flat to declining," he said.

Since the three-way merger in 2002 between Newmont, Normandy Mining Ltd. and Franco-Nevada Mining Corp., which gave birth to the present company, it has been less aggressive in pursuing mergers and acquisition than had been expected, says Flores. It's O'Brien's job now to reverse the company's conservative bent.

With gold prices substantially higher than they were three or four years ago, however, acquisitions have become much more expensive to do.

"On a relative basis, [Newmont's] shares have declined as the shares of potential acquisition targets have risen," Flores said.

In a research note on July 6, RBC Capital Markets said the cash Newmont raises by selling its merchant holdings should more than offset the $578 million Newmont spent to buy back its hedges and will bolster the company's ability to invest an estimated $1.9 billion in capital expenditures this year and make acquisitions.

Newmont is likely to hold onto its 18.9% stake in Gabriel Resources, its 15.4% interest in Miramar Mining and a 9.7% interest in diamond-producer Shore Gold, but it could sell some of its estimated 30 million units of the Canadian Oil Sands, according to RBC.

Based on Newmont's lifting of its gold hedges, RBC raised its 2008 earnings forecast to $1.17 from 76 cents a share and boosted its cash flow projection to $3.54 from $3.14 a share.