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Are Gold Miner Dividends Sustainable?

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All else being equal, dividends from the gold miners do help mining equities look more attractive to gold ETFs, says one analyst.

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Although the gold price has proved volatile in recent months, many gold miners continue to offer investors an attractive dividend. But is it sustainable?

For investors looking for a dividend from the large cap gold miners, the last decade and a half has proved fruitful. Frank Holmes, CEO and chief investment officer of US Global Investors, recently noted that the world's top 20 gold companies have increased their dividends at a compound annual growth rate of 16% over the last 15 years, while gold only rose 12% annually over the same period.

At the moment, Barrick Gold's (NYSE:ABX) dividend yield is 3.90%, while Goldcorp's (NYSE:GG) dividend yield is 2.07%, Newmont Mining Corp.'s (NYSE:NEM) dividend yield is 4.09%, and Kinross's (NYSE:KGC) dividend yield is 2.48%.

The miners themselves were optimistic about dividends heading into this year. According to PwC's 2013 global gold price report, 100% of senior miners surveyed planned to use cash to continue to pay dividends this year, with 80% saying that they planned to increase the proportion of profits paid as a dividend.

Indeed, speaking about the climate for M&A in the gold space at the Bloomberg Canada Economic Summit last month, Barrick Gold president and chief executive officer Jamie Sokalsky said that investors are hoping for free cash flow, which he said they would perhaps rather see "returned to them in a higher dividend at some point."

All else being equal, dividends from the gold miners do help mining equities look more attractive to gold ETFs, explains Elizabeth Collins, director, basic materials equity research at Morningstar.

"But unfortunately for gold mining equities, gold ETFs provide leverage to gold prices without the added headaches of cost inflation, production level disappointments, and political risk," she adds.

This week, Australia's Newcrest Mining (ASX:NCM) announced that, as a result of a reduction in profitability for the 2013 financial year following a sharp decline in the gold price, it expects that it will not pay shareholders a final dividend.

The company notes that as growth in production and earnings continues from two of its mines over the coming years, and costs and capital expenditures are reduced further, it "is confident it will be well-positioned for both an accelerated reduction in debt levels and a return to dividend payments."

Back in April, Newmont Mining -- which uses a gold price-linked dividend policy, with each quarterly dividend based on the company's average realized gold price for the preceding quarter -- cut its dividend to $.35 per share, based on the average London PM Fix of $1,632 per ounce for the first quarter of 2013. In February, the company's quarterly dividend was 42.5 cents per share based on the average gold price of $1,718 per ounce for the fourth quarter.

Certainly, the ability of many miners to continue to pay an attractive dividend depends on the gold price's moves. Earlier this year, RBC Capital Markets ran a "downside stress test" on North American gold producers, to see how robust miners' balance sheets are. While the test found that most of the companies appear to be able to weather gold prices of $1,500 or $1,4000 per ounce, at $1,200 per ounce, within 24 months most companies would have to cut capital spending and dividends.

"I think many gold miners' dividends are sustainable as long as gold prices don't fall. Many miners are cutting back on exploration and capital expenditures in order to boost free cash flow and return more cash to shareholders. However, many gold miners' dividend levels are either directly or implicitly linked to gold prices. So if gold prices fall, so too would dividend levels," says Collins.

Twitter: @helenbnichols
No positions in stocks mentioned.
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