With Gold Surging, miners face payouts compared to the production dilemma

(Bloomberg) –

With gold prices rising, miners have increased shareholder payouts in the face of a decline in global production. This worries some investors who are concerned about the long-term growth prospects of an industry based on an exhaustive resource.

The value of gold, a raw material for ports, is determined more by the global economy than by supply and demand. Any unexpected event – from a surprising cure for the corona virus to a positive trade deal – could dramatically decrease its value. High prices bring more gold scrap to the market, low prices increase hoarding, and if miners’ production remains unchanged, profits should also increase.

Investors are increasingly divided between their short-term desire for higher dividends and the need to ensure the company’s stability in the long term. According to Josh Wolfson, an analyst at RBC Capital Markets, it is crucial for the future of the industry to find the “best of two worlds” in allocating the growing stack of cash.

“Miners are generally exposed to significant external factors that are beyond their control,” said Simon Jaeger, portfolio manager at Flossbach von Storch AG, a top 10 investor at both Newmont Corp. as well as at Barrick Gold Corp. Reason not to pay too much dividends, ”he said. “You want the cash buffer on your balance sheet to be financially flexible when prices go down.”

Gold is currently at a seven-year high as concerns exist that the outbreak of the corona virus in Asia will affect global growth. As a sign that the virus is already affecting the world’s largest economy, business activity in the United States shrank again in February for the first time since 2013. Metal even rose 2% on Friday when the S&P 500 index released its first weekly loss since January.

Gold producers are “gushing,” said John Hathaway, senior portfolio manager at Sprott Asset Management, in support of higher dividends. “They are able to increase their dividends,” he said. “And there will be pressure on the boardroom and shareholders to do so.”

The industry has been blown up in the past for under-spending on production, over-spending on acquisitions, and debt accumulation. Now, after years of fat loss, miners and their investors are well positioned to benefit from the higher prices. This allowed companies like Barrick and Newmont to increase free cash flow and reward shareholders to varying degrees.

Earlier this month, Mark Bristow, Barrick’s chief executive officer, sent a warning shot about the industry’s bug. Even if all current projects work, the gold supply will still decrease by 30% by 2029. While a falling supply of gold bullion prices would be optimistic, margins and revenues could be impacted if companies were forced to mine inferior or hard-to-mine mines – access deposits.

The gap between increased profits or new production has widened this year.

Agnico Eagle Mines Ltd. shows how closely investors are watching the issue. Despite the 14% dividend increase and the forecast of increasing production by 2020, Agnico’s shares were punished after cutting their 2020 production forecast earlier this month. In an interview after the results, CEO Sean Boyd argued that dividend increases are important not only to share the benefits of higher gold prices, but also because they demonstrate a company’s ability to maintain capital discipline.

Success in the changing shareholder landscape will “come from the better gold mining companies able to attract new common money,” Boyd said over the phone.

“Endless Pit”

Steve Land, portfolio manager of the Franklin Gold and Precious Metals Fund, believes that the next step for miners is to show that the sector is “not just this endless pit where more and more money has to be invested”. According to the country, the trend towards higher dividends is a way to rebuild trust. These companies can also take the time to evaluate future projects, but should “not be in a hurry to push things forward”.

Meanwhile, Newmont seems to be trying to achieve a “Best of Two Worlds” scenario.

In January, Newmont announced that it would increase the dividend by 79% to $ 1 per share per year effective April, while maintaining production for the next five years. CFO Nancy Buese said Thursday that the US-based miner was considering “other shareholder-friendly measures” that he could take.

An important consideration “will be to determine our reasonable dividend level on a future and sustainable basis,” she said.

Meanwhile, Barrick announced a 40% dividend increase to 7 cents per share earlier this month. The Canadian-based miner hopes to attract general investors to his shares by selling assets and managing his debts. But it has also lowered its five-year production forecast and reevaluated its portfolio mix.

In general, the high dividend strategy appears to be helping to raise gold stocks. A Bloomberg Intelligence index of senior gold producers has underperformed gold futures for much of the past decade. But in the past 12 months, the gold group killed them and rose 57% compared to 24% for gold.

“If a company has real productive opportunities to invest high-return capital in its business, it is always preferable to paying dividends instead of paying a dividend,” RBC’s Wolfson said over the phone. “But companies that can demonstrate general discipline by effectively allocating capital and paying out cash flow to shareholders will ultimately achieve the best of both worlds.”

– With the support of Maria Elena Vizcaino.

To contact reporters on this story: Justina Vasquez in New York at [email protected], Danielle Bochove in Toronto at [email protected], Steven Frank in Toronto at [email protected]

To contact the editors responsible for this story: Luzi Ann Javier at [email protected], Reg Gale

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