Friday, August 31, 2012

Gold Miners Balk at Dividends

Gold miners are balking at diving into the dividends that investors and analysts have been calling for.

A dividend increase isn't a sure thing for Royal Gold(RGLD), said Tony Jensen, chief executive officer, during the Denver Gold Forum. Jensen said that raising it is on the table at the November board meeting but that pumping money into projects might win out.

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The company has increased its dividend every year for 10 years and in 2010 it went up 20%, but it's only 0.5%, measly compared to the 1.1% dividend yield of its competitor Franco Nevada(FNV). "We'll be taking a look at it," says Jensen. But "we're still in a real growth environment ... we've actually recycled a lot of our cash flow and we've actually gone out to the market to get additional capital to do that kind of thing." "If things do become more difficult to find then I think that having a higher yield would be a very natural thing for a royalty company to do." Jensen warns, however, not to expect anything dramatic from any dividend policy. The company primarily lays out a lot of cash upfront for a percentage of gold production over the life of a mine to help the miner fund its project. It has one stream, which means it put up a smaller amount of cash and then pays $400 an ounce for gold over the life of the mine. Royal Gold has working capital of $140.4 million and $226.1 million in debt. Despite having 33 producing assets and 21 development stage projects, the company is getting hurt as producers miss their production targets -- like when Goldcorp(GG) lowered its 2011 estimates at Penasquito by 100,000 gold ounces. It's these risks, along with expansion hopes, that are blocking a big dividend. A few years ago, according to Jensen, Royal Gold received 80%-85% of its revenue from one property. Today there are 36 different pieces of revenue coming in from various projects. Barrick Gold(ABX) was just as illusive, with CEO Aaron Regent saying the company had a "progressive dividend policy," which is currently at 0.9%. This means that if the company grows earnings and cash flow enough then Barrick will return more to shareholders. "If you look at the performance of the company and the outlook for the industry, things are going well and we are generating record earnings so I would suggest to you that dividends and dividend increases are probably something that will be very much discussed." JPMorgan Chase(JPM) wrote in a recent note that Barrick might be more apt to build out current projects and pay down debt before boosting dividends. Regent hedged his answer to the question a bit by saying that the "ideal scenario is we do a bit of everything." Barrick is the biggest miner in the world and is trying to increase production from 7.5 to 9 million ounces in five years. Although that is a 20% growth profile, it is tremendously hard to do the bigger a gold miner gets. Barrick is counting on Pascua-Lama and Pueblo Viejo, both in advanced stage projects, to add 1.4-1.5 million ounces to annual gold production. The company also recently announced two gold discoveries in Nevada, which could be huge for Barrick. The company increased its exploration program to $370-$390 million for 2011, perhaps signaling that growth just might be more important than dividends. Mark Bristow, CEO of Randgold Resources(GOLD), says investors need to stop whining about higher payouts. "For an investor in the gold space now, all he is doing is worrying about -- remember he's a fund manager -- is how does he maximize his returns." Dividends for dividends sake are fine, says Bristow, but what about the long term? "Our key is to create value for all stakeholders. We work in emerging markets [like West Africa] ... We rent their assets. We don't own them and it's about how do we deliver value for all of them." Randgold has doubled it's dividend in the last 5 years but it stands at a tiny 0.2%. Bristow declined to commit to doubling the payout within the next 5 years, "you're not going to get that out of me." Bristow says that big gold companies, his peers, have all dished out piles of paper and diluted shareholder value by issuing a ton of shares over the last 10 years. "They diluted the shareholders and suddenly now they've got so much money that they have to go give it back to the shareholders." Randgold is known for not issuing shares and Bristow wants to get to a point of sustainable production -- the company produced 184,711 ounces in the second quarter -- and then pay a set percentage in dividends. Still, he will not be swayed by market or investor pressure. Companies can increase cash flow, earnings, production, but it doesn't matter unless you are giving good production per share, he says, which means high grade gold. Randgold's grade is just under 4 grams per ton when other companies can be less than 1 gram.

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As much as investors cry for dividends, they seem to have forgiven Randgold whose shares are up 33% this year versus the PHLX Gold/Silver Sector down 5%

Newmont Mining(NEM) took a different route, however, and went aggressive on paying investors.

The company announced a new policy Monday, tying its dividend to gold price targets. Between $1,700-$2,000 an ounce for every $100 move in the gold price, the dividend increases by 30 cents. Then, from $2,000 to $2,500 an ounce for every $100 move, the dividend jumps 40 cents. This kind of payout could give Newmont a 3% yield, higher than the S&P. "I wouldn't call it aggressive," said CEO Richard O'Brien, "I think it balances the cash flow the company is generating at ever-improving gold prices with our need to reinvest in the business." This strategy seems to be working. Year-to-date, the stock is up 7%. Since mid-April, when the company first announced a dividend linked to the gold price, shares have popped 14%. "If all we do is continue to reinvest and reinvest and don't deliver something back, I don't think it rewards [investors] for all the volatility we see in the market." O'Brien is hoping gold hits $2,000 and pushes the dividend to 3% so it can be a catalyst for the company. At some point paying out a massive dividend will hurt Newmont's cash flow, but only if gold falls to $1,000-$1,200 an ounce. "I think we have plenty of current production which yields current cash flow to more than cover our capital and exploration needs and provide for the dividend." Fund managers and traders have already been placing bets on Newmont ever since the company grabbed their attention with their bold dividend policy in April. Their interest makes Newmont's shares very liquid, which can trigger a rush to the exits if traders get skittish, but O'Brien thinks the dividend actually offers protection against shorting. "You are going to have to pay to hold if they are trying to short our stock," he said. So far Newmont has been the only one to definitively answer investors' calls for more money. Now the test is to see if other gold miners cave to the pressure. Hecla Mining(HL) got in on the act today, announcing that it will implement a dividend linked to silver prices. The dividend will be three cents per share provided that Hecla's average realized silver price for the third quarter is $40 per once. Dividends will rise or fall by 1 cent for each $5 per once move in average realized silver prices for the previous quarter."Our board's action to adopt this dividend policy reflects our strong operating performance and high silver margins, each of which has strengthened our financial and liquidity position," said, Phillips S. Baker, Jr., chief executive officer. "This policy allows us to continue to invest in projects that are expected to grow silver production by 50% in the next five years, evaluate external growth opportunities, continue to strengthen our balance sheet, and now provide cash returns to stockholders." -- New York.>To follow the writer on Twitter, go to http://twitter.com/adsteel.

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