Despite rising gold prices and good market conditions, gold companies burned through $11 billion in cash over the last decade, leaving shareholders out in the cold. The failure to pay reasonable dividends has dented investor confidence in gold equities and could hurt their ability to recover even in the face of inflationary forces, according to a Citi Research report from Johann Steyn and Craig Irwin.

“The failure of most gold companies to pass on the benefits from the past four years has dented investor confidence,” write Steyn and Irwin. “Capital budgets soon followed to consume any surplus cash. Investors were kept engaged by the promise that higher capex would eventually lead to higher production and lower unit costs. However, these promises seldom materialized.”

gold companies

Gold companies reinvested when prices were up, didn’t share profits

As gold prices went up, companies reinvested in capital projects, spending $11 billion in FCF in the process, but didn’t share profits with investors. Instead that money was consumed by a four-fold increase in unit cost and a ten-fold increase in capital expenditures. Now that prices are dropping, those same companies need to make a strong case for investors to get interested again, but the consensus has turned decidedly bearish against gold equities. Steyn and Irwin don’t see any compelling reason to invest in gold equities, though they were bearish on gold long before the rest of the market came around.

Gold prices dropping, but mines not closing

Dropping prices in April caused a slight pick-up in physical demand for gold, and central bank buying is expected to increase by as much as 20 percent next year, but overall demand is expected to drop over the rest of the year unless prices fall even further, and closing mines doesn’t seem likely.

“Current prices levels are already well below 2013 average all in production costs,” say Steyn and Irwin. “However, we see little immediate prospect of mine cutbacks/closures providing price support given the extent of estimated above-ground stocks, estimated by Thomson Reuters GFMS to be in the region of 177,000 tons.”

gold prices soft q3

Of course, all of this comes in the context of a global recovery that has investors looking for more exciting opportunities than wealth preservation with gold equities. The Citi report was also compiled by Jon Bergtheil, Brian Yu, Alexander Hacking, Daniel Seeney.