Gold’s Best-Kept Secret

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Gold’s Best-Kept Secret by JL Yastine

What a difference a year (and an extra $245 an ounce) makes…

At this time in 2015, with the price of gold nosing below $1,100, mining companies were in the last stages of the “Great Dividend Cut.”

Any free cash flow that a firm once had to pay a substantial dividend had long since dwindled to a trickle. Mining companies had shifted their focus to cutting costs, chopping debt and staying alive.

And now?


As I’ll explain, dividends are back on the front burner. Here’s why that’s good news not just for stock investors, but for the long-term price of gold as well.

A few mining companies are already raising their dividends. Agnico Eagle upped its quarterly payout from 8 cents per share to a dime, as did South Africa’s Sibanye Gold.

Others are telling shareholders that dividend increases are on the table soon. Australia’s Newcrest Mining recently paid its first dividend after cutting the payout to zero three years ago. Randgold Resources, in South Africa, said it may up its payout before the end of the year.

Back in 2014, Newmont Mining slashed its quarterly 35 cents per share dividend by more than 90% and linked future payouts to the price of gold itself. The cut was the last straw for many investors, who bailed out of the stock and drove it from a 2014 high of $27 down to nearly $15 by the summer of 2015.

But recently, the company said it was seriously considering a doubling of its dividend payout and promised to “look at modifying our gold-price-linked dividend policy.”

A doubling of Newmont’s dividend from the current 2.5 cents per quarter still doesn’t amount to much (compared to the unsustainable payouts of a few years ago). But there’s a bigger point to make.

Sending a Golden Signal

It’s not just that gold prices are more than 25% higher since the start of the year (with a corresponding increase in profits to the bottom line). When companies and their CEOs make public statements to the effect of “we’re thinking of raising our dividend,” they’re sending a powerful message to Wall Street: We have regained control of our businesses and our balance sheets.

Newmont, one of the world’s largest gold miners, is a good example. In the past two years, it cut its total current liabilities (that’s short-term loans as well as long-term debt coming due within the next 12 months) in half ($1.4 billion at the start of this year). Nor is Newmont finished. It recently paid down a $275 million loan that wasn’t due until 2019.

As a group, the major gold producers in North America cut their net debt by 30% from a peak in late 2014, according to analysts at RBC Capital Markets.

The Message for Gold Bullion

You might ask whether it’s still too early for mining companies to start raising dividends. After all, gold’s had a great rebound in 2016. But perhaps these firms ought to keep all of their free cash flow in-house? What would happen to them in the event, however unlikely, that gold prices tanked again?

That’s why I find the longer-term outlook so encouraging for gold.

A few years ago, even with gold down more than $500 an ounce from its 2011 highs, many mining CEOs were still talking about expanding production volumes and acquiring other producers to help them achieve that goal.

That’s not the case these days. Barrick Gold, for instance, said last week that it would soon part with one of its crown jewels. It wants to sell its half-ownership in the Kalgoorlie “super pit” goldmine in Australia.

Why sell its stake in a quality, high-volume mine, especially now with gold prices on the upswing? As Barrick’s executives made clear, they still want to cut their company’s $9 billion in long-term debt by more than 20% this year. Within the next few years, they want to chop it all the way down to $5 billion.

Goldcorp’s CEO David Garofalo put it this way in a recent Reuters interview: “Eventually we are going to have to build new mines. When you’re not in that phase, it makes the most sense just to reduce your debt levels to the minimum possible.”

You can see where this is going for gold bullion: Less supply equals higher long-term prices. It’s yet another reason to own gold, along with the economic and monetary reasons as The Sovereign Society’s Jeff Opdyke, Paul Mampilly and Ted Bauman continue to point out.

Kind regards,

JL Yastine

Editorial Director

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