Dig Deeper Into Expanding Gold Dividends

Motley Fool Staff
Updated

It is simply not enough to just pay close attention to the gold miners you may own or have interest in acquiring. To truly claim to have performed due diligence, a survey of the industry's broader trends is absolutely required. Toward that end, the major miners provide the standard by which you can assess the performance of your selected gold stock(s), and also an indispensible overview of key trends impacting the industry at large.

Margins rising faster than costs
You don't have to own shares of Barrick Gold (NYS: ABX) to take interest when the miner announces a 25% increase in its dividend payout. This development matters because it conveys a confident outlook for continued margin expansion even in the face of varied and significant cost pressures. Consider that Barrick has faced skyrocketing capital costs associated with several of its key development projects. Over the past two years, the anticipated cost to construct the world-class Pascua Lama gold mine in South America has increased by more than two-thirds to approach $5 billion from a prior price tag of $2.8 billion. Meanwhile, projected start-up capital for the Cerro Casale project in Chile has expanded by more than 40% to reach $6 billion.

At the same time, Barrick last week cited "inflationary cost pressures" as a factor in its expectation that total cash costs could increase by 10% during 2012. Considering those powerful cost pressures -- along with Barrick's enormous $7.7 billion all-cash deal to acquire copper producer Equinox Minerals earlier this year -- I trust that Fools appreciate the bullish signal for gold investors that's inherent in the miner's latest dividend increase. The move conveys a confident outlook for further gains in the price of gold going forward. More specifically, it suggests that the company expects those price gains to out-muscle cost pressures to yield more of the impressive margin expansion recently observed within the industry.

During the third quarter, Barrick saw its net cash margin expand sequentially by more than 20% to reach $1,415 for every ounce of gold it sold. In other words, in just the past quarter Barrick saw its per-ounce profitability expand sufficiently to absorb twice the anticipated increase in cash costs for all of 2012! Year-over-year, that margin expanded by an astounding 51%. While these cash margins do not consider acquisition or development costs, they still portray how this secular bull market for gold has allowed for enhanced profitability amid a very challenging cost environment. Back in the second quarter, rival Goldcorp (NYS: GG) 's margin outshone Barrick's by more than $150 per ounce, with the result that Goldcorp's impressive third-quarter mark of $1,461 per ounce corresponds to only a 10% sequential expansion.

The race to lure stymied investors
Because that rapidly increasing profitability has generally failed to result in convincing gains among shares of gold's major miners, these behemoths face palpable pressure from investors to bridge the gap with aggressive dividend increases. Newmont Mining (NYS: NEM) faced some operating challenges during the third quarter that saw year-over-year gold production dip by 7% -- and copper production decline a more noteworthy 30% -- but Barrick's closest competitor in terms of scale remains at the vanguard of payouts to shareholders with a dividend formula that's tied to the prevailing price of gold. Annualizing Newmont's third-quarter payout of $0.35 per share, the company presently yields better than 2%. But if, like me, you expect gold prices to advance considerably, then Fools may wish to consider that Newmont's implied dividend yield -- if gold prices were to average $2,000 for the year to come -- would come in at a cool 4%!

Correspondingly, silver miner Hecla Mining (NYS: HL) has placed itself at the forefront of silver dividend payers by adopting a similar formula that ties its future payouts to average realized silver prices. Its stronger rival, Coeur d'Alene Mines (NYS: CDE) , notably pays no dividend at all.

Frankly, Barrick's 25% dividend increase feels tame by comparison, and Goldcorp's decision to delay its own likely dividend increase until after the company completes its "mine planning and budgeting process currently under way" will only serve to raise the expectations surrounding that move. While the majors clearly set the bar in this regard, investors I speak with are hungry to see profitable producers adopt this trend of expanding dividend yields -- even as they seek to provide for expanding production amid rising all-in costs of production.

Yamana Gold (NYS: AUY) fed some of that hunger when the company expanded its dividend by 50% after the second quarter, but following an overdue period of relative outperformance by the shares, the resulting yield is now just higher than 1%. Now that the market has accounted for Agnico-Eagle Mines' (NYS: AEM) unexpected mine closure, Yamana's closest rival in the intermediate space is sporting a yield of nearly 1.5%. Unless Yamana announces another dividend increase that would essentially match Agnico's current yield, I dare say Agnico-Eagle remains the more attractive of the two stocks in the wake of the recent sell-off.

With further distress in the Eurozone virtually guaranteed, in my opinion, I maintain that investors can ill-affordnot to allocate some of their investment capital to gold or gold miners to protect it from the further devaluation of key currencies that's likely to result from the next chapter of this global financial maelstrom. Contrary to the popular myth, gold can pay dividends, and in fact seasoned gold investors expect to see them increasing further. It's a lot to ask for, but as gold continues to march higher, so too will the expectations of currently underwhelmed gold investors.

At the time thisarticle was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Coeur d'Alene Mines, Goldcorp, Hecla Mining, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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