[miningmx.com] — MOST gold investors are looking for higher dividends to be paid from available free cash flow after gold companies had met their sustaining capital expenditure requirements.
That’s the key finding of a survey of 117 investors – mainly funds managing between $1bn and $5bn and split 62% generalist; 28% resources and 10% precious metals – carried out by JP Morgan Cazenove.
According to the report 87% of respondents felt that free cash flow should be allocated to dividends. Only 26% of respondents were “supportive of share buybacks’.
The JP Morgan report does not go into this aspect but in recent years managements have usually opted for share buyback programmes instead of increasing dividend payments when they had surplus cash.
The report – published by JP Morgan’s North America equity research division – highlighted that generalist investors appeared to be driving the demand for higher gold dividends, looking for a 3% yield, although the highest yield available in the sector so far is Newmont at around 2%.
Some executives have recently stressed their higher dividend payouts in response to rising gold revenues such as AngloGold Ashanti CEO Mark Cutifani, when he announced his group would introduce quarterly dividend payments.
Imara SP Reid gold analyst Percy Takunda pointed out to Miningmx that AngloGold’s likely 270c/share total annual dividend was less than 10% of its expected net annual profit.
He believed AngloGold could be paying out up to 50% of its profits and queried “if they only pay 10% when gold is at a record high, how much would they pay if the price turns? Gold is now at a record and shareholders should now share in the upside”.
Forecasts in the JP Morgan report showed Gold Fields on an “implied dividend yield” of 1.65% while AngloGold’s implied yield was just 0.89% and that of Harmony even lower at 0.55%.
MARKED CHANGE
The swing by investors to higher dividend expectations is a marked change from their previous focus which was on growth as a measure of outperformance by a gold mining company.
The report noted “some gold companies have surprisingly strong growth profiles such as Kinross ( plus 90%); Goldcorp ( plus 60%); Newmont (plus 30%); and Barrick (plus 15%) – calculated form 2010 production levels. This is no longer resulting in an outperformance to the gold price”.
“The last decade – with hindsight – was relatively easy, with investors asking gold miners to grow production into the rising gold market,” said JP Morgan.
“The next decade will likely be more interesting. We believe the need for gold and gold equities has never been more pressing. However, the space has not rewarded investors the way they expected.
“Most investors we polled expect inflation, but even after two episodes of QE (quantitative easing) inflation in the western world, it is still muted.
“And, with one of the world’s major currencies teetering, gold is only holding its own – not booming.
“This points to a very different world compared with the inflationary 1970’s. The comparison with the 1930’s is closer but, at that time, the dollar was so strong that it had to be devalued (relative to gold) to restart the US economy.”
The JP Morgan analysts reckoned that the underperformance of gold equities relative to the gold price was because “investors are not yet willing to factor 30-year (inflation adjusted) gold prices into valuations”.
“Our valuations, based on a conservative, long-term gold price of $1,300/oz shows value in a number of our gold equities.”
They added, ‘the gold sector, as a group, has been a reliable outperformer of the S&P 500 for the last decade and still appears to be pointing higher with higher highs and lower lows.”
Turning to investors’ expectations on the gold price as revealed in the survey, JP Morgan said two distinct views had been shown.
“A minority see the long-term price around the $1,200/$1,300 level that seems to be indicated by current gold equity trading levels while the majority are looking for a long-term price of $1,500/oz or higher.
“What’s interesting is both could be correct. Our long-term forecast for gold is $1,300 in today’s dollars, though we accept we may never see these prices again in money-of-the-day.
“If governments are forced to aggressively reflate then gold prices could be at $1,500/oz or higher in money-of-the-day; however, rising costs could reduce their profitability.”
