Gold Miners Face a Terrific Problem

What a long, strange trip it's been.

Even the most successful miners of gold and silver have trudged through some epic challenges to reach their current state of incredible profitability. Rising production costs, breathtaking price collapses, and the inevitable snags involved with acquiring and launching new mines have all taken their toll on the industry.

The difficult terrain behind them must render their present challenge that much sweeter.

As gold and silver prices continue to show remarkable strength, the biggest problem some of these miners seem to face is determining what to do with all the cash that's pouring in.

Take Barrick Gold (NYSE: ABX  ) for example, which generated a mind-boggling $1.28 billion in operating cash flow in the third quarter alone. With a net cash cost of just $349 per ounce of gold, the world's leading miner of gold raked in $888 for each of more than 2 million ounces of gold produced during the quarter.

While dunking the golden basketball with quadrupling of net income to $466.5 million, smaller rival Goldcorp (NYSE: GG  ) tipped-in an even more incredible margin of $979 per ounce.

Even further on down the scale-of-operations continuum, mid-tier success Agnico-Eagle Mines (NYSE: AEM  ) reported record cash flow of $171 million to accompany record net earnings of $121.5 million, or $0.73 per share. Even with a cost structure that has trended slightly higher during a massive, transformational growth spurt, these gold prices are supporting scales of profitability that the industry may be forced to get used to.

Before you lend them your pity for all this money they have to find a home for, let's consider where this cash flow is likely to be flowing next. Given the long lead-times associated with mine development and construction, the obvious answer for cash-rich miners is to acquire producing assets at various stages of development. Australian giant Newcrest Mining's $8.8 billion acquisition of Lihir Gold, and Kinross Gold's (NYSE: KGC  ) $7.1 billion deal for Red Back Mining, are mere tastes of what is to come by this Fool's estimation. The major players like Barrick have enormous construction projects to contend with, but strategic acquisitions will remain a significant focus for as long as the cash keeps flowing.

For miners like Agnico-Eagle that have already executed a major growth spurt, upcoming expenditures are likely to focus upon fast-tracked initiatives to optimize production explore expansion opportunities at existing operations.

The third solution for miners facing this terrific problem of generating more cash than they know what to do with is the one that seems most often overlooked by investors. Gold and silver are often derided as investments that don't pay dividends, but Fools who include mining shares within their precious metals exposure know that dividends form part of that strategy. These dividends remain small for now, but this cash flow spigot has only recently been opened. Barrick Gold and Compania de Minas Buenaventura (NYSE: BVN  ) already yield better than 1%, but I expect yields among the shareholder-friendly operators to expand further and faster than many Fools anticipate.

I expect Agnico-Eagle Mines, in particular, to raise its dividend aggressively over the coming years. To keep an eye on this shareholder-friendly producer, add the ticker to your watchlist by clicking here.

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 and Kinross 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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  • Report this Comment On November 05, 2010, at 7:36 PM, rfaramir wrote:

    "pity for all this money they have to find a home for"

    Such a problem! So much pity! LOL!

    I agree, dividends is a very good choice for the money. Especially if there are any outstanding options held by those making the decision between dividends or a share buy-back, as a buy-back would be a conflict of interest, as it directly benefits the option-holders with price manipulation.

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