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A Troubling Trend Emerging in the Gold Industry

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This past April, Newmont Mining  (NYSE: NEM  ) cut its payout to investors by almost 18% to $0.35 a share. Last month, Australia's Newcrest Mining said it was suspending its dividend payment for the last quarter of its fiscal year. And on Tuesday, Eldorado Gold (NYSE: EGO  ) said it was halving its exploration budget, slashing its capex budget by more than a third, and at its next board meeting would take up consideration of the miner's dividend policy. 

If gold prices don't recover soon, expect more miners to follow suit, particularly those with high debt and capital requirements such as Barrick Gold.

Budgets for gold miners were set when the metal's price was much higher, but now that they've tumbled, there are few options left. Hitting the capital markets doesn't look palatable at the moment as a means of raising money, since their stock prices are already in the basement, and while many began cutting their capital budgets, they've also pushed further out their production schedules as a means of conserving cash. Now the only piggy bank they have left to stick their hands into are their dividend payments.

Like Newmont, many miners adopted a dividend policy that was linked to the price of gold. Very cool for investors when gold was regularly hitting new highs, not so much now that the yellow metal's price has been hit hard. When it cut its payout earlier this year, Newmont said it was based on an average first-quarter price for gold of $1,632 per ounce. Yesterday gold closed 22% lower from that level at $1,274 an ounce.

The same thing happened in May to silver miner Hecla Mining (NYSE: HL  ) , when it was forced to hack its dividend 80% to account for silver's new lower value of around $29 an ounce. The payout fell from $0.0125 per share to $0.0025, and silver has tumbled further, closing this past week below $20 an ounce.

In addition to the precious metal-linked dividend, another trend that developed during 2012 was paying dividends in actual gold or silver bullion. Yet investors in those miners have learned that doesn't protect you from the fallout of falling prices, either. Gold Resources shareholders saw their dividend payment cut in half in May, from $0.06 per share to $0.03.

Silver Wheaton (NYSE: SLW  ) sought to eliminate volatility by pegging its payout to the operating cash flows it generated in the previous quarter, something AuRico Gold (UNKNOWN: AUQ.DL  ) just latched onto. The silver miner noted at the time that its revenues are primarily derived from the sale of silver, with its operating cash costs essentially fixed at approximately US$4 for every ounce of silver sold.

However, the silver streamer found that it didn't eliminate volatility at all and just changed over to a new schedule of basing its payout on cash flows generated over the past year. Needless to say, Silver Wheaton's dividend payment has begun sliding as well.

The fevered hope at the moment is that precious-metal prices continue their slow climb back, or at the very least don't fall further. That way, the spending cuts and production delays these companies have engineered will be enough to stave off having to cut their payouts further. Yet if price weakness returns, look for gold to lose even more of its luster.

When gold is good, it shines, When its bad, it's dirtier than a lump of coal. Since 2000, gold has outshined the stock market with strong returns, but more recently has become a canary in a coal mine. The Motley Fool's new free report "The Best Way to Play Gold Right Now" dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!

Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On July 22, 2013, at 9:00 AM, AnkurVarsheny wrote:

    Well that's not a troubling development. It's simply cause and effect. Gold prices have gone down, this is affecting their cash flow, and hence the dividend slash. When price goes up again which will certainly in some time may be within a year dividend will come back.

  • Report this Comment On July 22, 2013, at 9:29 AM, minin4au wrote:

    Perhaps it is just poor dividend policy. Investors by and large are comfortable with a fixed dividend. Companies can budget cashflows easier, and investors can plan better for the extra money. It was perceived as a big deal when a company changes the dividend, as it signals a long-term belief in the direction of the company.

    By having a variable dividend, it magnifies the variability of an already volatile industry sector. Quarterly changes in the dividend just confuse people. I think the gold-linked dividend was poorly thought out.

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Related Tickers

12/31/1969 7:00 PM
AUQ.DL $0.00 Down +0.00 +0.00%
AuRico Gold CAPS Rating: ***
EGO $4.13 Down -0.12 -2.82%
Eldorado Gold CAPS Rating: **
HL $6.00 Down -0.16 -2.60%
Hecla Mining CAPS Rating: **
NEM $39.56 Down -1.21 -2.97%
Newmont Mining CAPS Rating: ***
SLW $27.82 Down -0.87 -3.03%
Silver Wheaton CAPS Rating: ****