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The price of gold continues to decline and gold miners are feeling the pressure. However, many mid-cap gold miners such as IAMGOLD (NYSE: IAG ) , Yamana Gold (NYSE: AUY ) , and Gold Fields (NYSE: GFI ) are still offering a dividend yield above the market average of 1.9%. But are these yields secure?
Cost of production
To try to answer this question, I'm going to take a look at each company's all-in sustaining cash cost of production, or AISC, to pinpoint how much profit per ounce each is currently generating at current price levels.
Gold Fields' AISC came in at $1,089 per ounce of gold produced during the third quarter. The company also reported that its total all-in cost came in at $1,176 for the period, indicating that the company is only just profitable with gold at current levels. However, more importantly, these all-in cost figures were down year on year, which indicates that Gold Fields' management is taking action to try to reduce rising costs.
Unfortunately, IAMGOLD has not been able to control its costs like Gold Fields. IAMGOLD's AISC per ounce of gold produced came in at $1,216 for the three months ending September 30. Furthermore, this AISC figure was up 14% year on year. I don't need to highlight that this figure is not good and indicates that Gold Fields' profit margins are razor thin with gold trading at current levels.
Meanwhile, Yamana reported an AISC per gold equivalent ounce produced of $888 including co-products for the three months to September 30. This is one of the lowest AISC costs per ounce produced within the gold industry, indicating that Yamana is an extremely cash generative company. Indeed, the company's cumulative dividend payout of nearly $50 million for the third quarter was covered twice by cash generated from operations. These strong fundamentals indicated to me that Yamana's payout is safe.
While Yamana's dividend payout looks safe, we need to take a closer look at the financial stability of both IAMGOLD and Gold Fields.
To me IAMGOLD's and Gold Fields' AISC of production per ounce of gold produced is too close to the current gold price for comfort. I also feel that with such high costs, both companies could be facing negative profit margins if the price of gold drops much further.
But with so many non-cash items affecting the two companies' income statements, the best way to establish the sustainability of their payouts is to study cash flows.
For IAMGOLD, it very quickly becomes apparent that the company cannot sustain its dividend payout. In particular, during the third quarter, the company paid out a cumulative $55 million in dividends, but generated only $63 million in cash from operations. What's more, the company spent $131 million on capital projects. All in all, this gives us a free cash flow including dividends of negative $112 million.
Unfortunately for IAMGOLD this negative free cash flow was not a one off. For the past five quarters the company has produced a negative free cash flow of $132 million per quarter, not sustainable. With the current cumulative dividend payout costing IAMGOLD around $100 million a year, it looks as if it could be quickly cut to preserve cash.
Gold Fields on the other hand looks to be in a better position. Gold Fields has been free cash flow positive in two of the past five quarters. In addition, the company's dividend payout during the first quarter of this year was covered around three times by cash from operations. So, I would suggest that the dividend payout is safe, but a small cut could be on the way as the price of gold continues to decline.
What's more, Gold Fields has already withheld its interim dividend payment after the company posted a net loss in the second quarter after posting some non-cash writedowns.
So in conclusion, the only company out of these three that looks as if it can sustain its dividend payout is Yamana. At present, both IAMGOLD and Gold Fields are reviewing their dividend policies, which could indicate that a cut is soon to come.
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