Most people don't think dividends when they envision gold miners. But Yamana Gold (AUY) just announced something that would catch the attention of even the most dyed-in-the-wool dividend lover: It told the world that it plans to double its dividend. So, what's the story here and should investors be excited? Maybe and maybe not. Here's a quick review of what's going on.
A big number (but not really)
To put some scope on Yamana's dividend plans, it is going to increase its annual dividend from $0.02 to $0.04 a share. That's not a huge number, but it is a 100% boost. That said, add in the fact that the gold miner's stock trades hands at just a couple of bucks a share and the dividend change is more material than the absolute number would at first appear. In fact, it will take the yield from roughly 0.9% to 1.8% based on the recent stock price.
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Before you suggest that this isn't an interesting figure, note that some of the largest names in the industry only offer dividends at or below the 2% mark. In fact, compared to similarly sized intermediate mining peers, Yamana will offer one of the largest yields. Many of its closest peers don't pay any dividends at all. So, this is a big deal, even if the gold mining space isn't exactly known for dividends.
What's behind the change?
The big shift here is actually driven by a large asset sale, with Yamana recently announcing the $1 billion disposition of the Chapada Mine. It will receive $800 million up front, with the potential to receive the rest based on gold prices and the execution of development projects at the mine. It will also receive a 2% royalty as part of the transaction.
AUY dividend yield (TTM). Data by YCharts.
The sale, which still has to go through customary approval processes, is expected to close in the third quarter of the year. The bulk of the proceeds, meanwhile, are earmarked for debt reduction. Yamana will first pay down its revolving credit facility, and then work on near-term debt maturities. Management hopes to reduce net debt to EBITDA from 2.5 times to a very modest 1.5 times (it projects a drop to just 1 times by 2021, assuming it hits all of its financial and operational targets).
It expects these debt reduction efforts to result in annual interest saving of around $35 million. Based on the roughly 950 million shares outstanding at the end of 2018, the jump in the dividend will be roughly $19 million. So, the hike is more than covered by the projected reduction in interest expenses. In other words, the dividend increase looks to be on solid ground.
But what about the future? Yamana is a gold miner and selling assets isn't a great way to build a mining business. On that score, the company expects gold production to be flat year over year in 2019. In 2020, it is projecting a modest 2% increase. However, it believes it has internal projects that could materially grow that number in 2021, pushing production as much as 15% higher.
What's interesting about this sale, though, is that it will not only allow Yamana to reduce leverage, but it will also be able to cut its expenses because it won't be dealing with the Chapada Mine anymore. At this point, the annual savings are estimated to be around $75 million a year. This should allow the miner to raise its exploration budget by a targeted $20 million without any material problems. And that, in turn, should go a long way to helping Yamana achieve the 15% production increase it hopes to see in 2021.
AUY market cap. Data by YCharts.
All in, the company's mine sale looks like it will materially improve Yamana's financial position without significantly reducing its long-term appeal as an investment. And while material production growth is probably a few years out, it is rewarding shareholders with a huge dividend increase today to share the benefit of the asset sale.
A much better story
Is Yamana Gold the best gold investment around? Probably not, most investors would probably be better off with a streaming and royalty company. And, as a mid-tier player, Yamana has some scale behind it, but not nearly as much heft as industry giants like Barrick or Newmont. That said, Yamana's decision to sell the Chapada Mine materially alters its business for the better in many ways, including less leverage, lower costs, and the ability to return more cash to shareholders via dividends. For investors willing to take on the uncertainty of a mid-tier gold miner, Yamana is worth a deep dive today as it repositions for the future.
