With all-in sustaining costs of more than $1,200 an ounce, it shouldn't have surprised many investors that IAMGOLD (NYSE:IAG) cut its dividend, though the 11% plunge the stock took following the announcement suggests they were anyway.
Because gold miners were never particularly generous with their dividends, they sought more gimmicky ways of attracting investors, such as Newmont Mining (NYSE:NEM) and Eldorado Gold linking their dividend to the price of gold or paying it in actual bullion as Gold Resource (NYSEMKT:GORO) did. Others like Barrick Gold (NYSE:GOLD), Goldcorp (NYSE:GG), and IAMGOLD were wildly hiking their payouts by double-digit percentage increases two years ago.
While that garnered them attention in a rising price environment, the subsequent collapse of gold's market value has led miners to not only sell assets and cut capital expenditures but to cut or eliminate altogether the payouts they made to investors.
In March, Australia's Newcrest Mining suspended its dividend payment, followed in April by Newmont cutting its dividend by 18%, and Barrick slashing its payout by 75% in August. What had once been a portfolio of high-flying stars full of promise as gold marched inexorably to $2,000 per ounce and beyond, has instead become a motley assortment of grubby miners scrounging among the seat cushions to find enough spare change to keep their operations going.
Investors need to ask themselves not only which miner will be next to cut its dividend, but of those who've already done so, will it be enough?
Gold miners as a group are heavily indebted. Barrick has watched its debt mount to more than $15.4 billion and interest payments surge 20% from the year-ago period; Newmont has more than $6.5 billion worth of long-term debt on its balance sheet; and Goldcorp, $2.3 billion, giving them total debt-to-EBITDA ratios of 2.2, 1.9, and 1.4, respectively. But since that's calculated on a time frame that extends back to last December when gold was trading at around $1,700 per ounce, the yellow metal's precipitous 25% tumble since then means those ratios going forward are likely to soar.
The debt-to-EBITDA metric gives us a sense of how flexible the miners can be in meeting the many demands on cash flows they face, with a lower ratio suggesting they'll be able to cope better, particularly as pricing remains pressured. Moody's warned this past summer that gold below $1,300 per ounce would put their credit ratings under review while at $1,200 per ounce or less significant restructuring of operations would need to occur to maintain their ratings.
For those low-cost producers like Yamana Gold (NYSE: AUY) that have all-in sustaining costs well below $800 per ounce, weathering the storm should not be a problem compared to those higher-cost producers like IAMGOLD and AngloGold Ashanti whose ASIC hovers near gold's current pricing.
We've seen that playing out already as the mad dash to acquire gold assets regardless of quality is now leading miners to put their projects on ice. Barrick's Pascua-Lama gold project in Chile has been indefinitely suspended, Anglo American backed out of developing the Pebble copper and gold project in Alaska, and Goldcorp suspended its Cerro Negro project in Argentina.
The bloodletting in gold hasn't finished yet, and despite whatever long-term bullishness there may be for physical gold, it's clear the miners themselves still have a deep hole to dig themselves out of.