All good things must eventually come to an end, but for metal enthusiasts it was an incredible 12-year ride! Lately, however, commodities prices of all forms have been languishing. Both gold and silver have had their moments where they've generated short-term strength, but there haven't been any sizable rallies to speak of for either metal in about three years.
Source: Jennifer Woodard Maderazo, Flickr.
Traditionally, gold and silver are viewed as hedge investments in that they act as a hedge against the prospect of inflation caused by the Federal Reserve printing money. In addition, metal prices tend to move higher when fear and uncertainty are spiking as they represent tangible safe-haven investments. Unfortunately for those invested in physical metal or metal miners, you've caught no breaks. The market has marched precipitously higher with the VIX, an index that measures fear, hitting multi-year lows, and inflation remaining well below its historical average.
Source: Mark Herpel, Flickr.
But, could things be readying to change? Even though the S&P 500 and Dow Jones Industrial Average screamed to numerous all-time highs this year, there are plenty of reasons, which I've laid out previously, why this market rally could be nearing a top, and why fear and uncertainty might soon be reintroduced much to the delight of mining and physical metal investors. That's why I suggest taking a closer look at a few metal mining dividend-paying stocks that could be worth your attention, as well as one in particular that would be best left buried underground.
Keep in mind that businesses that pay a dividend are perceived to be healthier than those that don't, and any business willing to share its profits with investors demonstrates that it has their best interests in the forefront. It also doesn't hurt that dividends can help ease the pain of metal price downturns.
Two mining dividends you can buy right now
Without further ado, here are two mining dividends you can consider buying right now.
Silver Wheaton (SLW +2.70%)
Although Silver Wheaton's latest quarterly payout is down 50% from its peak payout in April 2013, there's still a lot to like about this company.
To begin with, Silver Wheaton isn't a traditional miner. It doesn't handle mine development, upkeep, or production. Instead, it's a royalty interest company that provides metal miners (predominantly silver miners) with upfront capital to develop or expand an existing mine in return for receiving silver and/or gold production from that mine at a low fixed cost over a long period of time (sometimes encompassing the life of the mine). This is important for two reasons. First, it absolves Silver Wheaton of any additional upkeep or labor costs. Secondly, it locks in low fixed prices over the long term, so the company's profit potential is often very predictable, which investors generally prefer.
Silver Wheaton investor presentation. Source: Silver Wheaton.
Per the company's first-quarter press release Silver Wheaton's average cash costs were just $4.12 for each ounce of silver and $381 for each ounce of gold. Even with silver prices more than 55% off their highs and gold prices down roughly $600 an ounce from their peak, they'd each need to lose more than two-thirds of their current value to make Silver Wheaton's long-term deals unprofitable.
Of course, there are risks involved. Silver Wheaton's greatest liability is the fact that it's reliant on the production of mines it has invested in. If production snafus occur (and "snafus" occur in the mining sector more often than you'd think) then Silver Wheaton could realize less in production. Similarly, if commodity prices are falling it could disincentivize Silver Wheaton's contracted miners from boosting their production.
Overall, investing in Silver Wheaton gives income-investors a close way of mirroring silver's price movement while actually collecting a dividend. On a forward basis investors are only going to net around a 1% yield based on its prior two payouts in 2014. However, with a payout ratio of slightly less than 30% based on the Street's projected 2014 EPS there's plenty of room for improvement.
Yamana Gold (AUY +0.00%)
Of non-royalty interest companies I "mirror, mirrored" the wall and Yamana Gold stood out as the best of all.
Source: Yamana Gold.
Similar to Silver Wheaton, Yamana Gold also cut its quarterly payout substantially in 2014 to reflect that gold price fell by roughly $475 an ounce. in 2013. However, among individual miners Yamana Gold stands out for a number of reasons, as I outlined this past April, when it once again took the top honor as the best gold miner from a statistical perspective.
Yamana's biggest boost comes from the fact that its mines are full of byproducts that it can use to offset the cost of its gold production. Of the 10 largest gold miners Yamana had the second-lowest cash cost per ounce, trailing only New Gold in the Jan. through March quarter.
Yamana also has reasonably low debt levels, even following its joint acquisition of Canada's Osisko Mining in June in collaboration with Agnico Eagle Mines. What this means is Yamana is nimble enough to expand its existing production or make acquisitions if opportunistic situations present themselves.
As reported by Yamana in the first-quarter back in late April, the company had all-in cash sustaining costs, including benefits from its byproducts, of $820 per gold equivalent ounce. In other words, gold would have to tumble around $500 an ounce for Yamana to be unprofitable, providing ample margin of safety for investors, especially after its aggressive Osisko joint-purchase.
Yamana's current payout ratio of 68% based on fiscal 2014's projected EPS isn't likely to induce a payout boost over the next quarter or two. However, production expansion, primarily from the inclusion of its share of Osisko, and tight cost controls will yield a projected payout ratio of just 37% in 2015. To me this signals the strong potential for a possible dividend increase next year if gold prices cooperate.
One mining dividend to avoid
But, not all dividends are created equally. In fact, there's one mining dividend that investors may be wise to avoid at all costs:
Gold Fields (GFI +1.00%)
It's no secret that gold miners have been cutting their payouts, as their dividend is often tied to the underlying price of gold. Yet, Gold Fields, a gold miner in Africa, South America, and Australia, recently slashed its semi-annual payout to what is its lowest stipend in 26 years. Its latest payout of $0.019932 is almost comical next to its previous semi-annual dividend of $0.30303 per share just two years prior.
Source: Gold Fields.
There are a couple of factors at work here, but the primary contributor that entices me to suggest you keep your distance from Gold Fields is the company's high all-in sustaining costs. According to Gold Fields' second-quarter update the company remains on track to produce all-in sustaining costs of $1,125 an ounce in 2014 -- and that's an improved figure! That's more than $300 per ounce higher than Yamana's result in its latest quarter.
The biggest detriment to Gold Fields is its high labor costs of operating in Africa. African mines have been prone to labor and production disruptions over the past couple of years, and are always a threat to have production interrupted by regional or political instability. Because these factors are largely out of Gold Fields' hands there's not much it can do to counteract these external costs.
Even with Gold Fields remaining profitable on an adjusted basis, it doesn't seem worthwhile to you're your hard-earned money with the company missing Wall Street EPS estimates for three straight years. Seriously ... not kidding -- for 11 straight quarters Gold Fields has booted Wall Street's expectations, often by a mile. My suggestion is to leave this miner and its dividend buried in the ground.
