Dividend increases factored large for gold miners on the back of booming cash flow in the third quarter, as the miners sought to reward shareholders and keep cash from piling up on balance sheets, with a clear upward trend in dividends for some of the sector's heavyweights.
|Gold pouring at Kinross' Fort Knox mine in Alaska. The Toronto-based gold miner recently reinstated a quarterly dividend.
Source: Kinross Gold Corp.
Newmont Corp. raised its dividend 60% to 40 cents per share quarter over quarter, and Barrick Gold Corp. boosted its third-quarter dividend by 12.5% to 9 cents per share. Agnico Eagle lifted its dividend by 75% to 35 cents per share in the third quarter, and Kinross Gold Corp. reinstated a quarterly dividend, setting it at 3 cents per share. AngloGold Ashanti Ltd. announced plans to double its payout ratio to dividends from 10% to 20% of free cash flow.
"It has certainly been good to see companies that eliminated dividends six or seven years ago reinstating them now and certainly good to see, from an industry perspective, companies growing dividends," Agnico Eagle Mines Ltd. Vice Chairman and CEO Sean Boyd said during an Oct. 29 earnings call.
The increasing dividends harken back to an era when the gold mining sector was better known for strong payouts, Franco-Nevada Corp. Chairman David Harquail told S&P Global Market Intelligence on Nov. 27, pointing to a slew of mines in South African and Canadian gold camps in the early 1900s.
"All these names were ... fabulous dividend producers," Harquail said. "They didn't have 'progressive' dividend policies. It was more 'aggressive' dividend policies."
Dividends fell out of favor as investors and miners looked for growth over profits starting in the 1970s, Harquail noted. But they are becoming popular again as investors seek cash flow over growth. "The gold companies are now in a competitive race to be relevant to these investors," he said.
Increasing dividends, and the policies behind them, were a key discussion topic on many third-quarter earnings calls.
Newmont President and CEO Thomas Palmer said the company's base dividend is set assuming a gold price of $1,200 per ounce, equating to about $1 per share on an annual basis. Above $1,200/oz, in $300/oz increments, the Colorado-based miner will aim to pay out between 40% and 60% of additional cash flow, Palmer said. In the third quarter, the company used a $1,500/oz gold price for its dividend calculation.
"We will typically reassess the gold price semiannually and recommend incremental dividend increases when we believe gold prices have rebased at levels of at least $300/oz higher," Palmer said during the company's third-quarter earnings call.
Barrick President and CEO Mark Bristow described taking a conservative approach to its dividend increase while stressing the importance of having a healthy balance sheet. "And right now, I think a stronger balance sheet is better," he said on a Nov. 5 earnings call.
For gold miners, the flurry of dividend increases comes on the back of strong metal prices. Gold traded just over $1,500/oz at the outset of the year and consistently climbed, peaking at more than $2,000/oz in early August. The price has pulled back and recently traded around $1,800/oz. In turn, with relatively stable operating costs, higher prices spurred increasing cash flows for many gold miners in the quarter.
"If gold can stay above $1,500/oz, there is adequate free cash flow to maintain the dividend flows and organically grow," Paradigm Capital analyst David Davidson told Market Intelligence on Nov. 27.
Like other analysts, Davidson took a bullish stance on gold's prospects into 2021. He noted that gold has come under pressure in recent trading and said he expects the recent price decreases to slow by the end of the year.
"The world is still awash in liquidity and, with [President-elect Joe] Biden at the helm, expect a further stimulus bill early in 2021," Davidson said. "Therefore the dollar is going lower [and] inflation is on the horizon."
As for the sustainability of dividends, Harquail said there is risk that miners deplete reserves, but this may be better for investors in some cases. "So often, returns from great mines would have been better distributed to shareholders rather than having the company trying to reinvest to chase inferior projects and acquisitions," he said.