Miners captured ~85% of the gold price increase in 2010. Gold miners continue to benefit from strong execution and favorable gold price environment in 2011.
Several companies have announced an increase in dividend over the last 12- 18 months. In a range-bound gold environment, stable dividend yield should improve the attractiveness of equities relative to gold-linked direct investments. Current dividend yield stands at 0.9% for ABX and ~2% for NEM.
At current gold prices, miners should generate strong cash flow, but continue to face a challenge pleasing investors with how the cash will be deployed. We believe current valuations reflect risk of dilutive acquisitions. P/Es have declined ~50% since early 2010.
MS Commodity team sees three challenges to the sustainability of the current record level of investment demand: (1) the growing prospect of the withdrawal of QE in the US at the end of June, (2) the growing possibility that inflationary risks in emerging markets will peak in H1 2011 as food price pressures ease, and (3) a plateau in inflation risks from rising energy prices.
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