With Gold Up, Miners Face Payouts Versus Production Dilemma
Comment of the Day

February 24 2020

Commentary by Eoin Treacy

With Gold Up, Miners Face Payouts Versus Production Dilemma

This article by Justina Vasquez, Danielle Bochove and Steven Frank for Bloomberg may be of interest to subscribers. Here is a section:

Gold producers are “gushing cash,” said John Hathaway, senior portfolio manager at Sprott Asset Management, in support of the higher dividends. “They are in a position to raise their dividend,” he said. “And there will be boardroom pressure and shareholder pressure to do that.”

The industry has been blasted in the past for underspending on production, overspending on acquisitions and piling up debt. Now, though, after years of fat-trimming, miners and their investors are well-positioned to gain from the higher prices. That’s allowed companies including Barrick and Newmont to boost free-cash flow and, to varying degrees, reward shareholders.

Earlier this month, though, Mark Bristow, Barrick’s chief executive officer, sent a warning shot across the bow of the industry. Even if all current projects work out, he said, gold supply will still fall 30% globally by 2029. While sinking supply would be bullish for bullion prices, margins and revenues could be hit if companies are forced to mine lower-grade or hard-to-access deposits.

Eoin Treacy's view

All-In-Sustaining-Cost estimates were introduced following the gold crash because investors were tired of seeing every available cent poured into investments in new production. It’s easy to see why miners were anxious to invest. The gold price had been in a bear market for decades and they had not been able to source capital for exploration or new projects. Higher prices ensured the survival of the sector but it came at the expense of stock market performance.

Today the mining community is shy about investing in new supply. They have been chastened from making ambitious plans by the previous bear market and banks are in no mood to lend based on a volatile price history. The pace of M&A activity is therefore likely to pick up since large miners will be willing, and now able, to pay up for proven resources among the mid-tier and junior miners.

The VanEck Vectors Gold Miners ETF (GDX) completed its base formation on Friday and improved upon the breakout today.

The coincident weakness in the oil sector represents a tailwind for gold miners since it boosts margins further.

Gold failed to hold its intraday high today, as stock markets steadied. Some consolidation of recent gains looks likely amid a short-term overbought condition.

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