Gold Rich, But Cash Poor

04/26/2013 5:00 am EST


Jim Jubak

Founder and Editor,

One gold miner is reducing its dividend to shore up its capital budgets during the metal's collapse, which may set a trend among some of its peers, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

More bad news for gold mining companies—although not for all miners: Newmont Mining (NEM) cut its dividend by 17.6%.

Now, a dividend cut of any sort is extremely unusual. Boards of directors consider a dividend carefully before instituting one because they know that investors take a dividend increase or decrease as an important sign from inside the company about its long-term prospects.

A 17.6% dividend cut, then, is a big deal. Both because companies go out of their way to avoid sending out such a negative signal, and because 17.6% is a big cut. So what’s going on here?

It’s called a funding gap. With the price of gold plunging from $1,778 an ounce in October to the neighborhood of $1,400 an ounce last week, some gold mining companies are facing a cash crunch.

These companies set their capital spending plans to explore and develop new sources of gold, and to expand existing mines, based on selling their current production at $1,600 or $1,700 an ounce. Now that gold is so much lower, the companies face a series of unpalatable alternatives:

  • They can cancel or postpone current spending (and take a beating in the stock market as analysts cut their estimates for future production).
  • They can raise money in the capital markets, and so either add debt or dilute current shareholders by selling stock.
  • They can cut dividends, take cash that would have gone to shareholders, and use it to fund capital spending.

That looks like what Newmont has decided. The company was one of the first gold mining companies to increase its dividend in order to compete for the investor dollar against gold and gold ETFs that didn’t pay a yield. Before the announced cut, Newmont was paying a 4% yield.

And there are other gold miners that might be facing this kind of crunch, and might look to cut dividends—if they pay any. Deutsche Bank put together a short list that included Barrick Gold (ABX), Kinross Gold (KGC), and of course Newmont Mining. On average, Deutsche Bank cut its target prices for these stocks by 30%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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