“Income-seekers could be forgiven for not knowing which way to turn, after interest rate cuts, further drops on government bond yields and – perhaps most damagingly of all – over 300 dividend deferrals, suspensions, cuts or cancellations in the UK alone, as firms have withheld £29.5 billion in payments in an attempt to weather the viral outbreak and oncoming recession as best they can,” says Russ Mould, AJ Bell investment director. “But as many industries and companies see their cash flow shrivel, one niche area is starting to see cash flow grow and flourish and that is gold mining.
“Gold is holding firm around $1,700 an ounce, some 30% higher than a year ago and this is quite naturally bringing benefits to those firms who go exploring and drilling for the precious metal.
“In its first-quarter results last week (5 May), Newmont Mining revealed a 43% year-on-year increase in sales, a 59% increase in operating profit and a three-fold increase in free cash flow (after interest, tax, working capital and capital spending) as higher gold prices supplemented increased metal production.
“This continued a pattern across the ten biggest members by weighting in the NYSE HUI ‘Gold Bugs’ index.
“Since 2015, when gold bottomed at barely $1,050 an ounce and miners were writing down the value of their assets, aggregate annual free cash flow has surged from $341 million to $5.6 billion.
Source: Company accounts. Top ten stocks by weighting in the NYSE Arca HUI Gold Bugs index are: Newmont Mining, Barrick Gold, Agnico Eagle, Novagold Resources, Alamos Gold, Equinox Gold, Kinross Gold, Eldorado Gold, B2Gold and AngloGold Ashanti
“Better still, that surge in free cash flow – after taxes, interest, working capital and capital expenditure needs had all been met – prompted a 78% increase in Newmont’s quarterly dividend to $0.25 a share.
“At a time when 43 FTSE 100 firms have cut, cancelled or deferred their dividends, this may catch the eye of income-seekers.
“The bad news is that the aggregate dividend yield across the ten biggest members of the HUI index was 1.1% in 2019.
“The good news is that 2019’s aggregate payments were less than half of 2012’s peak and if gold stays firm or goes higher still that sum could soon be within reach, given that the production weighted, all-in sustained cost (AISC) of production across those ten names was $949 last year. Any further surge in gold prices thanks to further money creation or deficit accumulation could turn gold miners into cash machines and the source of income that many investors crave.
Source: Company accounts, Refinitiv data. 2020E annualises last declared quarterly payments and uses market caps as of 8 May to calculate the 2020 yield.
“Such a surge is far from guaranteed. If COVID-19 can be contained (and then eradicated) quickly and the global economy can rebound sharply, investors may not need gold’s perceived defensive qualities and any drop in the metal’s price would erode miners’ cash flow and ability to pay dividends.
“But Governments and central banks, already running lofty deficits or swollen balance sheets, are going “all in” as they try to keep economies going during the lockdowns that are being imposed as part of the fight against the viral outbreak. The US Federal Reserve’s balance sheet has grown by $2.5 trillion, or 62%, since February while the US Government has begun to talk of adding to the $3 trillion in fiscal stimulus already provided. On this side of the pond, the UK Government is extending its furlough scheme until October and some economists think the Bank of England will add to its Quantitative Easing scheme at its June policy meeting.
“The longer the lockdowns last, the greater the economic damage and the greater the amounts that Governments and central banks feel obliged to provide. Equally, they face a tricky balancing act between providing consumers with support when it is needed and weaning the world off helicopter money – the longer that money is supplied, the greater the pressure will be to keep on creating it out of thin air.
Source: FRED – St. Louis US Federal Reserve, Refinitiv data
“Governments and central banks had not got around to withdrawing the stimulus doled out in the wake of the Great Financial Crisis a decade ago before they had to start reapplying it and the chances of this latest round of fiscal and monetary largesse being sterilised feel slim, even once the viral outbreak is finally contained.
“This could be one reason why the gold price is up so much over the past year and further bouts of fiscal and monetary stimulus could give the precious metal a further boost, especially if the pattern formed after the Federal Reserve embarked upon its first phase of QE in autumn 2008, with QE-II, Operation Twist and QE-III coming along in quick succession, to help drive gold from $750 an ounce to its ultimate all-time high near $1,900 in summer 2011.
“In this context, it is also worth noting that China is snapping up gold assets when it can.
“Zijin Mining acquired Canada’s Continental Gold for C$1.4 billion in cash back in March and earlier this month Shandong Gold agreed to acquire junior Canadian gold digger, TMAC Resources, for $149 million.
“Leading Western precious metal miners had already begun to jockey to position and snap up assets which they clearly felt offered value. Canadian firms Endeavour Mining and Silvercorp Metals swooped for Semafo and Guyana Goldfields back in spring – the former having been rebuffed in its efforts to snap up FTSE 250 constituent Centamin – while 2019 saw the consummation of two huge deals, as Barrick Gold merged with Randgold Resources and Newmont Mining bought Goldcorp.
“Investors could just dismiss this as necessary consolidation within an industry that failed to shine from an investment perspective for much of the last decade. But they could take note and at least ask themselves why gold executives in both the West and China are moving to acquire assets in such a hurry. Perhaps they feel there is value – and cash flow – to be had when they are hard to find elsewhere.”
