Gold miners are not known for their shareholder returns. In fact, miners are often criticized for not returning enough cash to shareholders, choosing instead to spend their income on expensive capital projects.
That said, recently miners have changed course and are now offering dividends to shareholders but with some of these yields touching 4-5%, they are way above the market average.
Can they afford it?
Gold Dividends
| Company | P/E | Dividend yield | EPS | DPS | Payout Ratio |
|---|---|---|---|---|---|
| Barrick Gold Corporation (USA) (NYSE:ABX) | 6 (forward) | 4.1% | $3.2 (projected) | $0.8 | 25% (projected) |
| Goldcorp Inc. (USA) (NYSE:GG) | 15.9 | 2.2% | $1.8 | $0.6 | 29% |
| Newmont Mining Corp (NYSE:NEM) | 10.1 | 4.3% | $3.2 | $1.4 | 45% |
| Yamana Gold Inc. (USA) (NYSE:AUY) | 22.2 | 2.4% | $0.5 | $0.3 | 50% |
As Barrick made a loss last year I have used projected earnings figures in the chart above.
Newmont Mining has the highest dividend yield in the group at 4.3% and the yield appears to be well-covered with a payout ratio of 45%, the dividend is $1.4 per share and the company is earning $3.2 per share. Indeed, all four companies look as if they can afford their payouts based on Earnings Per Share (EPS) cover.
But how do their cash flows look?
Barrick Gold Corporation
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $783 | $1,690 | $1,640 | $1,090 |
| Capital Expenditures | -$1,610 | -$1,510 | -$1,870 | -$1,440 |
| Net Investing Cash Flow | -$1,590 | -$1,560 | -$1,980 | -$1,500 |
| Cash Available For Financing Activities | -$807.00 | $130.00 | -$340.00 | -$410.00 |
| Cash Dividends Paid – Total | -$200 | -$193 | -$195 | -$201 |
| Issuance/(Reduction) of Debt, Net | $566 | ($8) | ($18) | $852 |
| Dividend Cover From Cash Available For Financing Activities | 0 | 0.7 | 0 | 0 |
| Free Cash Flow | -$1,030 | -$10 | -$429 | -$549 |
Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
Previously the largest gold miner in the world by market capitalization, Barrick Gold Corporation (USA) (NYSE:ABX)’s dividend payout does not appear to be secure. The company has been able to cover its dividend payout with operating cash flow after the deduction of investing activities in only one out of the past four quarters. Indeed, it would appear that the company is spending much more than it can afford on CAPEX.
So, based on the fact that Barrick Gold Corporation (USA) (NYSE:ABX) cannot actually afford its dividend , I believe the payout is in jeopardy.
Verdict: unsafe
Goldcorp Inc
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $553 | $411 | $774 | $287 |
| Capital Expenditures | -$692 | -$456 | -$895 | -$483 |
| Net Investing Cash Flow | -$615 | -$650 | -$650 | -$1,080 |
| Cash Available For Financing Activities | -$62 | -$239 | $124 | -$793 |
| Cash Dividends Paid – Total | -$112 | -$105 | -$107 | -$123 |
| Issuance/(Reduction) of Debt, Net | $0 | $0 | $0 | $1,490 |
| Dividend Cover From Cash Available For Financing Activities | 0.0 | 0.0 | 1.2 | 0.0 |
| Free Cash Flow | -$250 | -$150 | -$228 | -$318 |
Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
Goldcorp Inc. (USA) (NYSE:GG) recently surpassed Barrick Gold Corporation (USA) (NYSE:ABX) as the largest gold miner in the world by market cap. However, the company is not in a better financial position than Barrick and even though the firm offers the smallest payout of the group, it still cannot afford it.
Only in the Fourth Quarter (Q4) 2012 has the company had enough cash to be able to suitably fund its payout. In the other three quarters the company has had to raid its cash balance to fund the payout or borrow. The company only borrowed in Q1 2013 according to the table above, but the amount borrowed is more than enough to keep the company and payout secure for a year or so)
Overall, Goldcorp Inc. (USA) (NYSE:GG) cannot cover its payout with cash available and needs to borrow to keep funding its dividend payout.
Verdict: unsafe
Newmont Mining Corp
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $347 | $574 | $842 | $433 |
| Capital Expenditures | -$882 | -$816 | -$816 | -$510 |
| Net Investing Cash Flow | -$859 | -$737 | -$813 | -$507 |
| Cash Available For Financing Activities | -$512 | -$163 | $29 | -$74 |
| Cash Dividends Paid – Total | -$174 | -$174 | -$174 | -$211 |
| Issuance/(Reduction) of Debt, Net | -$37 | -$15 | $161 | $80 |
| Dividend Cover From Cash Available For Financing Activities | 0.0 | 0.0 | 0.2 | 0.0 |
| Free Cash Flow | -$709 | -$416 | -$148 | -$288 |
Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
It appears that Newmont Mining Corp (NYSE:NEM) cannot afford its 4.3% dividend yield either.
Only in one quarter, Q4 2012, out of the last three has the company had cash available to return to shareholders, after removing the cost of investing activities from operating cash flow. In the other three quarters the company had no money available after CAPEX spending and dividends have been paid through borrowing and cash balances.
Based on the fact that the company has not had positive free cash flow at all during the past four quarters Newmont’s dividend looks unsafe.
Verdict: unsafe
Yamana Gold
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $123 | $351 | $360 | $169 |
| Capital Expenditures | -$267 | -$638 | -$361 | -$241 |
| Net Investing Cash Flow | -$253 | -$609 | -$367 | -$278 |
| Cash Available For Financing Activities | -$130 | -$258 | -$7 | -$109 |
| Cash Dividends Paid – Total | -$42 | -$40 | -$48 | -$49 |
| Issuance/(Reduction) of Debt, Net | $3 | ($5) | ($2) | $0 |
| Dividend Cover From Cash Available For Financing Activities | 0.0 | 0.0 | 0.0 | 0.0 |
| Free Cash Flow | -$186 | -$326 | -$48 | -$121 |
Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
Last on the list is Yamana Gold Inc. (USA) (NYSE:AUY) and once again the company cannot afford its dividend based on its cash flows. Cash available for financing activities has been negative for the last four quarters and the company has continued to issue dividends despite the fact that they are not covered in any way.
Overall it is easy to draw a conclusion for Yamana’s dividend, it is unsafe as the company is spending all of its incoming cash flows on CAPEX. Indeed, in some periods the company has been spending double its operating cash flow on investing activities.
Verdict: unsafe
Conclusion
Gold miners have started returning cash to shareholders, but their high CAPEX and operating costs are impacting their ability to keep paying current dividends without dipping into cash reserves or increasing borrowing.
Overall, gold miners may have started offering a decent dividend yield, but I do not believe these yields are safe.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Gold Dividends Unsafe originally appeared on Fool.com and is written by Rupert Hargreaves.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
