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Peter Koven: To boost share prices, gold miners should pay more dividends

Section: Daily Dispatches

Gold Paying Dividends

By Peter Koven
National Post, Toronto
Friday, October 21, 2011

Gold mining investors got two interesting pieces of news to chew on this week. One demonstrated why equities have largely underperformed the gold price over the last few years, and the other showed one way that trend could potentially end.

The bad news came from Agnico-Eagle Mines Ltd., which stunned the street on Wednesday by shutting down its Goldex mine because of rock stability problems. As Agnico shares tumbled 18%, investors couldn't help but wonder: Why buy gold stocks when the exchange-traded funds have much less risk? The Goldex debacle seemed to embody everything wrong with the miners, who are creating little shareholder value despite record profits.

The positive news got a lot less attention. On Monday, Eldorado Gold Corp. announced an enhancement to its dividend policy that links the payout more closely to the gold price. The company demonstrated that its dividend per ounce of gold sold will rise progressively from US$100 (when gold is less than US$1,549 an ounce) to US$225 (when gold reaches US$1,850).

The price-linked dividend is a smart strategy, experts say, because it attracts yield-seeking investors while forcing reluctant miners to part with more of their cash when gold prices go up.

... Dispatch continues below ...


Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit,
Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

"The reality is that gold mining companies have been criticized, and rightfully so, for not [offering] what people look for in real businesses. And that is yield," Eldorado chief executive Paul Wright says. "That there has been such demand for ETFs is largely a reflection of the inability of gold mining companies to provide an alternative in terms of yield."

Gold miners have been raising their dividends over the past year, but they are still nominal at best. Most senior producers pay a yield between 0.5% and 1.5%, which has not been enough to draw new investors. Mr. Wright's view is that a level of about 2% would be taken more seriously, and it would provide a genuine advantage for equities that you can't get from ETFs.

The price-linked dividend is one way to get there, and the leader in this strategy is Newmont Mining Corp. Under the Newmont plan, introduced in April, the company's annual dividend rises by US20 cents a share for each US$100 rise in the gold price (and the payout rises even more when gold tops US$1,700).

The idea was welcomed with open arms by investors, and Newmont now has a dividend yield of roughly 2%, the highest among major producers.

"If you look at the Newmont stock chart, they were adrift," says George Topping, an analyst at Stifel Nicolaus. "And in a stroke of genius, someone came up with the idea to link the dividend to the gold price. That transformed the company in the eyes of many investors and caused fund flows into the stock."

That raises the obvious question of why other senior producers like Barrick Gold Corp., Goldcorp Inc., and Kinross Gold Corp. don't follow Newmont's lead. So far, only three precious metal companies (Newmont, Eldorado, and Hecla Mining Corp.) have adopted the fixed payout model.

Mr. Topping does not expect the other seniors to do it for two reasons: They don't want to be seen as copycats, and they simply cannot afford it because they need to spend billions of dollars on mine construction. Ironically, Newmont's weaker growth prospects turned out to be a positive as it left the company more free cash to return to investors.

That doesn't change the fact that the other seniors could pay higher dividends if they wanted to. Industry experts anticipate more increases in the months ahead, and there could be some next week as the gold miners begin reporting third-quarter earnings.

But the pace of dividend hikes has been very slow, and no one thinks that is going change. Part of the reason is that gold miners made virtually no money through most of their history, so they're just not eager to give it away now.

"It's almost difficult for them to release their cash," says Dennis da Silva, resource fund manager at Middlefield Capital. "It's taken years for them to get to this position where there's so much free cash flow."

He likes the idea of the price-linked dividend because it provides complete visibility for shareholders; they can plug in their own expectations on the gold price and calculate the dividend for themselves. That alone could be appealing for income investors, who may be bullish on gold but need to see more yield in the stocks.

"I think you would get the marginal buyer who has become disenchanted with gold companies and their seeming inability to generate stellar stock price movement," says John Stephenson, senior vice-president and portfolio manager at First Asset Investment Management.

That would be just fine for gold miners, who need to find a way to build more shareholder value. They have never been in a better position to do it than they are right now.

"At these prices, if it's not a healthy industry, I'm not quite sure what we're waiting for," Mr. Wright says.

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Prophecy Platinum Drills 120.9 Meters
Grading 1.26 g/t PGM+Au at Yukon Wellgreen Project

Company Press Release
Monday, September 26, 2011

VANCOUVER, British Columbia, Canada -- Prophecy Platinum Corp. (TSX-V: NKL, OTC-QX: PNIKF, Frankfurt: P94P) has announced the drill results received from its 2011 drilling Wellgreen platinum group elements, nickel, and copper project in the Yukon Territory.

Borehole WS11-188 encountered 457 meters of mineralization grading 0.47% nickel equivalent (including 0.72 grams per ton platinum, paladium, and gold) from surface to the footwall contact. Within this larger swath of mineralization, the hole encountered a high-grade section of 17.8 meters of 3.14 grams per ton platinum, palladium, and gold, 1.03% nickel, and 0.74% copper (1.77% nickel equivalent).

The hole was drilled completely outside of current resource boundaries, between the East Zone resource and the West Zone resource that was reported in the company's press release no July 14, 2011.

The high-grade intercept located between the two resources not only demonstrates that the East and West Zone resource form a single, geologically contiguous body but also indicates that the higher-grade material in the East Zone continues to the west and at depth at Wellgreen.

For drill result tables and maps, please see the company's full press release here: