It is likely that we will see many positive rating actions over the short term, more than we have seen in several years. However, we shouldn’t expect widespread upgrades on gold mining stocks.
Almost all the gold mining companies improved their financial situation thanks to the positive trending in the gold price since the beginning of 2016 that could lead some of these gold companies to start paying the dividend to their shareholders, increase their payout ratio or purchase their own shares on the stock market.
According to what Jarrett Bilous, analyst at S&P, said, the companies that will likely declare an increase in their dividend in the short term are Newmont Mining, Goldfields and AngloGold Ashanti (AU, Financial):
“Newmont Mining (NEM) announced that it will revisit its dividend strategy, which is linked to gold prices, and that could lead to an increase. In addition, Gold Fields (GFI) significantly hiked its interim dividend for 2016 (to 50 rand cents per share from 4 rand cents per share in the January-June period last year) and AngloGold Ashanti Ltd.” (Barrons.com).
The declaration of an increased dividend will undoubtedly have a positive impact on the share price of these stocks.
But considering that the dividend paid by gold stocks are usually very small, in my opinion what really matters and will push the share price of the gold stocks higher is merely the price of gold.
If the Fed will continue to postpone the interest hikes or even lower the interest rates, there will still be room for upside in the gold stock industry with the mid-tier gold producer experiencing the greater increase in the share price due to their high operating cost leverage.
The Fed's decision on the interest rates is expected from the meeting scheduled for Sept. 20 and 21.
For example, let’s compare Barrick Gold Corporation (ABX, Financial), the largest gold producer in the world, IAMGOLD Corp. (IAG, Financial), a mid-tier gold producer and Agnico Eagles Mine Ltd., a dividend payer. Although there is no comparison between the companies considering gold production and costs, we can see from the graphic below that IAG outperformed ABX with 68% and Agnico Eagles Mine Ltd. with 143% since the beginning of 2016 (except for the month of August), when you would expect exactly the contrary:
Source: Google Finance
Year to date, all the gold mining stocks surged on higher gold prices with some of them still trading below their book value:
Source: Data from Yahoo Finance
Harmony Gold Mining Company Limited (HMY, Financial) is trading below its book value per share and the average EV/EBITDA.
If the gold price scenario that S&P forecasts in 2017 ($1,250) and 2018 ($1,200) will become reality, Barrick is for sure one of the better-positioned gold mining stocks to face a downtrend in the price of the precious metal, having shifted its focus from production growth to maximize free cash flow and risk-adjusted returns.
"We implemented strategies that were either new to mining or had previously been frowned upon for no good reason." […] "As part of this new approach, Jamie decided to mine only the most profitable ounces and adopted a highly disciplined capital allocation framework that continues to underpin every decision we make" […] "because we used a conservative gold price assumption at year end, our reserves declined significantly for the first time in years." --Â Peter Munk, founder and chairman.
Barrick now focuses on controlling costs and operating efficiencies.
Disclosure: I have no positions in any stock mentioned in this article.
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