A report by Fitch Ratings states that miners should resist the temptation to increase cash returned to shareholders as gold prices rise and suggests exhibiting more caution than in past bull cycles.
According to Fitch, companies whose goals are to stand strong in the coming years and to maintain financial and operating flexibility, are going to exhibit discipline around capital allocation and are going to put an emphasis on sustainability of dividends.
“We expect industry FCF to remain robust in 2020 after modest improvement in 2019, even without further rallies in the price of gold due to cost reduction efforts, increased efficiency and lower capital spending,” the report reads. “Higher than expected FCF, due to a potential sustained increase in the price of gold, might be used to accelerate deleveraging if leverage metrics are outside of management’s stated targets or for M&A. Gold miners may also return more cash to shareholders.”
Cautious gold miners are expected to focus on improving cost positions and optimizing assets due to declining availability of high-quality assets and growing interest in long-term cash generation
As an example of the response taken by big names in the industry to higher prices, Fitch points to Newmont (NYSE: NEM) (TSX: NGT), the world’s No. 1 gold miner, whose management recently announced a 79% quarterly dividend increase to 25 cents/share and justified the action saying that it aligns with its disciplined approach to capital allocation that entails maintaining an investment-grade balance sheet, investing in profitable growth and returning cash to shareholders.
Yamana (TSX:YRI) (NYSE:AUY), on the other hand, recently its dividend to five cents/share annually, following a doubling of its dividend to four cents/share annually in July 2019, as part of a gradual and progressive approach to dividend increases.
“Fitch views this level of dividends as modest at less than 10% of Yamana’s cash flow from operations. The company is targeting a sustainable dividend and in December implemented a policy establishing a cash reserve fund to be drawn upon, if required, should the price of gold decline and there is sustained margin contraction,” the market analyst’s document states. “We project Yamana’s total debt/EBITDA will be about 2.0x in 2021 with our mid-cycle gold price assumption of $1,200/ounce (oz).”
According to the market analyst, producers comfortable with the level of debt on their balance sheets may maintain larger cash balances as dry powder for acquisitions, particularly given programs to shed non-core assets at Newmont and Barrick (TSX:ABX) (NYSE:GOLD) following recent acquisitions.
“Strategic M&A that improves cost position, size, diversification and average mine life while reducing country risk could reduce business risk and strengthen credit profiles,” the document states.