Two Gold Miners and One Silver Miner for Dividend Investors
Last year was not a good one for precious metals miners. Not only did their share prices fall but several of them cut their dividends. Here are just a few examples, but keep in mind that this is hardly a complete list:
- Barrick Gold (NYSE:ABX) cut its dividend from 80 cents per share to 20 per share.
- Newmont Mining (NYSE:NEM), which pays a dividend based on the gold price, paid a 42 per share dividend in March. This fell to 20 cents in December.
- Agnico Eagle cut its dividend from an annualized rate of 88 cents per share to 32 per share.
- Gold Resource Corp. (NYSEMKT:GORO), which made a name for itself in the sector by offering a large monthly dividend, cut its payout from an annualized rate of 72 cents per share to 12 cents per share.
- Silver Wheaton (NYSE:SLW), which like Newmont pays a dividend based on its cash flow, which is based on the prices of silver and gold, paid a 14 cents per share dividend in March and a 9 cents per share dividend in December.
- Kinross Gold (NYSE:KGC) paid a dividend of 8 cents per share on a semiannual basis starting the year and it ended the year with no dividend.
The list can go on, but the point is made. Now, a dividend cut isn’t necessarily a bad thing. In fact, in the cases of Newmont and Silver Wheaton investors were told that the dividend was not a fixed amount. Rather it would be determined by the gold price in the case of Newmont, or by cash flow in the case of Silver Wheaton. Dividend reductions were to be expected. Further, in the other cases we find that these companies got overextended, and the dividend cuts were a part of a broader cost-cutting agenda.
But in the context of last year’s weak gold market and the weak mining environment I think investors need to look at the companies that didn’t cut their dividends, and the one in particular that actually raised its dividend, as stronger companies at least in this respect. From the perspective of a retiree or of somebody who depends on dividend income in some capacity these rarities should stand out.
True, they suffered like any company in the sector that had to sell their gold and silver at lower prices. But ultimately the fact that they were able to maintain their dividends in a period of weakness indicates longer-term strength, and investors should take this into consideration when choosing their precious metals investments. Here I point out three companies. Two of them sustained their dividends, and one of them raised its dividend.
First is Royal Gold (NASDAQ:RGLD). Royal Gold raised its dividend minimally from 80 cents per year to 84 cents per year. While its 1.2 percent yield might not appeal to dividend investors I had to include it here as the one company in the sector that actually raised its dividend. Royal Gold is a royalty and streaming company meaning that lends money to gold miners in exchange for the right to buy or receive a certain amount of future gold production at a specified mine.
Royalty and streaming companies have fixed production costs that fall well below the gold price, and so when the gold price fell last year they didn’t suffer as much. Not only did Royal Gold not suffer as much as its mining company peers, but it started to see revenues from its largest stream — a stream on 52.25 percent of the gold produced at Thompson Creek’s (TC) Mt. Milligan mine.
This stream greatly adds to Royal Gold’s overall revenues and profits, and it is likely for this reason that the company decided to raise its dividend. The company owns several royalty agreements on some very large mines that are going to generate a lot of cash flow for years to come.
A couple of these include Osisko Mining’s (OTCMKTS:OSKFF) Canadian Malarctic mine, which will produce more than half a million ounces of gold for over a decade, and Goldcorp’s (NYSE:GG) Penasquito mine, which will produce a similar amount of gold as well as several other metals for many years to come. Royal Gold has a strong balance sheet and minimal costs, and for this reason it is likely going to remain an excellent long-term holding for dividend investors.
Second is Goldcorp. While most large-cap mining companies cut their dividends last year Goldcorp was a rare exception. The company is the second-largest gold miner by market capitalization and it will soon be the third-largest gold miner by ounces produced. It pays a dividend of 5 cents per month, which gives it a dividend yield of 2.2 percent, which is larger than the dividend paid by the S&P 500. Goldcorp owns and operates several large producing mines, all of which are in the Western Hemisphere.
Its total gold production is around 2.7 million ounces of gold. However, the company has a lot of near-term production growth coming from two new large mines that are coming into production in 2014: Eleonore in Canada and Cerro Negro in Argentina. Virtually all of the company’s mines are low-cost producers, which means that the company will be able to maintain its dividend in a low gold price environment and it will be able to raise its dividend, as it has many times in the past, should the ld price rise.
The company has a strong cash position with very little debt, and I think it is a great addition to any dividend-oriented portfolio.
Third is Pan American Silver (NASDAQ:PAAS). Pan American Silver owns and operates several silver mines in the Western Hemisphere. The company doesn’t have extremely low production costs, but it is becoming more efficient. More importantly, the company built up a large cash position while the silver price was rising. It even paid for the acquisition of Minefinders, using stock when it could have used some of its cash to limit dilution. But the move turned out to be a good one.
Now the company is producing more than 25 million ounces of silver annually and it has $400 million in cash versus just a $2.2 billion valuation. The company pays out 50 cents per share on an annual basis, giving it a dividend yield of over 3.4 percent, giving it a higher yield than bellweather dividend payers such as Procter and Gamble (NYSE:PG), Coca Cola (NYSE:KO), and Pfizer (NYSE:PFE). Given the company’s strong cash position and a now-rising silver price there is little doubt that Pan American Silver will continue paying out at this rate, and in a higher silver price environment it can raise the payout.
Had you held onto these stocks during the precious metals bear market you would have seen paper losses. But you wouldn’t have seen cuts to your income. As metal prices rise it becomes more certain that these companies will be able to continue paying these dividends, and it is well within the realm of possibility that they can increase them.
Disclosure: Ben is long Royal Gold, Goldcorp, Silver Wheaton, and Kinross Gold.