Tags: Gold | Miners | Value | Dividends

Mining CEO: Gold Miners Need to Prove Value, Pay Dividends

Monday, 23 April 2012 11:37 AM

Gold mining stocks, much like high-flying tech stocks, could be forced into paying out dividends, says a mining executive, or face a drain away into gold metal exchange-traded funds (ETFs) that seem to provide less risk.

Booming bullion prices have drawn in new investors, but the high price of gold can be a double-edged sword. Much like Apple recently, and Microsoft before it, an influx of cash make things easy for management but puts investors on edge.

Often, investors expect cash to be deployed in a way that produces immediate payback or a rich dividend. The problem is made worse by virtually zero return on “safe” fixed-income holdings, thanks to Federal Reserve policy.

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Nevertheless, the extra money has pushed miners instead into rapid-fire M&A deals. Acquiring gold in the ground is perhaps good for business long-term, but the result is that novice gold investors prefer bullion ETFs over mining stocks, executives warn.

“The generalist investor is not going to be attracted to an industry that is not judiciously allocating capital, whether it’s in the context of making acquisitions or in the context of dedicating capex,” Kirkland Lake Gold Chief Executive Officer Brian Hinchcliffe told Bloomberg News.

“ETFs are a major competing alternative for investment. I’m talking about a 5 percent to an 8 percent dividend policy, that is the best defense against the ETF.”

Holdings in bullion-backed ETFs, such as SPDR Gold Trust (GLD) iShares Gold Trust (IAU) have tripled in the past five years, Bloomberg notes, yet gold miners are trading lower.

For instance, Market Vectors Gold Miners ETF (GDX), a broad cross section of major miners, is down nearly 29 percent over 12 months, compared to a nearly 8 percent rise in bullion-backed GLD.

Two of the biggest mining ETFs are GDX and Market Vectors Junior Gold Miners ETF (GDXJ). While GDX has a small dividend, it does offer a broad play across the largest miners and less risk compared to a single gold mining stock.

The junior miner version of the fund, GDXJ, is more volatile, considering its holdings. But it currently pays a 4.9 percent yield. Most of the major individual miners pay miniscule dividends or nothing at all.

Gold traded near $1,640 an ounce on Monday. Expect it to go higher still, predicts one expert.

That’s because gold itself is quickly turning into a “safe collateral” asset in a world where credit is diminished and currencies are printed in overdrive, argues one expert, Professor Lew Spellman, from the McCombs School of Business at the University of Texas at Austin.

“The growth of gold as a collateral asset to debt heavy markets is inevitably in the cards and is de facto occurring,” he writes on his blog, The Spellman Report. “Gold is stepping up to the plate as ‘good’ collateral in a world of bad collateral.”

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Monday, 23 April 2012 11:37 AM
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