As gold prices rise, miners have been boosting shareholder payouts in the face of a decline in global output. That’s worrying some investors concerned about the longterm growth prospects of an industry built on a depleting resource.
The value of gold, a haven commodity, is driven more by global economics than supply and demand. Any unexpected event — from a surprising cure for coronavirus to a positive trade deal — could drop the value significantly. High prices put more gold scrap on the market, low ones increase hoarding and, if miners’ output remains static, so should profits.
Increasingly, investors are split between their wish for higher dividends in the short run and the need to assure company stability over the long term. Finding the “best of both worlds” in allocating the rising cash pile is key for the future of the industry, according to Josh Wolfson, an analyst at RBC Capital Markets.
“Miners in general are exposed to significant external factors that are out of their control,” said Simon Jaeger, a portfolio manager at Flossbach von Storch AG, a top-10 investor in both Newmont Corp. and Barrick Gold Corp. “It’s certainly a reason for not paying too much in dividends,” he said. “You want to have the cash buffer on your balance sheet in order to be financially flexible when prices get worse.”
Gold prices are currently at a seven-year high as concerns mount that the coronavirus outbreak in Asia will derail global growth. In a sign that the virus is already starting to dent the world’s largest economy, business activity in the U.S. shrank in February for the first time since 2013. The metal jumped as much as 2% on Friday as the S&P 500 Index was posting its first weekly loss since January.
Gold producers are “gushing cash,” said John Hathaway, senior portfolio manager at Sprott Asset Management, in support of the higher dividends. “They are in a position to raise their dividend,” he said. “And there will be boardroom pressure and shareholder pressure to do that.”
BY BLOOMBERG ONLINE