Capital gains and riding a buoyant physical metal price look like being the name of the gold game for a while longer.
Only a small clutch of gold producers has reached the dividend-paying stages — and those dividends, in most cases, are so far not “rivers of gold” anywhere near what self-funded retirees and other investors expect from the big banks.
It is the prospect of those banks either deferring, cancelling or reducing their upcoming dividend declarations that no doubt has many investors scouring the markets for sectors that will continue to pay regularly.
So far, the gold sector has sent mixed messages.
This week copper-gold producer OZ Minerals (ASX: OZL) chief executive Andrew Cole said the effects of the COVID-19 virus would have to worsen considerably before there would have to be any reduction in dividend payments.
And he underlined this by saying that should OZ have to preserve cash, reducing shareholder payouts would be one of the last options.
On the other hand, just days before the interim dividend payment due at the end of March, Northern Star Resources (ASX: NST) announced it was deferring that payment until late October for reasons of “prudent financial management”.
The company said it was expecting the impact of COVID-19 to result in a 10-15% drop in gold production.
OceanaGold (ASX: OGC) has also been hit. While its Haile mine in South Carolina has been operating at full capacity, there is now only a skeleton workforce at its operations in the Philippines due to virus controls. Over in New Zealand, the processing plant at OceanaGold’s Waihi mine is on care and maintenance, while at Macraes in the South Island staff numbers have been reduced by 85%.
Juniors showing life
When global equities began to tumble big time last month, they took gold stocks with them — both producers and explorers.
Yet the gold price, while volatile, showed considerably more resilience than did gold shares.
It was a repeat of the early 2000s when gold went through US$600 per ounce, then US$700/oz, but prices of gold stocks failed to keep up in terms of percentage gains.
And when those stocks took a tumble last month, veteran US mining commentator and geologist Mickey Fulp reminded investors why.
“For those who suggest that speculating in gold stocks equates to owning gold bullion, here is a stark reminder that juniors behave just like the broader stock markets when sell-offs are in fashion,” he said.
By mid-afternoon trade Friday, Predictive was up more than 966% for the week.
The reality of gold dividends
As tabulated by the ASX, Westpac Banking Corp (ASX: WBC) has a dividend yield of 10.68%.
The bank has warned that write downs will impact its interim results so that yield may be of historical interest only.
But it serves to throw into relief the record of the gold sector, as a few examples will show.
Those figures are respectable: the problem is that there are still too few gold companies paying regular dividends.
However, unlike many other sectors of the economy (and of the mining industry), the underlying conditions for these gold operations in general is positive.
As of the time of writing, the Australian gold price was sitting just on A$2,700/oz. A year ago, our miners could only dream of such a thing.
Fuel costs have collapsed, one of the major cost items in running a mine.
Even with subdued jewellery demand, physical gold remains in short supply.
And, above all, gold is essentially a store of value — looming global industrial contraction will impact on industrial and technology metals, but not gold.
Dividends slow even after gold boom post-2002
It was hard to make a profit from mining gold at 1999 levels when the metal got below US$260/oz (and averaged US$278.88 for the year).
But, for all the wonder of the gold rise between 2002 and 2011, shareholders did not see much of the benefits, especially from the smaller mining companies.
It was one of the black spots of the great gold boom and it was a feature of many years that gold shares did not keep pace with the rise in the metal’s price.
There remains the possibility that this decoupling of metal and share prices could recur if physical gold keeps gaining while miners face problems such as COVID-19 shutdowns.
The golden age of gold dividends
It once seemed possible to pay the type of dividends that will have investors rushing to buy your stock.
If you were a shareholder in the gold miner Colorado Dredging Company in 1913 you did very well out of mining the yellow metal.
That year the company paid a dividend of US$2.50 a share, so for 1,000 shares you would have received a cheque for US$2,500.
In 2020 terms, that would be equivalent to US$65,214 (according to the American Institute for Economic Research’s cost of living calculator).
This was not a lone example. In 1923, a gold dredging company announced a dividend of US$0.60/share.
That would be US$9.06/share in 2020 money.
But, back then, that dividend for 1,000 shares would total US$600, when an average car cost US$265. The payment for 45 shares would be enough to pay for a Wilton rug. The payout for one share would have bought you a dozen eggs, or 2.5kg of flour or a dozen oranges.
Also, in 1923 Consolidated Gold Fields of South Africa paid a dividend of three shillings a share, meaning that if you owned 1,000 shares there would be a cheque of £150. In today’s purchasing power, that is equivalent to £9,140 (or A$17,950 in our currency).
No wonder that was an age where people could live well off their investments.
Paying shareholders was then a priority
If you own stock in a gold mining company today, you can easily do the comparison: how much would the dividend from one share buy you?
Certainly not a dozen eggs, perhaps not even one egg.
Part of reason for the high dividends back then was that companies obviously took the view that the money earned by the company belonged to shareholders (and their labour costs were low).
Therefore, what was available was given to those very shareholders. Thus, in 1928, Consolidated Gold Fields made a profit of £736,000. It put £100,000 into reserves, held £52,400 for working expenses, then paid out all the remainder in dividends.
In 1934, during the Great Depression, London-listed Wiluna Gold Corporation paid a dividend equivalent to 22.5% of the face value of its £1 shares.
In the US, even during the Great Depression, gold miners paid out strong dividends — some added what we now call special dividends.
In 1932, probably the bleakest year of the Depression, Canada’s Pioneer Gold Mines doubled its quarterly shareholder payouts.
Growth will return
Once we’re through the COVID-19 mess and gold producers get back into full production, the miners will be seeing strong revenues, and these should underpin profitability and allow dividends to bounce.
However, it is important to remember that we will ever again see the largesse in dividends of the 1920s and 1930s.
Back then, labour costs were low.
The miners worked only high-grade deposits; they did not have to make a living with low-grade ore.
There were also no environmental and other permitting costs.
Moreover, governments gave the gold miners money rather than taking it from them.
In 1954 gold producers were subsidised by the federal government up to £2 per ounce for gold produced.
And, before 1991, there was no income tax on selling gold mined in Australia.