To compete against ETFs for investment demand until new production yields more metal, gold producers are raising their dividends, making their ROE stronger as gold prices are expected to scratch the $1,900 mark in 2012, said Ian M. Preston, a Resources Analyst at Goldman Sachs in Australia. In a December 6, 2011 interview, Preston said that Newmont Mining Corp. (NEM) has already implemented a dividend linked to gold’s rapid price increases. He also says other major producers are raising their dividends significantly, aiming to provide investors with 2.5% to 3% levels of yield.
“I think that's a clear signal that they want to make it very easy, very transparent for an investor to say, "Well, I have a view of where the gold price is going to be, therefore I can actually calculate what the dividend will be,” Preston said. “And the share price response for Newmont post that announcement has actually been very positive.”
The high price of gold is also fueling increased production among the world's major gold producers, making previously uneconomical projects profitable. The newly extracted gold is expected to hit the markets in the 2015 to 2020 period, according to a December 19, 2011 interview with Jorge Beristain, Analyst at Deutsche Bank Securities Inc.
"If investors start to form a belief that gold will at least sustain in the $1,700 to $1,900 range in the next few years - that really does change materially the outlook for these [gold] equities," Beristain said. "The thought process for a lot of investors prior to the summer spike was that gold was somehow going to reach a 'peak' level and then collapse."
The price of gold itself has been driven in large measure by ETF demand and central banks. Central banks have become net buyers of bullion and investors are increasingly parking their funds in gold ETFs, propelling gold prices around the world as the precious metal offers a way to hedge against currency fluctuations in a volatile macroeconomic environment, said Elizabeth Collins, of Morningstar in a December 19 interview.
Collins said:
We saw a very high level of demand for gold. Jewelry demand for gold was actually down and demand from the technology sector was flat, but we saw demand from the investment community be very strong because of the strong performance of gold to date, as well as because of worries about macroeconomic uncertainty.
| Company | Ticker | Price (12/27) | P/E | Market Cap ($bln) | Dividend Yield |
| Newmont Mining | (NEM) | $61.51 | 14.01 | 30.44 | 2.20% |
| Goldcorp Inc. | (GG) | $44.11 | 22.41 | 25.72 | 1.20% |
| Eldorado Gold Corp. | (EGO) | $13.59 | 28.31 | 7.49 | 0.90% |
| AngloGold Ashanti | (AU) | $42.11 | 84.46 | 81.35 | 1.00% |
The high dividend stock with a high upside exposure to gold prices through increased production is Newmont. The company is expected to grow its output by 40% in the next five years, reaping the benefits later this decade if gold prices stabilize in the $1,700 to $1,900 range.
"In May of this year [Newmont] came out with a new six-year growth plan to start to grow their output," Beristain said. "By 2016, Newmont expects to ramp up production by about 2 million net ounces per year versus today's 5 million ounces. But that's going to be very second half loaded and post-2015 time frame."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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