Gold Dividends Unsafe

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Gold miners are not known for their shareholder returns. In fact, miners are often criticized for not returning enough cash to shareholders, choosing instead to spend their income on expensive capital projects.

That said, recently miners have changed course and are now offering dividends to shareholders but with some of these yields touching 4-5%, they are way above the market average.

Can they afford it?

Gold Dividends

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>P/E</strong></p> </th><th> <p><strong>Dividend yield</strong></p> </th><th> <p><strong>EPS</strong></p> </th><th> <p><strong>DPS</strong></p> </th><th> <p><strong>Payout Ratio</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Barrick Gold <span class="ticker" data-id="206868">(NYSE: <a href="http://caps.fool.com/Ticker/ABX.aspx">ABX</a>)</span></strong></p> </td> <td> <p>6 (forward)</p> </td> <td> <p>4.1%</p> </td> <td> <p>$3.2 (projected)</p> </td> <td> <p>$0.8</p> </td> <td> <p>25% (projected)</p> </td> </tr> <tr> <td> <p><strong>Goldcorp <span class="ticker" data-id="203707">(NYSE: <a href="http://caps.fool.com/Ticker/GG.aspx">GG</a>)</span></strong></p> </td> <td> <p>15.9</p> </td> <td> <p>2.2%</p> </td> <td> <p>$1.8</p> </td> <td> <p>$0.6</p> </td> <td> <p>29%</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining <span class="ticker" data-id="204643">(NYSE: <a href="http://caps.fool.com/Ticker/NEM.aspx">NEM</a>)</span></strong></p> </td> <td> <p>10.1</p> </td> <td> <p>4.3%</p> </td> <td> <p>$3.2</p> </td> <td> <p>$1.4</p> </td> <td> <p>45%</p> </td> </tr> <tr> <td> <p><strong>Yamana Gold <span class="ticker" data-id="208929">(NYSE: <a href="http://caps.fool.com/Ticker/AUY.aspx">AUY</a>)</span></strong></p> </td> <td> <p>22.2</p> </td> <td> <p>2.4%</p> </td> <td> <p>$0.5</p> </td> <td> <p>$0.3</p> </td> <td> <p>50%</p> </td> </tr> </tbody> </table>

As Barrick made a loss last year I have used projected earnings figures in the chart above.

Newmont Mining has the highest dividend yield in the group at 4.3% and the yield appears to be well-covered with a payout ratio of 45%, the dividend is $1.4 per share and the company is earning $3.2 per share. Indeed, all four companies look as if they can afford their payouts based on Earnings Per Share (EPS) cover. 

But how do their cash flows look?

Barrick Gold Corporation

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p> Net Operating Cash Flow</p> </td> <td> <p>$783</p> </td> <td> <p>$1,690</p> </td> <td> <p>$1,640</p> </td> <td> <p>$1,090</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$1,610</p> </td> <td> <p>-$1,510</p> </td> <td> <p>-$1,870</p> </td> <td> <p>-$1,440</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$1,590</p> </td> <td> <p>-$1,560</p> </td> <td> <p>-$1,980</p> </td> <td> <p>-$1,500</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>-$807.00</p> </td> <td> <p>$130.00</p> </td> <td> <p>-$340.00</p> </td> <td> <p>-$410.00</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$200</p> </td> <td> <p>-$193</p> </td> <td> <p>-$195</p> </td> <td> <p>-$201</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>$566</p> </td> <td> <p>($8)</p> </td> <td> <p>($18)</p> </td> <td> <p>$852</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0</p> </td> <td> <p>0.7</p> </td> <td> <p>0</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p> Free Cash Flow</p> </td> <td> <p>-$1,030</p> </td> <td> <p>-$10</p> </td> <td> <p>-$429</p> </td> <td> <p>-$549</p> </td> </tr> </tbody> </table>

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Previously the largest gold miner in the world by market capitalization, Barrick Gold's dividend payout does not appear to be secure. The company has been able to cover its dividend payout with operating cash flow after the deduction of investing activities in only one out of the past four quarters. Indeed, it would appear that the company is spending much more than it can afford on CAPEX.

Barrick has spent almost all of its operating cash flow on CAPEX during the last four quarters and the dividend payout has been funded with borrowing. The one quarter where Barrick had cash to spare to return to shareholders was Q3 2012, even then the company's payout was only covered 0.7x times - Barrick had to raid its cash reserves to find the other $63 million it needed to fully fund the payout.

So, based on the fact that Barrick cannot actually afford its dividend , I believe the payout is in jeopardy.

Verdict: unsafe

Goldcorp Inc.

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Net Operating Cash Flow</p> </td> <td> <p>$553</p> </td> <td> <p>$411</p> </td> <td> <p>$774</p> </td> <td> <p>$287</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$692</p> </td> <td> <p>-$456</p> </td> <td> <p>-$895</p> </td> <td> <p>-$483</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$615</p> </td> <td> <p>-$650</p> </td> <td> <p>-$650</p> </td> <td> <p>-$1,080</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>-$62</p> </td> <td> <p>-$239</p> </td> <td> <p>$124</p> </td> <td> <p>-$793</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$112</p> </td> <td> <p>-$105</p> </td> <td> <p>-$107</p> </td> <td> <p>-$123</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>$0</p> </td> <td> <p>$0</p> </td> <td> <p>$0</p> </td> <td> <p>$1,490</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> <td> <p>1.2</p> </td> <td> <p>0.0</p> </td> </tr> <tr> <td> <p>Free Cash Flow</p> </td> <td> <p>-$250</p> </td> <td> <p>-$150</p> </td> <td> <p>-$228</p> </td> <td> <p>-$318</p> </td> </tr> </tbody> </table>

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Goldcorp recently surpassed Barrick as the largest gold miner in the world by market cap. However, the company is not in a better financial position than Barrick and even though the firm offers the smallest payout of the group, it still cannot afford it.

Only in the Fourth Quarter (Q4) 2012 has the company had enough cash to be able to suitably fund its payout. In the other three quarters the company has had to raid its cash balance to fund the payout or borrow. The company only borrowed in Q1 2013 according to the table above, but the amount borrowed is more than enough to keep the company and payout secure for a year or so)

Overall, Goldcorp cannot cover its payout with cash available and needs to borrow to keep funding its dividend payout.

Verdict: unsafe

Newmont Mining Corp

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Net Operating Cash Flow</p> </td> <td> <p>$347</p> </td> <td> <p>$574</p> </td> <td> <p>$842</p> </td> <td> <p>$433</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$882</p> </td> <td> <p>-$816</p> </td> <td> <p>-$816</p> </td> <td> <p>-$510</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$859</p> </td> <td> <p>-$737</p> </td> <td> <p>-$813</p> </td> <td> <p>-$507</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>-$512</p> </td> <td> <p>-$163</p> </td> <td> <p>$29</p> </td> <td> <p>-$74</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$174</p> </td> <td> <p>-$174</p> </td> <td> <p>-$174</p> </td> <td> <p>-$211</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>-$37</p> </td> <td> <p>-$15</p> </td> <td> <p>$161</p> </td> <td> <p>$80</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> <td> <p>0.2</p> </td> <td> <p>0.0</p> </td> </tr> <tr> <td> <p>Free Cash Flow</p> </td> <td> <p>-$709</p> </td> <td> <p>-$416</p> </td> <td> <p>-$148</p> </td> <td> <p>-$288</p> </td> </tr> </tbody> </table>

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

It appears that Newmont cannot afford its 4.3% dividend yield either.

Only in one quarter, Q4 2012, out of the last three has the company had cash available to return to shareholders, after removing the cost of investing activities from operating cash flow. In the other three quarters the company had no money available after CAPEX spending and dividends have been paid through borrowing and cash balances.

Based on the fact that the company has not had positive free cash flow at all during the past four quarters Newmont's dividend looks unsafe.

Verdict: unsafe

Yamana Gold

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Net Operating Cash Flow</p> </td> <td> <p>$123</p> </td> <td> <p>$351</p> </td> <td> <p>$360</p> </td> <td> <p>$169</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$267</p> </td> <td> <p>-$638</p> </td> <td> <p>-$361</p> </td> <td> <p>-$241</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$253</p> </td> <td> <p>-$609</p> </td> <td> <p>-$367</p> </td> <td> <p>-$278</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>-$130</p> </td> <td> <p>-$258</p> </td> <td> <p>-$7</p> </td> <td> <p>-$109</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$42</p> </td> <td> <p>-$40</p> </td> <td> <p>-$48</p> </td> <td> <p>-$49</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>$3</p> </td> <td> <p>($5)</p> </td> <td> <p>($2)</p> </td> <td> <p>$0</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> <td> <p>0.0</p> </td> </tr> <tr> <td> <p>Free Cash Flow</p> </td> <td> <p>-$186</p> </td> <td> <p>-$326</p> </td> <td> <p>-$48</p> </td> <td> <p>-$121</p> </td> </tr> </tbody> </table>

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Last on the list is Yamana Gold and once again the company cannot afford its dividend based on its cash flows. Cash available for financing activities has been negative for the last four quarters and the company has continued to issue dividends despite the fact that they are not covered in any way.

Overall it is easy to draw a conclusion for Yamana's dividend, it is unsafe as the company is spending all of its incoming cash flows on CAPEX. Indeed, in some periods the company has been spending double its operating cash flow on investing activities.

Verdict: unsafe

Conclusion

Gold miners have started returning cash to shareholders, but their high CAPEX and operating costs are impacting their ability to keep paying current dividends without dipping into cash reserves or increasing borrowing.

Overall, gold miners may have started offering a decent dividend yield, but I do not believe these yields are safe.

Gold has outshined the stock market with strong returns since 2000, but more recently has given way to big declines. The Motley Fool's new free report, "The Best Way to Play Gold Right Now," dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!


Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus