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Gold miners may increase the cash returned to shareholders as gold prices rise but should exhibit more caution than in past bull cycles, ratings agency Fitch Ratings advises.
According to the agency, greater discipline around capital allocation and an emphasis on sustainability of dividends when trends are bearish is anticipated, given an emphasis on maintaining financial and operating flexibility.
Moreover, the agency notes that a focus on improving cost positions and optimising assets, owing to limited availability of high-quality assets and growing interest in long-term cash generation, should curb widespread shifts in financial strategy.
“We expect industry free cash flow (FCF) to remain robust in 2020 after modest improvement in 2019, even without further rallies in the price of gold [owing] to cost reduction efforts, increased efficiency and lower capital spending”.
Higher-than-expected FCF, owing to a potential sustained increase in the price of gold, might be used to accelerate deleveraging if leverage metrics are outside of management's stated targets or for mergers and acquisitions, and gold miners may also return more cash to shareholders.
Fitch referred to gold miner Newmont’s announcement of a 79% quarterly dividend increase on January 6, stating that the action aligned with the miner’s disciplined approach to capital allocation that entailed maintaining an investment-grade balance sheet, investing in profitable growth and returning cash to shareholders.
Newmont also recently initiated a stock repurchase programme of up to $1-billion but is targeting net debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) of below 1.0x over time, post its 2019 buyout of fellow miner Goldcorp.
Yamana, meanwhile, recently increased its dividend to $0.05 a share yearly, following a doubling of its dividend to $0.04 a share yearly in July 2019, as part of a gradual and progressive approach to dividend increases.
Fitch on Thursday said it viewed this level of dividends as modest at less than 10% of Yamana's cash flow from operations.
“The company is targeting a sustainable dividend and in December implemented a policy establishing a cash reserve fund to be drawn upon, if required, should the price of gold decline and there is sustained margin contraction. We project Yamana's total debt/Ebitda will be about 2.0x in 2021 with our mid-cycle gold price assumption of $1 200/oz.”
Other miners, like Kinross, have not paid dividends in over five years. In this respect, Fitch views spending on capital projects or cash retention in advance of $500-million notes due in 2021 maturing as more likely than an increase in cash being returned to shareholders.
The agency projected total debt/Ebitda at about 2.0x in 2021, assuming a gold price of $1 200/oz and silver at $15/oz.
In a statement on Thursday, Fitch noted that producers comfortable with the level of debt on their balance sheets may maintain larger cash balances as dry powder for acquisitions, particularly given programmes to shed noncore assets at Newmont and Barrick following recent acquisitions.
The agency explained that transaction values increased in recent years owing, in part, to deals such as Newmont's $10-billion acquisition of Goldcorp and Barrick's $6.5-billion buyout of Randgold Resources.
Strategic mergers and acquisitions that improve cost position, size, diversification and average mine life, while reducing country risk, could reduce business risk and strengthen credit profiles, Fitch suggested.
Additionally, the price of gold rose to more than $1 500/oz in December, owing to escalating Middle East tensions, after gaining strength since last June on trade tensions between the US and Mexico, the US and China and US interest rate cuts.
Higher demand owing to gold's countercyclical characteristics and safe haven status, along with a modest supply outlook is positive for gold prices, further improving industry cash flow, Fitch enthused.
It added that global metals analysts CRU expects the price of gold to average $1 558/oz in 2020, after averaging $1 390/oz in 2019, with total supply of 3 611 t and total fabrication demand of 2 719 t, resulting in a fundamental balance of about 892 t.