Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Crazy Stocks

Are Gold Miners Losing Money?

We have to ask are gold miners losing money because 2018 was a terrible year for the precious metal.

For example, the price of gold was $1,291.80 a troy ounce on 3 January 2019. That was below the $1,320 gold was trading at on 18 January 2018. However, the gold price was well above its 2018 low of $1,176.20, Gold Price reports.

Thus the best we can say about gold in 2018 was that its price did not fall below $1,100 an ounce. However, the gold price has been stagnant for a long time, for instance, the metal’s price has stayed under $1,400 an ounce for nearly six years since 2013.

Are Gold Miners Bargain Stocks?

Not surprisingly, the price for gold mining stocks is falling to new lows because price of gold is falling.

For instance, Goldcorp Inc. (NYSE: GG) was trading at $9.58 a share on 7 January 2019. In addition, Barrick Gold (NYSE: ABX) was trading at $12.93 a share on the same day.

However, the largest American gold miner; Newmont Mining (NYSE: NEM) was trading at $34.00 a share on 7 January 2018. Hence, gold miners could be bargain stocks right now.

Are Gold Miners Losing Money?

Gold miners losing money is concern valid because of falling revenues.

For instance, Barrick Gold records revenues of $9.7058 billion for 3rd Quarter 2018. Those revenues were down from $11.14 billion in September 2017. In addition, Goldcorp records revenues of $3.113 billion for 3rd Quarter 2018. Those revenues were down from $3.468 billion in 3rd Quarter 2018.

In addition, Newmont’s revenues for 3rd Quarter 2018, were $7.09 billion. That figure was down from $7.233 billion in 3rd Quarter 2017.

However, Newmont Mining records a net loss of -$187 million and an operating loss of -$114 million for 3rd Quarter 2018. Hence that miner is losing money.

On the other hand, Goldcorp records a $77 million net income for 3rd Quarter 2018. Conversely, Barrick Gold records a -$859.62 million net loss for 3rd Quarter 2018.

Note: some information for Goldcorp and Barrick Gold is incomplete because they are Canadian companies. It is difficult to get full details on Canadian companies’ quarter financial results because of differences in laws.

Are Gold Miners Value Investments?

Despite the losses, Newmont Mining could be a value investment because of its cash flow.

For instance, Newmont recorded an operating cash flow of $2.559 billion and a free cash flow of $1.446 billion on 30 September 2018. Moreover, Newmont mining recorded $3.259 billion in cash and equivalents and $62 million in short-term investments on the same day. Thus Newmont Mining is a cash-rich company.

Moreover, Barrick Gold records a free cash flow of $417.16 million and $2.192 billion in cash and short-term investments for 3rd Quarter 2018. In addition, Goldcorp records $1.133 billion in cash from operations and $82 million in cash from financing for 3rd Quarter 2018. Despite that, Goldcorp recorded $166 million in cash and short-term investments on 30 September 2018.

Thus gold miners look like value investments because they are cash rich companies with low stock prices. To add icing to the cake, the gold miners pay dividends and they have the cash to support dividends for a long time.

Gold Miners are Losing Money but do they Pay Dividends?

Gold miners can be attractive income stocks because some of them pay dividends. Unfortunately, those dividends are often small and unreliable.

For instance, Goldcorp paid a 2¢ dividend on 21 December 2018. However, Goldcorp has paid that low dividend for three and half years, since July 2018 when it paid a 5¢ dividend. Moreover, Goldcorp’s dividend percentages are low, for instance; the company paid a 0.84% dividend yield, an annualized payout of 8¢ and a payout ratio of 30.8% on 7 January 2019.

Conversely, Barrick Gold pays a low yearly dividend that can fluctuate dramatically. For example, Barrick investors received just 7¢ on 27 December 2018. However, Barrick shareholders could receive $2.67 dividend in 2019. Thus, Barrick Gold Corporation is not a reliable dividend stock.

For the record, Barrick shareholders received a dividend yield of 2.07%, an annualized payout of 28¢, and a payout ratio of 45.9% on 7 January. Based on these numbers I conclude the Canadian gold miners are not good dividend stocks.

Newmont Gold Pays a Good Dividend

On the other hand, Newmont Mining offered a 1.65% dividend yield, an annualized payout of 56¢, and a payout ratio of 45.5% on 7 January 2019. Newmont shareholders received a 14¢ dividend on 27 December 2018.

Newmont has experienced impressive dividend growth over the past three years. In detail, Newmont paid a 2.5¢ dividend in September 2016; that grew to 5¢ in December 2016, 7.5¢ in September 2017, and 14¢ in March 2018. Thus, Newmont’s dividend grew by 11.5¢ in the last three years.

Under these circumstances, Newmont is the only gold miner to buy for the dividend. The others are undependable and pay tiny dividends.

Why are Gold Prices so Low?

Therefore, Newmont proves a gold miner could be a reliable value and income stocks. However, there is something everyone must understand about gold and gold miners.

Gold is a commodity; to explain, they mine gold just like any metal. Thus prices fluctuate because miners dig more gold whenever prices go up. In fact, we seem to be in a gold glut because of falling oil prices right now.

To elaborate, low oil prices mean low diesel fuel prices, and diesel fuel powers most of the machines used to dig gold. For instance, power shovels, track hoes, front-end loaders, bulldozers, and dump trucks. Cheaper diesel fuel means it costs less to mine gold, so miners dig more of it.

Why Low Gold Prices can help Gold Miners Make Money

Something to remember is that miners are not in the business of investing in gold. Instead, miners are in the business of selling gold. Thus, the more gold miners can extract, the more money they make.

This leads to a gold glut because miners can extract large amounts of gold at a lower price and sell it.  Moreover, lower gold prices favor big miners like Newmont because they can dig and sell large amounts of gold.

Newmont makes money even if the price is lower because of the large volumes of gold it produces.  To explain, a company like Newmont makes money if it clears a profit of just $100 or $200 an ounce of gold. Therefore, low gold prices give Newmont a strong incentive to increase production.

I think low oil prices and the gold glut will continue for the foreseeable future. Thus, gold prices will stay low for the next few years but companies like Newmont and Goldcorp will make money.