The Conversation (0)
Precious metals ETFs have performed well in the past few years, especially those that are backed by the metals. Shares of precious metals companies, however, have languished, as investors have preferred the ETF route. But experts say that precious metals firms need to up dividend payments to keep investors interested.
The price of gold and other precious metals has risen for years and remains high compared to historical measures. But the stocks of miners who produce these metals have languished. The reason, many say, is that precious metal exchange-traded funds (ETFs), which either hold bullion or a combination of mining shares, have emerged as competitors for investors’ money. And bullion-backed ETFs, which track the price of their respective metals, have performed well.
Gold ETFs have “been a huge hoover of capital and competition for the gold companies,” Peter Miller, head of equity capital markets at BMO Capital Markets, told Bloomberg in an interview. “It’s easy just to park yourself with an ETF versus taking on the capex creep and the operational risk of some of these development plays.”
Let’s take a look at the numbers. The Market Vectors Gold Miners ETF (INDEXNYSEGIS:GMI) has risen nearly 8.4 percent in the past five years. The index’s top three components are Barrick Gold Corp. (TSX:ABX), Goldcorp Inc. (TSX:G), and Newmont Mining Corp. (NYSE:NEM). The bullion-backed SPDR Gold Trust ETF (ARCA:GLD) has risen nearly 129 percent in the past five years, and four percent in the past year, when gold prices retreated from record levels. The SPDR Gold Trust’s gold bars are physically stored by the custodian at its London, England vaults.
In comparison to the above two ETFs, Kinross Gold Corp.’s (TSX:K) shares have fallen nearly 49 percent in the past five years. While Barrick Gold’s shares have risen nine percent in the past five years, they are down about 21 percent so far this year.
“We will generate value”
Tye Burt, CEO of Kinross, told shareholders at the company’s annual meeting this month, “[w]e recognize that the past period has been trying for our shareholders. And we recognize that progress never happens fast enough for investors – it doesn’t for management either….With patience, we will generate value in the months ahead.”
Some may argue that southbound share prices for gold miners make them cheap to buy, but investors looking for exposure to gold prices are not taking the route of investment in the equity of mining companies.
Gold prices, which peaked in September of last year above $1,900 an ounce, dropped to four-months lows in London on May 14 at $1,569.32 an ounce, Bloomberg reported. Silver for immediate delivery fell as much as 1.6 percent to $28.45 an ounce on the same day, the lowest price since January 3. Precious metal palladium slid as much as 1.6 percent to $593.25 an ounce, the lowest price since November 30.
“The main thing is that investors are putting their money into gold rather than into gold-mining shares because the mining shares have additional risks such as higher-than-expected production costs, geopolitical risks, and issues with operating the mines themselves,” metals and mining analyst Joung Park was quoted as saying on Morningstar.
Park added, “[o]n the contrary gold-mining shares have actually fallen during the past year, going down by 16% as a group. And this must leave investors scratching their heads because gold is up, while gold miners, which are supposed to track gold, are down.”
Dividends to the rescue
All, however, is not bleak for the shares of precious metals miners. As precious metals companies distribute more of their earnings to investors in the form of dividends, they are catching the eye of many analysts.
Chris Bailey, head of global direct investment at Close Asset Management, told the Financial Times that yields on large-cap gold companies currently average about 1.5 percent and could climb even higher as mining companies move to attract investors away from physical gold ETFs.
Morningstar’s Park said that some miners are paying “in excess of 2 percent, which is a nice yield. Some miners have become even more creative and linked their dividends to the gold price itself, and we think that these attractive dividend schemes could help persuade some investors to put their hard-earned money into the miners instead of into gold.”
Park added, “[a]s the miners continue to lag gold, the ounces in the ground that’s owned by these miners becomes so much cheaper than the gold that you can buy on the market through ETFs or jewelry. So, we think that maybe investors will see that valuation disconnect and purchase more mining shares instead of gold.”
Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.