By David J. Phillips
Spot gold prices have fallen more than 30% from the record $1,921 per ounce reached in September 2011 as sentiment reversed amid signs that global economic stimuli policies, known as quantitative easing, failed to yield commodity-friendly inflation witnessed during prior cycles of expansionary monetary actions by central banks.
Despite deep dividend cuts by industry leaders like Barrick Gold (ABX) and Kinross Gold (KGC), there are still a few gold-mining stocks out there that can pay healthy dividends in a world where the price of the precious metal trades even lower.
Gold Price in US Dollars data by YCharts
Gold miners have cut expenses and slashed cash dividend payments in recent months in order to "make ends meet in a lower gold environment," wrote Citigroup (C) analysts in a research note last month. Nonetheless, most leading precious metals miners continue to burn cash at much higher "all-in-costs" - defined by the World Gold Council as sustainable costs (those expenses necessary to sustain day-to-day operations of existing production, which includes everything from mining costs to royalties, permitting and exploration to sustain production) plus the varying additional costs needed to extract gold over the life-cycle of a mine (such as capital exploration, study and operating costs, permitting and reclamation expenses) -- at much higher rates than recent average spot prices of $1,320 per ounce.
Despite cuts to cap-ex and exploration, Citigroup data reveal that gold majors like Barrick Gold, Goldcorp (GG) and Yamana Gold (AUY) are burning cash at all-in costs of $1,600/oz., 1,800/oz., and $2,000/oz., respectively - in part, due to overpayment for leases and acquisitions of marginal properties during the commodities bull market of the last decade.
Looking ahead, World Bank, Fitch Rating Agency and other commodity forecasters opine that gold prices will continue to trend lower, bottoming around $1,000/oz. by 2025. Ergo, the aforementioned miners and other peers with poor cost positions will likely need to shutter additional operations, reduce production and slash capita budgets to adjust to lower cash flow being generated in this new, lower pricing environment.
In addition, expect liquidity constraints to stress already weakened balance sheets (due to asset write-downs) and to increase borrowing costs as risks of loan covenant defaults increase - resulting in the suspension of remaining cash dividends, too.
Nonetheless, for those investors willing to stomach residual risk, there are a few gold mining stocks with stable balance sheets and attendant all-in costs significantly lower than the industry average capable of paying healthy dividends in the current slow growth environment.
IAMGOLD (IAG) is a mid-tier mining company operating five long-life gold mines on three continents and one of the world's only niobium mines. Niobium is a scarce metal that strengthens and lightens the weight of steel. The Toronto-based miner pays a semi-annual dividend totaling 25 cents per share, with a dividend yield of about 5.5% at the current stock price.
The company experienced a steep earnings decline in its most recent quarter - 89 cents per share versus $1.03 in the prior year - due to a $220 drop an ounce year-over-year in the realized price of gold. Nonetheless, the current dividend looks secure, as management has aggressively responded to the new reality. Reducing power, transportation and labor costs, coupled with renegotiated supply contracts, is expected to decrease total cash costs by at least $50 per ounce, resulting in an all-in-cost guidance for fiscal 2013 in a range of $1,150 to $1,250 an ounce, down from a high of $1,300 an ounce.
Despite the bear market in gold, a disciplined capital allocation strategy has helped IAMGOLD maintain a healthy balance sheet with ample liquidity: Debt is a manageable 18% of total equity, consisting principally of $650 million in convertible notes not due until 2020. Net debt is 31% of EBITDA and the asset side of the ledger holds $1.4 billion in liquidity.
The company is one of three significant producers of ferroniobium in the world, with a market share of approximately 8% at the end of 2012. Investors shouldn't overlook the material contribution of these pyrochlore deposits to IAMGOLD's overall financial performance: During the quarter, worldwide niobium consumption grew 19%; operating margin contribution of niobium was $41.2 million in 1H 2013, almost enough in and of itself to cover the $47 million paid in cash dividends in the first half.
Gold Resources (GORO) operates six gold and silver mines in Mexico's southern state of Oaxaca, led by the profitable high-grade, open pit at its El Aguila project. Responding to the dramatic decline in average realized prices -$1,386 per ounce gold and $23 per ounce silver in the second quarter, down 13.5% and 14.8% from last year - management cut its dividend by half. Nonetheless, the company currently pays a dividend yield of 6.5% (which investors can opt to receive in cash or convert their cash dividends into physical gold and silver and take delivery).
Despite annual mill production of just 90,432 ounces of precious metal gold equivalent - 13% and one-fifth the annual production of Barrick Gold and Newmont Gold (NEM), the two largest ore producers in North America. - Gold Resources has one of the lowest mining costs, recording all-in costs of just $942 per ounce in 2012.
Looking at comparable solvency metrics, Gold Resources is probably one of the safest plays too: net debt is a nominal 12% of EBITDA and free cash flow represents 80% of net income.
"To expect the unexpected shows a thoroughly modern intellect," said the 19th century playwright Oscar Wilde.
Given most analysts are uniformly bearish in their outlook for the forward price of gold - and the current stock prices of IAMGOLD and Gold Resources already discount this expected pricing environment - what would happen if some unforeseen event shook up the status quo?
Pandemic MERS outbreak, simultaneous Islamist militant attacks on key mining or financial centers, U.S. default on debt obligations - expect the unexpected. Given the respective budget projections for life-of-mine, annual production and estimated cash flows at IAMGOLD and Gold Resources, patient investors with a penchant for risk could earn attractive yields of stock ownership while waiting for that inevitable trend reversal.
David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at firstname.lastname@example.org.