Dividend stocks are typically analyzed by financial bloggers in one of two ways. The first approach involves choosing a singular stock that pays any semblance of a dividend and subsequently detailing every aspect of its business, while the second technique is usually a list of some kind that briefly discusses a preset number of companies that pay yields above a predetermined mark.
For readers who already follow the ins and outs of a specific company, the first method isn’t very useful and frankly, articles that employ the second method of analysis don’t really provide any insight. In an effort to spice up things up a little bit, we at Insider Monkey would like to reimagine how you think about dividend-paying stocks, or at least add another tool to your repertoire when searching for income.
As you’ve likely noticed in our analyses on Seeking Alpha, we like to cover hedge funds’ positions in large and small-cap stocks, and in many cases, these stakes are built because a catalyst is expected in the future, whether it’s six months or three years from now. If no mind-blowing transformation (like a spinoff or a MLP conversion) is on the horizon, we seek to understand why a particular fund has shown interest in that stock’s sector, because in many cases, there’s a secular or cyclical trend at play.
Here are a few themes we’ve noticed in the metals and mining space, and how to play them from with dividend-paying stocks.
Industry fragmentation, lower gold prices
According to some analysts, the gold mining industry in particular is due for fragmentation in the eventual future. Lower gold prices are something all miners are already dealing with.
Barrick Gold Corporation (USA) (NYSE:ABX) is a perfect example to explain both phenomena. Earlier this month, we discussed how one investment firm is calling for Barrick to breakup. The Indianapolis-located Two Fish Management published a lengthy slideshow detailing how it would make financial since for the global gold miner to spin off its lower performing assets in areas like Australia, while selling its assets in Africa and South America to rid itself of elevated geopolitical risks and costs associated with these regions.
According to their presentation, of the 1.8 million ounces of gold Barrick produced in the first quarter of this year, almost half were from North America, followed by Australia (447K oz.), western South America (370K oz.) and mid-Africa (108K oz.). More importantly, around three-fourths of Barrick’s proven and probable reserves are in North and South America, sitting in only 12 of its 28 total mines in operation. In other words, the company is wasting resources by keeping the remaining mines open.
In terms of profitability, the story is the same. Over 70% of Barrick’s EBITDA is derived from its mines in North and South America, and all-in sustaining costs (the cost to sustain administrative oversight, research, and all other operations in a particular region) are significantly lower east of the Pacific. More specifically, Barrick pays $775 per oz. to maintain North American operations, $900 an oz. in South America, $1,150 per oz. in Australia, and almost $1,600 an oz. in Africa. Gold currently trades in the range of $1,330 per oz., and if you expect another 15% in price declination, it’s unsustainable to hold onto Australian and African operations.
With a dividend yield of 1.1%, Barrick Gold offers investors a moderate level of income—greater than two-thirds of the gold mining industry. With last month’s sale of a few Australian mines to Gold Fields Limited (ADR) (NYSE:GFI) and more potentially on the horizon, dividend-seeking investors would enjoy further sales over any sort of spinoff because of the cash potentially driving a dividend boost.
In the aforementioned slideshow, Two Fish Management said it thinks that a streamlined Barrick is worth 50% to 100% more than current levels, so there’s a potential for capital appreciation via a breakup as well. Not bad for a stock that offers an above-average dividend yield.
The other side of the aisle, but still in a similar spot
Speaking of Gold Fields, this is a higher-yielding stock that investors can play in this space. The smaller miner pays a 2.9% yield, and it has paid dividends for 15 consecutive years. Aside from being a bit more generous than Barrick, Gold Fields also has more liquidity. Gold Fields’ operating cash to market cap ratio (0.33) is greater than Barrick’s (0.29), and it has halted production at its St. Ives, Agnew (except for its Kim lode here), and Tarkwa (except for its North heap leach here) mines.
While Gold Fields’ footprint is a little different than Barrick’s, its decision to reduce its “marginal mining” operations, as it calls them, is a result of the same headwinds that are facing the industry at large.
Other options
By now, you can see where this is going. If you can find a gold miner that has underperforming assets to shed, or is in the process of boosting efficiency, there’s a potential play. If these stocks pay dividends, it’s even better. A few other gold miners that do offer solid yields and sit in similarly attractive scenarios as Barrick or Gold Fields include: Newmont Mining Corp (NYSE:NEM), AngloGold Ashanti Limited (ADR) (NYSE:AU) and Compania de Minas Buenaventura SA (ADR) (NYSE:BVN).
Newmont pays a dividend yield of 3.5%, AngloGold offers a 1.6% yield and Compania gives investors a whopping 4.7% yield. Earlier this month, Newmont sold its higher-grade Midas mine to focus on its Pheonix and CopperBasin open pit operations. Deutsche Bank’s head of equity research in metals and mining (Americas) Jorge Beristain has mentioned Newmont by name alongside Barrick as candidates to breakup to unearth “hidden value,” and in a similar fashion to Barrick, we see Newmont’s sale or spinoff candidates coming from its lower-performing assets. The company also sold its stake in Canadian Oil Sands Ltd (TSE:COS) earlier this year.
With regard to AngloGold Ashanti and Compania de Minas Buenaventura, the latter has carried out an intense asset-streamlining operation in 2013, while Minas has stopped production in its unprofitable Antapite, Poracota and Shila-Paula mines. Both names are worth further research to dividend-seeking investors looking to play the gold mining industry’s continued fragmentation.
Disclosure: none
