More bad news for gold mining companies-although not for all
) cut its dividend by 17.6%.
Now, a dividend cut of any sort is extremely unusual. Boards of
directors consider a dividend carefully before instituting one
because they know that investors take a dividend increase or
decrease as an important sign from inside the company about its
A 17.6% dividend cut, then, is a big deal. Both because companies
go out of their way to avoid sending out such a negative signal,
and because 17.6% is a
cut. So what's going on here?
It's called a funding gap. With the price of gold plunging from
$1,778 an ounce in October to the neighborhood of $1,400 an ounce
last week, some gold mining companies are facing a cash crunch.
These companies set their capital spending plans to explore and
develop new sources of gold, and to expand existing mines, based on
selling their current production at $1,600 or $1,700 an ounce. Now
that gold is so much lower, the companies face a series of
- They can cancel or postpone current spending (and take a
beating in the stock market as analysts cut their estimates for
- They can raise money in the capital markets, and so either
add debt or dilute current shareholders by selling stock.
- They can cut dividends, take cash that would have gone to
shareholders, and use it to fund capital spending.
That looks like what Newmont has decided. The company was one of
the first gold mining companies to increase its dividend in order
to compete for the investor dollar against gold and gold
that didn't pay a yield. Before the announced cut, Newmont was
paying a 4% yield.
And there are other gold miners that might be facing this kind of
crunch, and might look to cut dividends-if they pay any. Deutsche
Bank put together a short list that included
), and of course Newmont Mining. On average, Deutsche Bank cut its
target prices for these stocks by 30%.
Editor's Note: This article was written by Jim Jubak of
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