Canadian mining companies rocketed to success last year on the back of stellar metal prices, but the payoff for investors in gold companies hasn’t been so rosy.
Len Boggio, a senior partner with PwC’s mining group, said investors who are interested in cashing in on record-high gold prices are increasingly sticking their money in exchange-traded funds (ETFs) rather than in gold companies.
“That’s put … brakes on the market caps of the gold mining companies,” Boggio told Business in Vancouver.
In the last six months, gold companies have seen a pull back in their market capitalization despite record results and strong commodity prices.
For example, Goldcorp (TSX:G), the Vancouver-based precious metals giant, has seen its share value fluctuate between $38.99 and $53.34 so far this year.
Meantime, the price per ounce of gold has steadily increased to US$1,525 from approximately $1,400 at the beginning of the year.
“Certainly, the valuation gap is something we’ve seen over the last year between the gold producers and gold,” said Goldcorp spokesman Jeff Wilhoit.
When it comes to choosing between a gold company and an ETF, many investors have gone with the latter option because, quite simply, there’s less to think about.
“All you have to do is make a bet on the gold price, you don’t have to bet on the gold price and how is that management team going to execute their plan,” explained Ken Stowe, president and CEO of Vancouver-based Northgate Minerals (TSX:NGX).
The ETF provides investors with the ability to make money based solely on the value of the commodity in question.
In other words, the investor doesn’t risk exposure to the political, operating and logistical issues part and parcel to mining companies.
SPDR Gold Shares (NYSE:GLD), the most popular gold ETF, has enjoyed a 23% increase in value to US$150.99 in the last year.
This while Barrick Gold (TSX:ABX), the world’s largest gold mining company, has seen its stock value drop 17% to $42.23 since the beginning of the year.
The situation has forced gold companies to think about how they can get investors back to the table.
One solution has been dividends, which ETFs don’t offer.
“I think that’s the most significant opportunity we have to differentiate ourselves versus the metal,” Wilhoit said.
In the last year, Goldcorp has more than doubled its dividend.
Denver gold giant Newmont Mining (NYSE:NEM) increased its quarterly dividend 33% in April.
The company has also linked its dividend to the gold price, promising that its quarterly payout would increase $0.05 per share for each $100 per ounce rise in the price of gold.
But hefty dividends might not be enough to change investors’ minds.
The global mining industry continues to face rising political risk as countries around the world install new tax regimes that eat into the sector’s bottom line.
At the same time, the demand that has driven commodity prices through the roof in the last year has also increased the cost of everything from the fuel that powers the trucks that haul ore to the tires they drive on.
“They’re concerned that as these companies invest, their capital is going to cost them more and their cost structure is rising,” said Boggio.
“As a result, fund managers and institutional managers looking at investing are more reluctant to invest in the gold companies.”