Gold miners keep the faith at Denver Forum

A decade ago, when gold’s bull run was just beginning, the sessions at the Denver Gold Forum were “a lot like going to church,” said Franco–Nevada (FNV-T, FNV-N) president and CEO David Harquail at a presentation at this year’s show.

The gold price was around US$250 an oz., Harquail recalled, and “everybody prayed a lot.”

With gold having recently hit an all-time nominal high of US$1,900 an oz., those prayers have been answered, and at current prices, gold miners are now enjoying record profit margins.

The only problem is that gold stock prices aren’t responding.

However, gold miners haven’t lost their faith. Far from wringing their hands over the disparity between gold’s spectacular run and the lagging prices of gold equities, gold miners at the forum, held in Colorado Springs this year over Sept. 18-21, are universally confident that their share prices will soon close the gap.

“Lagging performance of the gold equities has been a key topic of conversation of late… but I really don’t think that it should be unexpected,” said Goldcorp (G-T, GG-N) CEO Chuck Jeannes yesterday. “If you look back at how equities have responded to very rapid increases in gold prices, it always takes time for investors’ views of long-term gold prices to catch up with the gold price — that’s only logical.”

Jeannes cited a recent study which calculated the amount of gold traded in the first quarter of 2011 at 10.9 billion oz. – twice the amount of gold that has ever been mined in the world.

“This level of liquidity I believe supports the view that gold truly enjoys a position as an asset class today and as a part of the international currency market.”

Jeannes argued that the next logical target for gold would be US$2,400 per oz. — its 1980 record high adjusted for inflation.

Barrick Gold (ABX-T, ABX-N) president and CEO Aaron Regent was similarly upbeat on the yellow metal, arguing there are few safe-haven alternatives to gold.

“Gold has became the global default currency in the world,” Regent said. “It’s the one currency that can’t be devalued.”

Dahlman Rose mining analyst and director Adam Graf, however, isn’t so sure investors see a buying opportunity in the gold equities.

“Look, the gold price has been up over US$1,900 and today, it’s down under US$1,800,” he noted in an interview on Monday. “Where gold is going to go I couldn’t tell you, but certainly the volatility of the gold price is not going to inspire confidence in the buyers of gold equities.”

Aside from a near-relentless bullishness, another theme of the conference was yield, with many producers calling attention to their dividend payments. Mindful of the cash accumulating in their coffers at current gold prices, gold miners are increasing their dividends – something that investors have been pushing for even before gold equities started underperforming the gold price, Graf says.

The world’s second-largest gold miner, Newmont Mining (NMC-T, NEM-N), has been especially responsive to investors’ need for yield, announcing a new gold-linked dividend policy in April.

“This is a company which is paying conscious heed to returning capital to investors in an industry which, historically, has not done a lot of that,” said Newmont president and CEO Richard O’Brien in a presentation on Monday.

The gold major announced on Monday that it was sweetening the dividend policy further with higher payments at US$1,700 and US$2,500-per-oz. gold. If the gold price averages US$2,500 an oz. over a quarter, shareholders would receive an annualized $4.70 per share.

“If gold goes up to US$2,000 and our share price doesn’t move, we’ll be yielding about 4.5 %,” O’Brien said. At current prices, the yield on Newmont shares is 3%.

O’Brien said the policy makes Newmont a unique investment in the gold space.

“If you want to invest in equities and have a parallel return in gold price, we are it, and we compete very effectively not only with all the equity peers but up against ETFs as well.”

It’s not just majors who are embracing dividends. Three months after starting production at its 60%-owned Bisha gold-copper-zinc mine in Eritrea, Nevsun Resources (NSU-T, NSU-X) declared a semi-annual dividend of 3 cents. And New York-listed, Mexico-focused Gold Resource Corp. (GORO-X) has paid out 14 monthly dividends totalling 48 cents since it achieved production at its La Aguila mine.

While the dividends of majors are creeping up, Dahlman Rose’s Adam Graf says yields haven’t risen significantly. And with all the cash gold companies have been accumulating, Graf says the sector is “ripe” for takeovers.

“Certainly, (even) with high gold prices and wide margins, there still hasn’t been a lot of M&A – it’s been very sporadic.”