Today, it can be difficult to find a precious metals stock that provides a reliable, worthwhile dividend.
And since gold and other precious metals don’t pay dividends directly, income investors are hard-pressed to attain a good position in these resources.
Thus, we need to pay particular attention to those precious metals stocks that do have meaningful dividends, and take advantage of them. With that in mind, I went digging for opportunities…
The Fallout From an Epic Run-Up
At one point, precious metals mining stocks were excellent plays for income investors. An individual mine, once constructed, settled into a predictable income stream that offered investors steady dividends and an upside on precious metals prices.
Of course, when the mine ran out of gold, the income stream ceased. That made such plays suitable for only part of the portfolio… but with inflation an ever-present danger, they were still a useful hedge.
Alas, solid dividend-paying precious metals stocks are an endangered species today, and the killer was the long run-up in gold and silver prices from 2000 to 2011.
The run-up made mines with a finite life and moderate reserves trade at a discount. Meanwhile, the premium players were those with aggressive exploration plans and a steady succession of new mines, which gave the impression of perpetual production growth.
But the reversal in precious metals prices since 2011 has wreaked havoc on these plans.
Expansive exploration budgets were barely affordable at lower prices, and even profitable companies developed a nasty habit of requiring massive write-offs on projects that had lost value. That destroyed both assets and earnings, and put companies in severe danger of violating debt covenants.
Even for basically profitable companies, dividends went out the window. Worse yet, the pernicious fashion for stock buybacks (which are of little or no benefit to retail investors) led many companies to buy back their stock near the top of the market and then watch the price collapse, decimating shareholder value.
The result is that few mining companies pay decent dividends today – and some, like Hecla Mining (HL), preserve a nominal but unhelpful $0.01 annual dividend. Unfortunately, there are very few choices for income investors who wish to receive a significant and reasonably reliable dividend stream while maintaining an exposure to a possible rise in precious metals prices.
Solid Yield From One Industry Giant
The most substantial income stock in the precious metals space is Freeport-McMoRan (FCX), a global miner of copper and gold. FCX also owns the world’s largest gold reserves in New Guinea’s Grasberg mine, which made an abysmally timed foray into the oil market when it bought Plains Exploration and McMoRan Exploration in 2013.
FCX recently released its fourth-quarter results, which, on an operating basis, showed profits of $0.25 per share for the quarter. And, as I forecast a few weeks ago, the results included a $3-billion write-off of oil and gas assets. In the end, though, $5-billion worth of asset sales in the quarter secured FCX’s balance sheet.
Of course, the most important feature of the conference call after the results was Freeport Chairman Richard Adkerson’s confirmation, “The plan we are presenting to you today involves a continuation of the payment of our current cash dividends to our shareholders.”
That means FCX’s quarterly dividend of $0.3125 per share appears safe, at least for now (the next dividend is due to be announced in early March and paid at the beginning of May). That gives FCX a juicy 6.8% yield, with excellent upside in gold, copper, and oil.
Outside of FCX, though, there aren’t many good alternatives.
Barrick Gold (ABX), the sector leader, has suffered huge write-offs stemming largely from its Pascua-Lama project on the Argentina-Chile border. The project has been tangled in inevitable political and environmental complications, including the fact that northern Chile has very little water, which is essential for gold mining. Barrick is also a devotee of stock buybacks, while its actual cash dividends offer a measly 1.5% yield.
One smaller company paying a decent dividend is Nevsun Resources (NSU), which yields 4.7% and has over $300 million in cash. However, NSU’s main mine is in Eritrea, a jurisdiction that’s leftist and unstable even by African standards.
Finally, Alamos Gold (AGI) is another small producer that sports a decent yield of 3.4%. Alamos owns Turkish development projects and has $400 million in cash, as well.
In conclusion, both NSU and AGI fit the traditional precious metals mining profile of a stable and secure dividend yield with a finite life, though they both have limited upside potential if precious metals prices rise. FCX is a more adventurous pick, with a higher yield, more risk, and more potential reward.