If you’re an investor — or interested in being an investor — in the uber-speculative world of gold mining stocks, you’re highly encouraged to read this analysis from MineWeb, on the failure of many major gold miners to soar or spin off substantial cash, despite the boom in the yellow metal.
Gold producers are finding it increasingly difficult to generate profits, which are increasingly complicated to express under dazed modern accounting rules. But no gold miner can escape from the challenge that generating free cash flow is now agonizingly difficult. Free cash flow is simply operating cash flow, less cash laid out on capital expenditure.
Since the start of 2007 (and excluding the fourth quarter of 2009), eight of the world’s Tier I gold stocks — – AngloGold Ashanti, Barrick (ABX), Goldcorp, Newmont (NEM), Yamana, Kinross, Harmony, and Gold Fields — have generated negative free cash flow of USD 3.2bn (for the first nine months of this year, in line with rising bullion prices, generation of free cash flow has been positive to the tune of USD 1.1bn).
Cash flow deficits have been financed by raising fresh equity, to the tune of USD 10.1bn, raising fresh debt, and selling assets. These eight gold companies have been determined, however, to create a lively impression, paying an astonishing USD 2.7bn in cash dividends over the period. Cash has often moved around in circles, rather than from profitable gold mines to shareholders.
Given the belief among so many in the gold world that cash is mere worthless paper, it’s a wonder these companies would go through such trouble to borrow cash, and then distribute it to shareholders. Why not just pay dividends by sending out envelopes containing gold flecks, and skip all the nonsense.
Regardless, it is pretty shocking looking at a company like Newmont (NEM), over the past 5 years, and seeing how lackluster its performance has been. Only with the latest gold surge has it really made much of a power move, and as the article notes, it’s still not anywhere its highs of just a couple of years ago.
Combine the free cash flow problems at the majors, with the .com-like IPO mania from junior miners without real businesses, and you have a situation in which investors need to proceed very cautiously.