Share prices of gold-producing companies have lagged the huge run-up in the price of gold, as well as the broad stock market, for years. Investors, instead, have poured billions of dollars into exchange-traded funds backed by actual bullion, believing that would provide purer exposure to gold prices and avoid unrelated stock-market risk.
This year, the biggest gold ETF, SPDR Gold Shares, is up 7.6%, easily outperforming the 12% fall in the Dow Jones US Gold Mining Index. Over five years, the disparity is even starker. The ETF has more than doubled, while gold-mining shares are up a paltry 12%.
On Friday, gold settled at $1,528.60 a troy ounce, only 1.8% shy of its record of $1,556.70, hit May 2.
In bull markets for gold, mining stocks historically have outperformed the gold price, as swarms of stock investors piled in. But the creation of gold ETFs opened up a whole new investing option, sucking demand from gold-mining shares. Since the first gold-backed ETF was created in 2003, such funds have collectively amassed about $70bn in assets that might otherwise have gone into gold miners.
Now, gold miners are fighting back.
Thirteen leading gold producers are expected to hand out a total of $2bn in dividends this year, the biggest payout in history, according to MineFund, an independent research firm. These companies, including Barrick Gold, Newmont Mining and Goldcorp, account for more than 90% of the industry's total dividend payments.
"The industry's stocks have been devalued to such a point that we need to reattract investor interest," said Richard O'Brien, chief executive of Newmont, which is second only to Barrick in terms of production.
In April, the Denver company introduced a "gold-price-linked dividend," promising an increase of 20 cents a share in its annual payout for every $100-an-ounce rise in gold prices. Newmont receives about $300m in additional cash after taxes for every $100 increase in gold prices, O'Brien said. Based on current gold prices, the company is expected to declare a 25 cent quarterly dividend in July, a 25% rise from April's.
The promised payouts, although still small compared with traditional big dividend payers such as utilities or health-care providers, are aimed at setting gold stocks apart from bullion or gold ETFs.
A long-standing criticism of holding bullion is that, unlike dividend-paying stocks, it doesn't throw off any income. Instead, investors in those instruments have to pay a fee for storage and management.
Miners also hope higher yields will put their stocks on the radars of investors looking for steady incomes and an alternative to ultralow bond yields. That, in turn, could eventually help boost their share prices.
In some cases, it is working.
Joe Foster, who runs the $1.8bn Van Eck International Investors Gold fund, said his fund has increased its Newmont holdings because of the dividend increase.
Mining companies "are probably generating more money than what they know what to do with," Foster said. "We deserve to share those profits."
George Soros's hedge-fund firm sharply reduced its gold ETF holdings early this year. At the same time, he bought miners that have boosted dividends, including Barrick, Goldcorp and small miner Eldorado Gold, filings from the first quarter show.
To be sure, the wave of payouts might raise eyebrows among investors who are buying gold stocks for their growth potential and in hopes they may find the next major deposit by reinvesting profits in prospecting and research, not dividends. And if gold prices weaken, the companies might find themselves with less cash than they need.
Mining executives dismissed the concerns. "We would only do this if we can already fully fund" operations, exploration and investment in growth projects, said Charles Jeannes, chief executive of Goldcorp, which has more than doubled its annual dividend, to 40.8 cents a share, since November.
"We are just in a unique position where we can both grow and pay a dividend," he said.
Historically, gold miners have tended to retain most of their earnings to fund costly exploration and mine-development operations. From 2006 to 2010, the industry paid an annual dividend of 0.7% on average, while the US stock market yielded 1.8%, according to Dow Jones Indexes, which is owned by CME Group.
They are able to pay up now because they are sitting on the enormous piles of cash they have generated, thanks to the rise in the gold price and their increased output.
"It has been the first time in this cycle that they have been able to accumulate money faster than they have to spend it," said Tim Wood, publisher of MineFund, referring to the decadelong bull market for gold.
The industry's dividend yield has already gone up to 1.1% from 0.8% this year, according to Dow Jones Indexes. It is expected to push toward 2% by the end of the year.
Goldcorp expects to continue to raise its payout, based on this year's spending and revenues, Mr. Jeannes said. He said "a close-to-2% dividend [yield] makes more sense."
"I've been in the industry for a long time, and, for most of that period, we have been pretty much scraping by and trying to raise money in any way to explore for new deposits and build a new mine," Jeannes said. "Paying a dividend was never an option."
By Carolyn Cui And Liam Pleven
Write to Carolyn Cui at carolyn.cui@wsj.com and Liam Pleven at liam.pleven@wsj.com
This article first appeared in the Wall Street Journal and can be read in full here: [ http://on.wsj.com/jP34SB ]
