True Gold taps new sources to raise capital

Mark O’Dea has to be the envy of every of nearly every junior mining CEO in the country.

As the executive chairman of True Gold Mining Inc., Mr. O’Dea has signed off on deals to raise $33.5-million of fresh capital since the start of May. That equates to more than half of True’s $60-million market value.

It is an enormous amount of money for a junior gold miner to raise at this point in time. Juniors are suffering through some of the worst market conditions seen in decades, as risk capital has fled the sector and equity financing opportunities have dried up due to lack of demand. The recent drop in gold prices only made matters worse.

Mr. O’Dea, a well-known mining entrepreneur, said he recognized the equity markets were a non-starter for raising capital. That caused him to take a different approach and look for strategic investors. His success demonstrates that money is available for quality junior companies, but they have to work a little harder for it than they used to.

“We’ve really tried to target a different style of niche investor, and different pools of capital from the traditional resource sector funds which have been really beat up,” the 45-year-old said in an interview.

Many juniors like to talk about how they are courting various “strategic” investors (particularly in Asia) but almost none are able to raise substantial amounts of money that way.

True Gold, however, was able to tap two different sources. Back in May, the Vancouver-based miner raised $10-million through a private placement with Canadian giant Teck Resources Ltd. And on Thursday, the company announced it is receiving a $23.5-million investment from Liberty Metals & Mining Holding LLC, a subsidiary of Liberty Mutual Insurance and a very long-term investor in the resource space.

True Gold was helped by the fact that Mr. O’Dea has a strong track record. He was the CEO of Fronteer Gold Inc., which made a discovery in Nevada and was sold to Newmont Mining Corp. for $2.3-billion in 2011. He also has a relationship with Teck that dates back to his days at Fronteer.

But on its own, that would probably not be enough to raise significant funds in this market.

Mr. O’Dea said the key was to match the project he wanted to build with the right kind of long-term investors. He said that Liberty was interested in True Gold’s Karma project in Burkina Faso because it has low capital intensity, with a construction cost of less than $150-million. That is a must in a market where capital is so scarce, and provides a useful lesson for juniors trying to tackle more ambitious projects.

“As the market began to turn, we recognized that projects with low capital costs, that can get into production relatively quickly, and can withstand downward pressure on the gold price are the projects you want to be in,” he said.

Source: http://business.financialpost.com/2013/07/18/true-gold-taps-new-sources-to-raise-capital/

Get ready for turbulent gold earnings season

The second quarter of 2013 is one that gold miners and their investors would love to forget. Unfortunately, they will have to relive the horrors when the companies start reporting earnings later this month.

The results will be ugly. Analysts at Stifel Nicolaus estimated that the gold miners under their coverage (which includes the senior producers and a smattering of others) will report an average 20% drop in EBITDA from the first quarter. Lower metal prices are obviously a key factor, but so is an anticipated decline in production (down 1%) and an increase in cash costs (up 8%).

With squeezing margins and potential mine closures on investors’ minds, the Stifel analysts ran their models at a gold price of US$1,000 an ounce to see how many operations would have to shut down if the price stayed at that level for an extended period. They found that Kinross Gold Corp., Barrick Gold Corp. and Newmont Mining Corp. would lose well over 30% of their production from closures. But Goldcorp Inc. would only lose 7% because of its low-cost asset base.

“With a management response on costs, probably half of the production loss could be saved for a year or two. However, the simple study shows that there would be strong supply side support at US$1,000 [an ounce],” they said in a note.

The only gold miner under Stifel Nicolaus coverage to be downgraded is Barrick Gold Corp., which was cut to hold from buy by analyst George Topping. He noted the company needs higher gold prices to pay off its debt, and the stock is likely to drift lower if prices remain flat. He also anticipates a dividend cut in the second quarter, along with US$7-billion to US$8-billion of writedowns. Neither of those moves would come as a surprise to investors.

Source: http://business.financialpost.com/2013/07/09/get-ready-for-turbulent-gold-earnings-season/

Are Gold Miner Dividends Sustainable?

Although the gold price has proved volatile in recent months, many gold miners continue to offer investors an attractive dividend. But is it sustainable?

For investors looking for a dividend from the large cap gold miners, the last decade and a half has proved fruitful. Frank Holmes, CEO and chief investment officer of US Global Investors, recently noted that the world’s top 20 gold companies have increased their dividends at a compound annual growth rate of 16% over the last 15 years, while gold only rose 12% annually over the same period.

At the moment, Barrick Gold’s (NYSE:ABX) dividend yield is 3.90%, while Goldcorp’s (NYSE:GG) dividend yield is 2.07%, Newmont Mining Corp.’s (NYSE:NEM) dividend yield is 4.09%, and Kinross’s (NYSE:KGC) dividend yield is 2.48%.

The miners themselves were optimistic about dividends heading into this year. According to PwC’s 2013 global gold price report, 100% of senior miners surveyed planned to use cash to continue to pay dividends this year, with 80% saying that they planned to increase the proportion of profits paid as a dividend.

Indeed, speaking about the climate for M&A in the gold space at the Bloomberg Canada Economic Summit last month, Barrick Gold president and chief executive officer Jamie Sokalsky said that investors are hoping for free cash flow, which he said they would perhaps rather see “returned to them in a higher dividend at some point.”

All else being equal, dividends from the gold miners do help mining equities look more attractive to gold ETFs, explains Elizabeth Collins, director, basic materials equity research at Morningstar.

“But unfortunately for gold mining equities, gold ETFs provide leverage to gold prices without the added headaches of cost inflation, production level disappointments, and political risk,” she adds.

This week, Australia’s Newcrest Mining (ASX:NCM) announced that, as a result of a reduction in profitability for the 2013 financial year following a sharp decline in the gold price, it expects that it will not pay shareholders a final dividend.

The company notes that as growth in production and earnings continues from two of its mines over the coming years, and costs and capital expenditures are reduced further, it “is confident it will be well-positioned for both an accelerated reduction in debt levels and a return to dividend payments.”

Back in April, Newmont Mining — which uses a gold price-linked dividend policy, with each quarterly dividend based on the company’s average realized gold price for the preceding quarter — cut its dividend to $.35 per share, based on the average London PM Fix of $1,632 per ounce for the first quarter of 2013. In February, the company’s quarterly dividend was 42.5 cents per share based on the average gold price of $1,718 per ounce for the fourth quarter.

Certainly, the ability of many miners to continue to pay an attractive dividend depends on the gold price’s moves. Earlier this year, RBC Capital Markets ran a “downside stress test” on North American gold producers, to see how robust miners’ balance sheets are. While the test found that most of the companies appear to be able to weather gold prices of $1,500 or $1,4000 per ounce, at $1,200 per ounce, within 24 months most companies would have to cut capital spending and dividends.

“I think many gold miners’ dividends are sustainable as long as gold prices don’t fall. Many miners are cutting back on exploration and capital expenditures in order to boost free cash flow and return more cash to shareholders. However, many gold miners’ dividend levels are either directly or implicitly linked to gold prices. So if gold prices fall, so too would dividend levels,” says Collins.

Source: http://www.minyanville.com/trading-and-investing/commodities/articles/GG-NEM-ABX-KGC-NCMAX-gold/6/7/2013/id/50235