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Gold producers focused on dividends; investment sentiment upbeat - BMO

Kitco News

(Kitco News) - Investors remained optimistic about equities of gold-mining companies, and producers remained focused on returning capital to shareholders, in particular by paying dividends.

Those are some of the takeaways of analysts at BMO Capital Markets following the Canadian bank’s 29th annual conference for investors and representatives of the mining industry this week. Company officials gave presentations over a three-day period. BMO analysts listed their overall assessment in a followup 102-page report issued late Wednesday.

The BMO conference drew with roughly 500 investors and 753 corporate attendees, including 142 presenting companies.

“Anecdotally, we have found the mood at the conference to be relatively mixed – optimistic toward gold equities, while more cautious toward base metals/bulk commodities,” BMO said. “The general investor expectation is that gold can maintain its current high levels for a prolonged period, though admit that the strength of the recent rally has been surprising.

“Meanwhile, base metals and bulks fundamentals remain overshadowed by the current situation in China,” BMO continued, referring to coronavirus outbreak that has impacted the economy in the key consuming nation for base metals.

In terms of terms of commodity preferences, investors are generally bullish on gold and other precious metals, particularly as Treasury yields fall, BMO said. Copper is a favorite among base metals, due to potential demand growth, asset scarcity and a grade decline, and potential new sources of demand from the green economy.

BMO said senior gold producers appear “firmly focused” on paying dividends.

“Capital returns continue to be the preferred asset allocation decision amongst large-cap gold producers,” BMO said. “In our investor polls on Monday, we saw a clear bias toward dividends, particularly for the largest miners. As balance sheets are strong, production profiles are relatively flat in the near term, and investors are optimistic...in the persistence of high gold prices, the market is clearly messaging its preference for capital returns rather than accelerating growth or raise cut-off grades at existing operations.”

Meanwhile, many medium-sized gold producers have undertaken transactions that puts their annual output above 1 million ounces, “arguably justifying higher valuation multiples,” BMO said.

“For many of those that have not transacted, and for some that have, capital returns via share buybacks and/or dividends are being pursued at an increased level,” BMO continued. “With the gold price moving favorably recently, there also seems to be a resurgent desire for growth in the smaller producer space, which may spur continued M&A [mergers and acquisitions] in 2020.”

Producers of base metals are walking a “fine line” between capital returns, shareholder returns, innovations, adapting to a green economy, and cash flow from long-lived, low-cost assets, BMO said. This sector was described as being in the early stages of a significant transition and will continue to evolve over the next decade.

BMO characterized the growing Covid-19 epidemic as “the elephant in the room,” commenting that most producers indicated no direct impact on their sales yet, although some flagged challenges in the chain for raw materials sourced from China.

Meanwhile, BMO analysts said they sensed a more serious attitude toward efforts in “ESG,” or environmental, social, governance. There has been a risen in sustainable, green and ethics investment funds in recent years.

“Major diversified miners each addressed sustainability themes extensively through their presentations; some base-metal miners are shifting their asset portfolios toward increasingly ‘green’ initiatives, senior gold producers featured social programs as key aspects of their identities, while the mini-mill steel producers highlighted the increasing importance of their environmentally advantaged production process,” BMO said.

The chief executive of Anglo American, Mark Cutifani, reiterated a commitment to exit the thermal coal business within five years.

“Several other miners have also indicated plans to realign their asset portfolios to the expected needs of a low-carbon world,” BMO said.

A number of companies also emphasized efforts to move toward more environmentally friendly energy sources an effort to reduce emissions, BMO continued. 

“All of the major companies that presented highlighted their efforts to this end, which range from building/sourcing renewable energy generation (Anglo American, Antofagasta, BHP, Teck Resources) to mine electrification (Anglo American, Boliden, Newmont) and the hydrogen economy (Anglo American),” BMO said. “One of the challenges facing mining companies is how to measure the effectiveness of emissions-reduction strategies, given a lack of consensus in emission-reporting standards, uncertainty around carbon pricing, and where the responsibility for Scope 3 targets will ultimately lie.”

“Of these themes, renewable energy generation was the most prevalent. Several miners have committed to increasing their own exposure to renewable energy.”

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