Big spending in 2012 for gold mining companies – dividends and acquisitions

Rising gold prices, more acquisitions, and further project development expected in 2012: PwC Report

TORONTO, Dec. 20, 2011— According to PwC’s annual Gold Price Report, 80% of mining companies expect the price of gold to continue to increase in 2012, with the majority of respondents expecting gold to peak at $2,000 in 2012. Sixty-two per cent of respondents reported the price of gold was positively impacting their stock price, yet the impact was less than expected.

Through December 15th, gold has risen 11%, but gold stocks within the S&P/TSX Global Gold Index have declined 10.6%.

“One main driver behind this unprecedented disparity between the price of gold and gold stocks is the availability of alternative investments that investors can use to generate a return from higher gold prices,” says John Gravelle, Canadian mining leader, PwC. “One example for retail investors is the ETF, which provides investors who want exposure to gold with a simple alternative to buying gold stocks. Such investments do not give the investor risks associated with cost overruns and resource nationalism."

This disparity is having an impact on how executives plan to spend their increased cash flow:

• 27% paid dividends in 2011, a notable increase from only 9% in 2010
• 29% expect to spend their cash on acquisitions in 2012, up from 19% in 2011

PwC’s 2012 Gold Price Report assesses gold companies globally, with companies surveyed representing 26.5 million ounces of gold mined in 2011, and 37.75 million ounces to be mined in 2012.

Outlook on mergers and acquisitions

To date in 2011, there have been 544 gold acquisitions with an approximate value of $11.2 billion. As of November 30th, the volume of acquisitions increased 12.6% and the value decreased 38.4% compared to the same period in 2010. In 2010, 483 acquisitions were completed with an approximate value of $18.2 billion.

“Cash-fat, acquisition-hungry companies are in the driver’s seat, as they are able to launch takeovers of smaller exploration-based companies that are not certain when the current market malaise will lift,” explains Gravelle. “Such juniors may be more motivated to accept takeovers given their current challenges in raising capital.”

With 29% of respondents expecting to spend their cash on acquisitions in 2012 and 40% of companies planning to replace reserves through acquisitions, it’s evident that acquisitions remain on the minds of gold mining executives for 2012.

Going the extra mile for investors

To provide an advantage to those investing in their companies rather than alternative gold investments such as ETFs, many gold mining companies have started or increased dividends. As of November, dividend payments for the top 20 gold mining companies were up 44% from 2010. In 2010, dividends increased only 18% from 2009.

“Connecting dividends to the gold price is an interesting development,” says Gravelle. “For investors, there is a clearer link between gold price and dividends. It also allows management teams to be more aggressive with dividend rates without concerns of maintaining levels in the long-term if gold sharply declines. Gold-linked dividends are only one option; companies need to get more creative with their dividend strategies.”

Foreign interest intensifies

Countries around the world are investing part of their foreign currency reserves in gold. “If we look at the Bank of Korea as an example, they haven’t purchased gold since the 1997-1998 Asian financial crises, and this year they made two major gold purchases - 25 metric tonnes of gold in June and 15 metric tonnes of gold in November,” says Gravelle. “Korea is not the only country increasing its interest in gold; many emerging markets are also keen on raising their gold holdings.”

PwC believes countries are now entering into a long-term period of gold accumulation. Given the relatively low amounts of gold available for purchase, countries with substantial foreign currency reserves that wish to diversify away from US dollars must do this over a long period.

For more information or to read the full 2012 Gold Price Survey, please visit: http://www.pwc.com/ca/goldsurvey

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