Gold, The Miners And Income: Generating Income In Challenging Times

If the dividend keeps going up, then even if the share price jumps around…

by Simon Popple of the Brookville Capital Intelligence Report

Income

In these challenging times it’s becoming more and more difficult to get income.

Negative interest rates and many companies either slashing or stopping their dividends are making life more complicated.

With the pandemic upon us, we need to think about supply chains. The shorter the supply chain….the better.

What is particularly attractive about gold and silver mining companies is that not only are their supply chains relatively short…..but a lot of the value is delivered up front….when the ore is mined and processed.

There are far fewer links in the chain. Remember – you only need one component missing to stop a production line.

To illustrate this point, I’m going to talk about one gold producer. There are many…..but the logic is largely the same.

Here goes.

Evolution Mining

Evolution is a relatively new company. In 2010, an opportunity was identified to fill a vacuum in the Australian gold mining sector by creating a new mid-tier producer. Their first asset was a resource in North Queensland that others believed was not feasible to develop. Undeterred, their Executive Chairman and founder, Jake Klein, with the assistance of a small management team, pursued a series of bold and complex deals to form Evolution in November 2011. They then successfully turned that initial resource at Mt Carlton into one of the world’s highest-grade open pit gold mines.

Since then they’ve not looked back. They just keep on growing.

As you can see from the chart below, over the next three years they are forecasting production to expand quite significantly.

I’d like to add that as at 20th September 2020, the mines had a mine life of at least 10 years.

Not only that, but their costs are also heading the right way. Here is a chart from the same presentation.

This increasing production forecast….coupled with a lower cost outlook should result in much stronger cashflow – especially if the gold price is kind to us.

As you can see from the chart below. They’re already leading their peers on cashflow. And I’m hoping this will get better!

Before I get on to dividends….let’s touch on reserves.

When calculating reserves a company assumes a gold price to determine whether or not they are economic. The logic being, the higher the gold price assumption, the greater chance that reserves are economic.

Set out below is a comparison of the prices used by Evolution and their competitors from 2015 – 2020.

Given the current gold price is US$1,812 (A$2,364.6) and their reserves are based on a price of A$1,450 per ounce – there is potential to increase it. Although it’s not possible to calculate how much extra gold would be included in reserves if a higher gold price was assumed, it’s not unreasonable to assume the reserves will increase.

Not only that, but the market has to “buy-in” to the gold price assumption. Given it has already “bought-in” to A$1,750 per ounce used by Northern Star and Saracen, I would view this as the floor that Evolution could use when they re-calculate their reserves later this year. So they could well go up – meaning longer mine lives and therefore a longer stream of cash. This should not be bad for the share price either.

Which brings me on to dividends. Their dividend policy is 50% of free cashflow – that could result in some very nice dividend payments to shareholders.

I want to focus on two areas here. Firstly, the growth in their dividends. As you can see from the chart below, they’ve become good dividend payers, with an increasing percentage of their revenue being distributed as a dividend.

I’d suggest you take a look at the charts above that set out production and costs forecasts before looking at my next chart……

….which compares them to their peer group.

The numbers you should focus on are the 2.8% yield (which is better than you’re likely to get from a fixed instrument). And the total amount of capital they’re declaring as a dividend – the A$365m.

Why could dividends be exciting?

I just want to play around with some numbers. Please bear with me.

The total dividend per share in FY 2020 was 16 cents per share. That’s a yield of around 3.5% on the current share price

Now if this dividend per share keeps growing….it’s a big “if” but please bear with me, let’s say it increases to 22 cents per share.

That means a dividend yield on the “current share price” (the A$4.63) of 22/365 = 4.8%.

Sorry to labour this point, but take a look at the chart below:

Let’s assume you bought your shares when they were around $2. But if you held on to those shares….not only would you have been sitting on a nice capital gain….but with a dividend of 16 cents a share in FY2020 – that’s a yield of 8% on your initial investment. If the dividend keeps going up, then even if the share price jumps around…that income could be very important.

My point is really simple. If you believe the gold price will improve and hold some gold shares for their dividends, then over time you could be getting a very nice dividend yield.

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Simon Popple is the Author of the Brookville Capital Intelligence Report – further information about this weekly report can be found at www.brookvillecapital.com

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