Foster: Historically Low Gold Stocks Stall M&A Activity In Mining Sector

January 05, 2012


HAI: We saw gold miners paying dividends in 2011, something like more than $2 billion in total. What’s the outlook for dividends in 2012?

Foster: They have the capacity to increase dividends. I think we will see a continued increase in dividend payout amongst the gold producers.

HAI: Will that trend be more likely with bigger miners? Are you seeing junior gold minors also paying dividends in the same fashion?

Foster: It’s more amongst the larger companies. The larger companies have a portfolio of mining operations.

HAI: Let’s talking a little bit about Van Eck’s gold mining ETFs. Why the disparity of performance between majors and juniors? The major miner ETF (GDX) is just a fraction in the red for 2011, whereas the junior gold miner ETF (GDXJ) has fallen more than 20 percent.

Foster: I think it’s a function of the macro environment. It’s a function of what’s going on in the credit market. The producing companies are generating a tremendous amount of cash. They’re self-funding. They’ve got so much cash, they’re increasing their dividends. They’re able to fund all of their exploration and their capital needs internally. So they really don’t need to access the credit markets.

The juniors, on the other hand, these are smaller companies. And a lot of the juniors are development companies. Some aren’t even producing gold yet. They’re completely reliant on the equity and the debt markets for their funding. When the credit market starts to seize up and experience the problems that we see emanating from the eurozone, the companies that get hit the hardest in that environment would be the junior miners.

HAI: There doesn’t seem to have been a lot of consolidation in the mining sector. Do you anticipate some of the junior miners starting to get bought up?

Foster: Gold stocks have done very poorly in 2011. And you generally don’t see much M&A [merger and acquisition] activity unless companies feel good about their share prices. These stocks are trading at historically low valuations. So until management feels better about their share prices … . If they’re going to do an acquisition, they like to do it from a position of strength, when you’re talking about valuations and equity prices. So until we see more strength in gold stocks, I don’t think we’re going to see a lot of M&A activity.

HAI: Will higher gold prices push up those stocks? Or is it just a symptom of the market right now, where equities, in general, seemingly are punished, and that phase has to fade away?

Foster: Well, you won’t get higher gold equity prices without a higher gold price. So that’s the first step in achieving a higher gold price, or establishing a positive trend in the gold market. As the second step, we would have to see more investors moving into these gold stocks. And for that to happen, we need to see these companies meet earnings expectations and show some good operating performance to attract investors back into the sector.

HAI: For an investor who wants to follow gold miners, is there a particular index that you feel is better than another?

Foster: I think the Amex Gold Miners Index (GDM) is the best and the most representative of the producing companies. The Market Vectors Junior Gold Miners Index (GDXJ) would be great for the juniors. The other ones, the XAU (PHLX Gold/Silver Sector Index) and the HUI (AMEX Gold Bugs Index), take a narrow slice of the sector, but they’re not as comprehensive as those other two.

HAI: Is Van Eck contemplating any new gold ETF products?

Foster: We’re looking at other funds, not necessarily ETFs. But we are looking at other forms of gold funds to bring to the market. But it’s too early to give you any details.

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