According to PwC’s annual Gold Price Report – which surveyed 41 mostly North American-listed mining companies representing 26.5 million oz. gold mined in 2011, and 37.75 million oz. to be mined in 2012 – 80% of respondents expect the gold price to continue to rise in 2012, with the majority expecting gold to peak at US$2,000 per oz. in 2012.
Sixty-two percent of respondents reported the price of gold was positively impacting their stock price, but that the impact was less than expected.
Through Dec. 15, gold has risen 11% in 2011, but gold stocks within the S&P/TSX Global Gold Index have declined 11%.
“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,” John Gravelle, Canadian mining leader at PwC, says in a release. “One example for retail investors is the exchange-traded fund (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. Twenty-seven percent paid dividends in 2011, a notable increase from only 9% in 2010, and 29% expect to spend their cash on acquisitions in 2012, up from 19% in 2011.
To date in 2011, there have been 544 gold acquisitions with an approximate value of US$11.2 billion. As of Nov. 30, 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 US$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,” Gravelle explains. “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.
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,” Gravelle says. “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.”
Countries around the world are investing part of their foreign currency reserves in gold. PwC notes that the Bank of Korea, for example, hasn’t bought gold since the 1997-1998 Asian financial crisis, and this year it made two major gold purchases – 25 tonnes, or 804,000 oz. gold, in June and 15 tonnes, or 482,000 oz. gold, in November. “Korea is not the only country increasing its interest in gold,” Gravelle says. “Many emerging markets are also keen on raising their gold holdings.”
PwC believes countries are 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 U.S. dollars must do so over a long period.
– The preceding is a summary of PwC’s newly released, 20-page 2012 Gold Price Report, which is available at www.pwc.com/ca/goldsurvey.