Gold's big taboo

Six of the world's major gold diggers truly sweat for cash, and hoodwink with headlines.

JOHANNESBURG - 

Don't be fooled by high dollar gold prices, don't be hoodwinked by flattering headlines from gold companies, and don't deny the patent overvaluations. The world's major gold producers are sweating for free cash flow, the ultimate test of underlying performance.

The numbers can be aggregated from historic reports, and the latest set of quarterlies from global Tier I gold miners AngloGold Ashanti, Barrick, Goldcorp, Newmont, Yamana, and Kinross. Gold Fields and Harmony report with 30 June year-ends, and will be included in future surveys; Australia's Newcrest and Lihir, and Russia's Polyus are excluded, on a quarterly basis, on the basis of publishing limited details in quarterlies, and Buenaventura and Freeport-McMoRan are excluded as diversified metal miners.

The aggregated numbers for the six gold majors selected show that the grouping produced free cash flows of US$1.058m in the first nine months of the year, with free cash flow defined as operating cash flow minus cash outlaid on capital expenditure. The calculation of FCF excludes cash from selling/buying assets, cash spent on acquisitions/sales, and cash spent to close out hedge books. Of the free cash flow generated by the six companies in the first nine months of 2009, more than half, at US$554m, was paid out in dividends.

This meant that of aggregated revenues for the six gold companies of US$18.2bn for the nine months, just over half a billion dollars was free after payment of dividends. Combined net debt (including cash) fell from US$8.3bn on 31 December 2008 to US$2.2bn on 30 September 2009.

The apparent contradiction between the relatively modest free cash flow and the sharp decline in net debt was explained mainly by the seemingly endless procession of rights issues by gold companies. During the first nine months of 2009, US$5.9bn has been raised in fresh equity, including a huge issue by Barrick.

It seems that the more dollar gold prices rise, the more gold majors need to call on shareholders to fund actual and potential cash deficits. During 2008 the six gold majors raised US$2.2bn in fresh equity, and in 2007, a more modest US$409m. Cash acquisitions (as opposed to where equity is issued to vendors) fell from an aggregate US$2bn in 2007 to US$1bn in 2008, and have risen to US$1.5bn for the first nine months of this year.

The good news is that free cash flow generation is better for the first six months of 2009 than for the comparable period of 2008. Where FCF this year has been positive to the tune of US$1.1bn, it was negative to the effect of US$1.1bn for the first nine months of 2008. The rising dollar gold price has played a role, and capital expenditures have risen this year, somewhat, to US$5.4bn.

For the individual companies, FCF differs widely; it is almost universally ignored by gold companies. As an instance, for the September quarter 2009, Goldcorp reported that: "total cash costs were $295 per gold ounce, net of by-product copper and silver credits, compared with $346 per ounce in 2008. On a co-product basis, cash costs were $384 per gold ounce, compared with $398 per gold ounce in 2008".

These costs look very low, and are very low, but Goldcorp has so far this year failed to break positive in generating positive free cash flow, mainly due to heavy ongoing capital expenditures that have already topped US$1bn in nine months. The most significant contributors to positive FCF generation in the first nine months of 2009 have been especially Newmont, and Barrick.

At the same time, Barrick and Newmont rank as the world's two biggest gold diggers, and are by definition most restrained in growing production, percentage wise, given the high base. For the next three years or so, the highest production growth is anticipated to come from group production of Goldcorp, followed by a restructured Harmony, Kinross and a somewhat restructured Gold Fields.

Companies on a higher output growth trajectory tend to have heavier capital expenditure commitments, but, by the same token, the giant companies tend to be faced with rising stay-in-business capital expenditure at mature and ageing mines, plus the cost of new mine builds. The individual and aggregate numbers for the six gold majors may at least hint at the notion of circular tail chasing; alternatively of raising the question of how high the gold price needs to go before gold companies stop launching one rights issue after another.

The odds are, however, that the issue of free cash flows will continue to remain taboo to gold diggers, a phenomenon that appears to have the silent consent of a good number of professional investment analysts. In conversation with a specialist London-based gold analyst during September, a reply to a question on the issue was simply: "don't get hung up on gold companies and free cash flow - an oxymoron!  Just brush that little issue aside..." Indeed.

For the first nine months of 2009, not to be repetitive, the six gold majors posted aggregate revenues of USD 18.2bn, of which just USD 1.1bn was left as free cash flow; about half of that was used to pay cash dividends. Net interest payments on debt added further to demands on cash.

The six gold majors may well generate a few hundred million dollars of free cash flow for 2009 as a whole, and may even have some left after paying dividends, interest and other sundries. But it seems almost inexplicable that these companies should carry a combined market value of US$132bn. But that they do.

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responses to this article

Free cash flow This all important metric should look better in 2010 - each $100 increment in price leads to a aggregate $6 billion or so for 2,000 tonnes of production. Gold prices at the moment are more than $100 higher than the 9 month figures used . .more here. Looking forward, these companies are now more conservatively priced with room to expand on the upside -providing gold prices stay at these levels or increase. . .less by David Gunter on November 09 2009, 06:40 Find this comment inappropriate? Report it

FCF Exactly - a havit too of some iron ore companies - cashed up from going continually to shareholders - selling iron ore to the Chinese at a loss !! I produce gold in Resource Gold with a big wet gravity plant for $100 oz and have FCF . .more because we actually do make money -not continually tap shareholders. . .less by Ken Watson on November 09 2009, 07:01 Find this comment inappropriate? Report it

free cash flow Mining companies like oil and gas companies generate revenue from a finite resource and a declining asset base and are always looking to grow. therefore, they are always seeking their next capital investment. I find a dividend paying trust . .more model would work best in large miners where accretive growth is most difficult so they come close to being pure commodity price plays. this requires a favorable tax environment. let the small explorers find the stuff (or an affiliate controlled by a large entity/producer) and develop through to bankable feasibility, in that way you create two separate models 1. a high risk growth oriented model (explorer) and a milking the cow low risk , dividend paying trust model, large producer . .less by r savard on November 10 2009, 05:10 Find this comment inappropriate? Report it

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