For Big Gold, 2009 was a good year

With wiped faces, is it time for major gold companies to start focusing on shareholders?

JOHANNESBURG - 

The majority of major gold producers finished 2009 on a high note, generating record levels of operating cash flows, in line with the rise in the dollar gold price which notched up its eighth year of successive increases, rising from around USD 250 an ounce in 2001 to above USD 1,200 an ounce in December 2009. The fourth quarter was especially strong, underpinned as well by copper prices that moved above USD 3.00/lb, compared to the multi year low of USD 1.28/lb seen in December 2008.

Such copper prices, twinned with gold bullion notching up a record in nominal terms, saw overall aggregated operating cash flow for eight gold majors come in at USD 10.4bn for 2009, compared to USD 7bn in 2008, and USD 3.9bn in 2007. Copper price-assisted gold miners Barrick and Newmont , the world's two biggest gold miners, contributed USD 5.9bn of the total USD 10.4bn operating cash flow noted during 2009, following trends set in previous years.

Of the other gold majors that have so far reported for 2009 - AngloGold Ashanti, Newcrest, Gold Fields, Kinross, Harmony, and Lihir - AngloGold Ashanti and Gold Fields each reported more than USD 1bn in operating cash flow for 2009. Aggregate capital expenditure for the gold miners rose marginally in 2009 to USD 8bn, leaving free cash flow of USD 2.5bn, compared to negative free cash flow of USD 773m in 2008 and a significantly negative USD 2.6bn in 2007.

Cash dividend payouts increased from USD 792m in 2007 to USD 941m in 2009.  The eight gold majors raised a notable total of USD 13.4bn from investors in rights issues across the three years. Much of this cash was earmarked for taking out hedge books, headed by Barrick, which in 2009 raised USD 4bn from shareholders, and ploughed USD 5.2bn towards eradicating its hedge book. Similar, but smaller, moves were made in 2009 and previously by AngloGold, Lihir and Newcrest.

Rights issues and improved free cash flows saw net debt for the eight gold majors falling from USD 9.1bn at the end of 2008 to USD 7.2bn a year later.

In general reflection of the relative scarcity of cash among gold majors, stock buybacks have been all but absent for some years, in sharp contrast to a number of major diversified resources stocks. BHP Billiton, the biggest, alone pushed USD 11.2bn cash into stock buybacks in 2006 and 2007, and mailed close to USD 5bn in cash dividends over the two years.

For years, gold companies of all sizes have promised, and promised, as gold bullion prices rose and rose. No matter its size, an expectation gap remains, and may be whittled down somewhat during 2010. The eight gold stocks mentioned carry an aggregate market value of USD 117bn, and returned a relatively modest USD 2.5bn in free cash flow for 2009. Combined cash dividends were USD 941m, as noted, giving a dividend yield well below 1%.

Could this be a year when gold majors focus on genuine returns to shareholders, rather than drawing attention to a good number of areas that sit on the periphery of underlying investor interest?

Given the persistent increase in dollar gold bullion prices, gold majors have fewer options available than mining rivals that produce little, or any, gold. A sampling of ten of the world's major mining companies shows a significant compression in aggregate cash flows during 2009 to USD 47.8bn, from USD 82.9bn recorded in 2008. The slowdown broadly reflected lower average commodity and metal prices during 2009.

However, the scope for recovery in commodity and metal prices beyond gold (and to some extent silver) has been, and remains, considerable. Dollar gold bullion prices fell about 30% in 2008, where metals such as copper fell by some 70%. Forecasting prices is a mug's game, but without persistently rising gold bullion prices, the priorities of listed gold stocks could become interesting.

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