Betting the Business

Earlier this year, the Newmont Mining Corporation announced that future dividend payouts would be linked to the price of gold. For every $100 increase in the average price received on its sales of gold, the annual dividend would be increased by 20¢ a share. From the Newmont deck:

What does the promise of a gold-linked dividend provide above and beyond what investors in Newmont already had?

First, Newmont is in the business of mining gold and this makes Newmont’s shareholders directly exposed to gold prices, even if the company pays no dividend.

Second, dividends may be de facto linked to the price of gold even without the company pre-announcing a specific formula. In July 2010, after record gold prices helped double Newmont’s quarterly profit, but before any explicit link to gold prices had been promised, the company boosted its dividend by 50% to $0.15/share.

But a payout linked to gold is not certain. The payout is management’s prerogative. Shareholders in companies with dispersed ownership don’t have any guaranteed right to a specific payout, nor even a direct say on the matter. So, awash in cash from high gold prices, Newmont’s management could decide to reinvest it all in expanding output, or diversify into other ventures as many oil companies did in the eighties.

Investors of late have clearly shown that they see a real difference between an investment in gold and an investment in a gold company. Since the beginning of 2009, the SPDR Gold Trust Index went up 90 percent. The performance of gold mining companies during this period has varied considerably: Freeport McMoRan appreciated 180 percent, Newmont 50 percent, and Barrick Gold 32 percent. In particular, Newmont’ shares have systematically underperformed the SPDR Gold index since October 2010. Over the last year the SPDR was up 24 per cent, and Newmont 0 per cent.

Newmont’s management wishes investors would value the shares like gold. Promising a link between the gold price and dividends is a way to make the point.  This past month, Newmont doubled-down on this communications strategy by announcing that it was goosing the link even more. On top of the original link there will be

…an additional step up of 7.5 cents per share when the Company’s realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company’s realized gold price for a quarter exceeds $2,000.

From the new deck:

 Will this linkage be effective in boosting Newmont’s stock price? Does the new policy give investors certainty that the payout is linked to the gold price?

Investors should be circumspect. In fine print the footnote states that,

Newmont has established a gold price-linked dividend policy that serves as a non-binding guideline for Newmont’s Board of Directors (the “Board”). The Board reserves all powers related to the declaration and payment of dividends. In addition, the declaration and payment of future dividends remain at the discretion of the Board and will be determined based on Newmont’s financial results, cash and liquidity requirements, future prospects and other factors deemed relevant by the Board. In determining the dividend to be declared and paid on the common stock of the Company, the Board may revise or terminate such policy at any time without prior notice.

Indeed, September’s upward revision in the promised gold-link only serves to emphasize that the entire linkage is just a promise about what the future holds. If the Board can change the linkage upwards, it can also change it downwards. A gold-linked dividend policy is not a contractual commitment like a gold-linked bond. It would be better to think of it as “guidance” about the near term dividend exposure to the gold price. But be prepared for surprises, too.