THE GROWTH OB­SES­SION

Finweek English Edition - - INSIGHT: LOCAL -

In the gold busi­ness this is not just an ob­ses­sion, but a sick­ness. Un­til very re­cently there was not even a ques­tion about what to do with re­tained earn­ings and the free cash f low that gold com­pa­nies oc­ca­sion­ally make.

They use it to try and f ind the next mine or to buy the next mine or fund the op­er­at­ing losses of non-prof­itable mines. Man­age­ment seems to have for­got­ten that for eq­uity in­vestors there is more than one way to make re­turns on their in­vest­ment. In the hands of in­vestors, re­turns in­crease when the share price goes up, and if they re­ceived re­turns on cap­i­tal. Imag­ine that!

And for those com­pa­nies that do pay div­i­dends, I’d sug­gest the point of de­par­ture when faced with the ques­tion (and it is a ques­tion) of what to do with re­tained earn­ings, should be: “Why should we not pay it all back to in­vestors?” as op­posed to “How lit­tle should we pay them to keep them happy?”

Tax con­cerns aside, chances are that if you ask them for money for an at­trac­tive busi­ness propo­si­tion at a later stage they are likely to give it back to you. To this point Bloomberg shows that an ag­gre­ga­tion of the largest North Amer­i­can listed gold and sil­ver com­pa­nies in the Philadel­phia Gold and Sil­ver In­dex fore­casts that based on con­sen­sus num­bers to have f ree cash f low i n 2013 and 2014 of -$ 6.7bn and -$1.7bn on com­pa­ra­ble EBITDA of $28 and $33bn!

To be sure that means de­spite mak­ing op­er­at­ing mar­gins (in ac­count­ing terms) of around $30bn per an­num, the in­dus­try is still not mak­ing any money on a net ba­sis. This af­ter 13 years of 15% per an­num in­creases in the gold price.

They are also not pro­duc­ing any more gold than they were. No won­der the gold shares are be­ing ig­nored.

The other is­sue with re­spect to the growth “prob­lem” re­lates to the in­ces­sant need to get big­ger (by any met­ric) that oc­cu­pies most in the gold sec­tor. It would ap­pear to be a com­plete in­sult not to be seen to be de­sign­ing for con­tin­ual and sig­nif­i­cant growth in size as op­posed to

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