THE GROWTH OBSESSION
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