Most individuals do not suppose dividends after they envision gold miners. However Yamana Gold (NYSE:AUY) simply introduced one thing that may be a magnet for even probably the most dyed-in-the-wool dividend lover: It instructed the world that it plans to double its dividend. So, what is the story right here and will traders be excited? Possibly and possibly not. This is a fast evaluate of what is going on on.
A giant quantity (however probably not)
To place some scope on Yamana’s dividend plans, it’s going to enhance its annual dividend from $zero.02 to $zero.04 a share. That is not an enormous quantity, however it’s a 100% enhance. That mentioned, add in the truth that the gold miner’s inventory trades palms at simply a few bucks a share and the dividend change is extra materials than absolutely the quantity would at first seem. Actually, it can take the yield from roughly zero.9% to 1.eight% primarily based on the latest inventory value.
Earlier than you counsel that this is not an attention-grabbing determine, observe that a number of the largest names within the business solely provide dividends at or beneath the two% mark. Actually, in comparison with equally sized intermediate mining friends, Yamana will provide one of many largest yields. Lots of its closest friends do not pay any dividends in any respect. So, it is a huge deal, even when the gold mining house is not precisely recognized for dividends.
What’s behind the change?
The large shift right here is definitely pushed by a big asset sale, with Yamana not too long ago saying the $1 billion disposition of the Chapada Mine. It can obtain $800 million up entrance, with the potential to obtain the remainder primarily based on gold costs and the execution of growth tasks on the mine. It can additionally obtain a 2% royalty as a part of the transaction.
The sale, which nonetheless has to undergo customary approval processes, is anticipated to shut within the third quarter of the yr. The majority of the proceeds, in the meantime, are earmarked for debt discount. Yamana will first pay down its revolving credit score facility, after which work on near-term debt maturities. Administration hopes to cut back web debt to EBITDA from 2.5 instances to a really modest 1.5 instances (it tasks a drop to only 1 instances by 2021, assuming it hits all of its monetary and operational targets).
It expects these debt discount efforts to lead to annual curiosity saving of round $35 million. Primarily based on the roughly 950 million shares excellent on the finish of 2018, the soar within the dividend will likely be roughly $19 million. So, the hike is greater than coated by the projected discount in curiosity bills. In different phrases, the dividend enhance appears to be on stable floor.
However what in regards to the future? Yamana is a gold miner and promoting belongings is not a good way to construct a mining enterprise. On that rating, the corporate expects gold manufacturing to be flat yr over yr in 2019. In 2020, it’s projecting a modest 2% enhance. Nonetheless, it believes it has inside tasks that would materially develop that quantity in 2021, pushing manufacturing as a lot as 15% larger.
What’s attention-grabbing about this sale, although, is that it’s going to not solely permit Yamana to cut back leverage, however it can additionally have the ability to lower its bills as a result of it will not be coping with the Chapada Mine anymore. At this level, the annual financial savings are estimated to be round $75 million a yr. This could permit the miner to lift its exploration finances by a focused $20 million with none materials issues. And that, in flip, ought to go an extended technique to serving to Yamana obtain the 15% manufacturing enhance it hopes to see in 2021.
All in, the corporate’s mine sale appears like it can materially enhance Yamana’s monetary place with out considerably lowering its long-term enchantment as an funding. And whereas materials manufacturing development might be just a few years out, it’s rewarding shareholders with an enormous dividend enhance right this moment to share the advantage of the asset sale.
A significantly better story
Is Yamana Gold the very best gold funding round? Most likely not, most traders would in all probability be higher off with a streaming and royalty firm. And, as a mid-tier participant, Yamana has some scale behind it, however not almost as a lot heft as business giants like Barrick or Newmont. That mentioned, Yamana’s determination to promote the Chapada Mine materially alters its enterprise for the higher in some ways, together with much less leverage, decrease prices, and the power to return extra cash to shareholders through dividends. For traders prepared to tackle the uncertainty of a mid-tier gold miner, Yamana is value a deep dive right this moment because it repositions for the longer term.