Dividends are an investor’s best friend. According to Standard & Poor’s, over the past several decades, about 40 per cent of the total return of the S&P 500 can be attributed to the reinvestment of dividends.Jupiterimages/Photos.com
Calls for dividends from gold companies are growing louder, and AuRico Gold Inc. is a convert.
The company on Wednesday agreed to sell a Mexican mine for $750-million, after a surprise bidder emerged, and plans to give a good chunk of the proceeds back to shareholders rather than look for something to buy. Moreover, having shed a costly mine, chief executive officer Scott Perry said on a conference call about the transaction that he is looking forward to creating a lot of cash flow from lower cost mines that can be used to fund a "meaningful" regular dividend.
Not so long ago, the idea of a smaller gold producer focusing on handing out cash to shareholders rather than acquisitions to get bigger would have been unheard of. Small gold companies existed to become bigger gold companies, and they fought hard to make it happen, usually through a constant stream of takeovers.
But with influential investors in gold companies (such as Sprott Inc. fund manager Charles Oliver) focused increasingly on dividends, growth for growth's sake is fading as an imperative.
Mr. Perry estimated that the return of capital to shareholders could be on the order of $300-million, after AuRico pays its taxes on the sale of the mine and pays down debt. The return could take the form of a buyback or a special dividend, or a combination.
When asked by an analyst on the conference call about the deal whether giving the money back would be "premature" and "hamstring" the company should an acquisition come up, in return for a "one-time" pop in the share price, Mr. Perry said that he is giving investors what they want.
"What we're more focused on is what is the focus right now in the investment community – shareholder friendly initiatives," he said, noting that the company does not believe "bigger is better."
He said the company doesn't believe its shares are fairly valued and so the "most compelling opportunity" is to fix that, and "we don't see anything external that's more accretive."
Judging by the 21 per cent surge in AuRico's stock yesterday, Mr. Perry appears to have read the mood of the market well. The reaction is likely to make an impression on other gold companies as they weigh what to do with excess cash. Even though prices for gold producers are depressed, handing the extra money back to shareholders rather than spending it may generate more value.
Mr. Perry said the deal came together quickly after Minera Frisco of Mexico made a bid to acquire the Ocampo mine in Mexico, along with two nearby exploration properties. AuRico hired Credit Suisse as its financial advisor, and Fasken Martineau as legal counsel. Davies Ward Phillips & Vineberg LLP worked for the AuRico special committee. BMO Nesbitt Burns and CIBC World Markets were financial advisers to the special committee.