GDX: Dividends Could Be At Risk

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The VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) is by nary intends inexpensive contempt a 15% diminution from its January highest erstwhile I shifted to a bearish stance connected nan assemblage (see 'GDX: Don't Get Greedy' and 'RING: A Risky Bet Despite High Gold Prices'). In fact, nan autumn successful golden prices seen complete nan past fewer weeks has near nan GDX arsenic overvalued arsenic it was astatine its caller highest arsenic net are apt to diminution complete nan coming months. The price-to-earnings ratio connected nan underlying NYSE Arca Gold Mining Index is simply a lofty 28x, while nan price-to-free rate travel ratio is 38x. In nan absence of a surge successful golden prices miners are improbable to beryllium capable to make capable free rate travel to turn dividends complete nan coming years successful my view, which may moreover beryllium group to contract.

The GDX ETF

VanEck Vectors Gold Miners ETF is nan oldest, largest, and astir liquid golden mining ETF which tracks nan capacity of nan NYSE Arca Gold Mining Index. Newmont (NEM) has nan largest weighting connected nan scale astatine 13%, followed by Barrick Gold (GOLD) which has a 10% weighting. The GDX is much diversified than nan iShares MSCI Global Gold Miners ETF (RING) wherever these 2 stocks comprise 19% and 15% respectively. This comes astatine nan disbursal of a somewhat higher disbursal ratio of 0.52% versus RING's 0.39%. Despite rising dividend payments crossed nan sector, nan GDX only offers a 1.7% dividend yield, compared to 2.4% connected nan underlying index.

Earnings And Free Cash Flow Weakness Point To Dividend Cuts

Despite golden prices remaining conscionable 10% from their all-time highs, golden mining companies still cannot make important earnings. On a per stock basis, adjusted net are still a shocking 65% little than their 2012 peak. Furthermore, erstwhile we adhd successful nan effect of alleged one-off losses, EPS falls further, putting nan existent price-to-earnings ratio astatine almost 28x.

The anemic net capacity is besides reflected successful free rate flows. Free rate flows complete nan past 12 months person been moreover little than unadjusted net and arsenic a consequence nan price-to-free rate travel ratio sits astatine 38x. Mining companies are now paying retired nan aforesaid magnitude successful dividends arsenic they make successful free rate flows moreover astatine adjacent grounds golden prices. In nan absence of a surge successful golden prices, I judge miners are apt to beryllium forced to pare backmost their fierce dividend increases seen complete nan past 5 years. The existent dividend output connected nan NYSE Arca Gold Mining Index of 2.4% faces important downside risks, and is already acold beneath nan output connected US Treasuries.

Gold Prices Face Further Downside

The imaginable of an upside reversal successful golden prices that would beryllium needed to warrant nan existent value of nan GDX are bleak. As I based on precocious successful 'Gold's Bearish Reversal Maybe Just Beginning', golden prices proceed to look costly comparative to nan image painted by US inflation-linked enslaved yields. As nan floor plan beneath shows, based connected nan humanities relationship betwixt inflation-adjusted golden prices and 10-year US TIPS yields, golden should beryllium trading beneath $1,500.

Bloomberg, Author's calculations

This is not to opportunity that golden is heading down a further 20%, but it is simply a cardinal consequence to support successful mind and suggests we would apt request to spot a melodramatic downside reversal successful US existent enslaved yields successful bid for golden prices to emergence and support nan GDX. I really spot specified a reversal arsenic apt complete nan adjacent 12 months, but overmuch for illustration to beryllium invested successful inflation-linked bonds themselves, which connection a overmuch much favorable risk-reward profile.

I americium a full-time investor and proprietor of Icon Economics - a macro investigation institution focussed connected providing contrarian finance ideas crossed FX, Equities, and Fixed Income based connected Austrian economical theory. Formerly Head of Financial Markets astatine Fitch Solutions, I person 15 years of acquisition investing and analysing Asian and Global markets.