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Dividends ‘Best Defense’ Against Bullion ETF, Kirkland Gold Says

Gold miners should pay more in dividends if they are to compete with exchange-traded funds as two years of record buyouts eroded shareholder value, Kirkland Lake Gold Inc. (KGI) Chief Executive Officer Brian Hinchcliffe said.

Precious metal producers spent a record $53 billion on deals in 2010 and a further $43 billion last year as all-time high gold prices spurred deals. That led to writedowns that are an admission of overpaying when cash could have been returned in dividends to lure investors from increasingly popular ETFs.

“The generalist investor is not going to be attracted to an industry that is not judiciously allocating capital, whether it’s in the context of making acquisitions or in the context of dedicating capex,” Hinchcliffe said. “ETFs are a major competing alternative for investment. I’m talking about a 5 percent to an 8 percent dividend policy, that is the best defense against the ETF.”

The 16 members of the benchmark Arca Gold BUGS Index will pay an average dividend yield of 1.5 percent this year. That compares with an average dividend yield of 4.2 percent by companies in the STOXX Europe 600 index, according to data compiled by Bloomberg.

ETF Holding Surge

Gold stocks are trading at the cheapest levels in at least nine years as profits reached record levels on near-record bullion prices. The NYSE Arca Gold BUGS Index (HUI) that includes Barrick Gold Corp. (ABX), Newmont Mining Corp. and AngloGold Ashanti Ltd. (ANG) ended last week at 14.7 times profit, the lowest since at least November 2002 and below a five-year average of 36 times as gold stocks fell 5.2 percent in the first quarter.

Holdings of the metal through ETFs have more than tripled in the last five years and reached a record 2,410.2 metric tons on March 13, valued at about $140.3 billion, according to data compiled by Bloomberg.

“The first quarter was a seminal time in the gold industry because of the number of write-offs and the number of admissions from companies that they had overpaid,” said Hinchcliffe. “There will be a bit of reticence about going out and buying stuff in the wake of the major write-offs that the gold industry has seen.”

Newmont Mining Corp. (NEM), the largest U.S. gold producer, took a $1.61 billion writedown on its Hope Bay mine in Canada in February after putting the project on hold. The company gained control of the mine as part of its C$1.5 billion acquisition of Miramar Mining Corp. in 2007.

Kinross Gold Corp. (K) recorded a $2.49 billion goodwill writedown on its Tasiast mine in Mauritania. Agnico-Eagle Mines Ltd. (AEM) posted a fourth-quarter loss on Feb. 15 after taking a writedown on its Meadowbank project in northern Canada.

Hinchcliffe said Kirkland Lake Gold plans to introduce a dividend policy in 12 to 15 months’ time after deciding on the level. The company mines for the precious metal in Ontario, Canada. It forecast output of 100,000 ounces to 105,000 ounces for this fiscal year and is targeting annual production of 250,000 ounces to 300,000 ounces in 2014, according to a March 13 statement.

To contact the reporters on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net; Tim Barwell in London at tbarwell@bloomberg.net

To contact the editors responsible for this story: John Viljoen at jviljoen@bloomberg.net; James Ludden at jludden@bloomberg.net

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