Investments  

New source of dividend may come from mining

With mining companies having undergone a period of judicious management of resources and capital, the chief investment officer for boutique asset manager Craton Capital said higher dividend yields would be on the cards from such firms.

Mr Bachmann said that, for too long, mining companies have been facing the double whammy of falling gold prices and consequent margin pressure as the cost of production has outweighed the profit made on the metal.

He said: “By 2012, the top 16 mining companies has spent 75 per cent of their estimated global mining capex. It was a wasteful exercise and cost inflation was eating into their profits.”

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Now the mining cycle has peaked in terms of capital expenditure - hitting more than $130bn (£78.8bn) in 2012 - the companies have reined in their costly exploration and new techniques, making the most of existing sites. As a result, they have undergone a “180 degree change in strategy to ensure sustainability under a falling/stable commodity price”, Mr Bachmann added.

This means that in the next few years, investors will see a rise in dividends from funds invested in mining stocks, as the companies are in better capital positions than in 2012.

Key Points

Producers cuts costs as gold price declines

Gold price has rallen from near $1800 per Troy ounce in 2012 to 1224pto as of 2 January.

Costs of producing dropped 21 per cent from Q1 2013 to Q4

Source: Craton Capital/Bullion Vault

Philip Milton, managing director of Devon-based IFA Philip J Milton & Co, had expressed concerns last year about commodity investing but has suggested it now might be less expensive to buy.

He said: “I suppose as one of the few resource bears when everyone else was being bullish and talking about the super cycle, I might have some interesting thoughts. My clients have done very nicely from our zero exposure even if it appeared expensive in the early period.

“However, I’ve started nibbling-away at some since. Maybe too soon?”