A Comparative Analysis of North American Gold Miners

(Continued from Prior Part)

The EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a good measure for capital-intensive industries because the timing could be different for different companies. This could provide a distorted view of net earnings-based measures.

In the above chart, it compares gold miners’ EV to forward EBITDA to the revenue growth from 2014 to 2017. EV is the total market value of a business’ debt, equity, preferred shares, and minority interests, net of cash and equivalents and investment in associates. EBITDA is a fundamental measure for the company’s stakeholders.

Based on an investor’s risk appetite and different gold price scenarios, investors could consider the following.

The best bet is to go for gold miners with healthy balance sheets, increasing production profiles, low costs, and good cash flows. Goldcorp (GG) checks almost all of the right boxes for senior gold miners. That’s probably why it’s trading at a relatively higher multiple than its peers.

Newmont Mining (NEM) has a multiple of 5.5x with revenue growth of 4.80%. Its recent cost-cutting and debt reduction efforts have started bearing fruit. However, its high absolute debt is still a concern for some investors.

Barrick Gold (ABX) also has debt reduction as its number-one priority. However, its debt loads could be a cause for concern among investors in the weaker gold price environment. Given the leverage of Newmont and Barrick, they should be outperforming other gold miners once gold prices start rising.

Recently, Yamana Gold (AUY) has started reducing its unit costs significantly. However, its inconsistent operational performance is something that market isn’t very fond of.

Kinross Gold (KGC) has higher unit costs and an unstable production profile. Kinross is most likely factoring in a discount for exposure to emerging markets, especially Russia and a falling production profile. It’s trading at the lowest multiple of 3.8x

Barrick and Newmont account for 5.50% and 6.40%, respectively, of the Market Vectors Gold Miners ETF (GDX).

Investors should note that before making investment decisions, they should take into account the reason for the investment and their appetite for risk. Investors who prefer a higher risk-reward situation can go with gold miners (GDX), even the leveraged ones. Investors who prefer a low-risk environment might want to invest in physical gold or ETFs that track gold prices including the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU).

To read more about gold and gold equities, read Everything you need to know about gold and gold companies.

You can also visit Market Realist’s Gold ETFs page for the latest analysis of gold.

Browse this series on Market Realist:

• Part 1 - Comparative Analysis: How Have Gold Miners Performed This Year?
• Part 2 - Comp: Do Gold Miners with an Exposure to Copper Face Downside?
• Part 3 - Comp: A Look at Gold Miners’ 2Q15 Production Profile