A Comparison of Key Intermediate Gold Mining Companies in 2015
(Continued from Prior Part)
Maintaining financial leverage
Gold mining is a capital-intensive industry. Gold miners raise debt to fund their capital expenditures, and debt is a very risky funding source because it has to be repaid with certain interest over a limited time period. Thus, it’s very important for investors to understand the optimum debt level of gold miners.
During industry downturns, however, the gold miners report lower margins and cash flow, which poses a threat to debt repayment and interest charged to gold miners. So if a gold mining company has high leverage, it will underperform during an industry downturn compared to a lower-leveraged company.
Comparisons of gold companies’ leverage ratios
Among the biggest players in the industry, Anglogold Ashanti (AU) has the highest debt-to-assets ratio at 42%. By comparison, Gold Fields (GFI) has a debt-to-asset ratio of 29%, while Agnico Eagle Mines (AEM) has 18% and Sibanye Gold (SBGL) has 13%. On the low end, Eldorado Gold Corporation (EGO) has a debt-to-asset ratio of 8%, and Tahoe Resources (TAHO) comes in with the lowest ratio, at 2%.
If we compare the same gold mining companies using another leverage measurement, DE (debt-to-equity) ratio, we see a similar ranking. Anglogold has the highest DE ratio at 140%, while Tahoe Resources has the lowest DE ratio at 20%. Anglogold is one of the largest players in the industry, with a total of 19 gold mines in nine countries, whereas Tahoe Resources only recently entered gold mining through its acquisition of the Rio Alto gold mine.
Gold miner debt
Anglogold had a total debt of $3.7 billion as of June 30, 2015. The company has been considering the following options to reduce its debt level:
- joint ventures
- asset sales
- rights issues
In order to reduce its debt, Anglogold sold its Cripple Creek & Victor mine for $820 million. The company also signed a deal with Randgold Resources (GOLD) to jointly rebuild and fund the Obuasi mine in Ghana. The company has planned to reduce its net debt by $1 billion by the end of 2015.
Gold ETFs
Anglogold and Tahoe Resources account for 4.8% and 2.7%, respectively, of the Market Vectors Gold Miners Index (GDX). Rather than investing directly in gold miners or GDX, investors can also invest in the SPDR Gold Trust (GLD) to get exposure to the spot gold prices.
During the industry downturn, low-leveraged companies generally outperform high-leveraged companies. Therefore, investors would to do well to focus on the financial strength of the individual company when investing in gold.
In the next part of this series, we’ll look at the net debt-to-EBITDA ratios for these intermediate gold miners.
Continue to Next Part
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