Today's Gold Environment: Can Gold Miners Cut Costs, Reduce Debt?
(Continued from Prior Part)
Investors should prefer quality
It’s a weaker gold price environment right now, and there’s still a downside related to the Fed’s rate hike decision. But right now, it’s better to own high-quality, low-risk stocks.
In the above chart, we’ve compared gold miners’ EV (enterprise value) to EBITDA (earnings before interest, taxes, depreciation, and amortization) to revenue growth from 2014 to 2017. EV is the total market value of a business’s debt, equity, preferred shares, and minority interests, net its cash and equivalents and investment in associates. EBITDA is a fundamental measure for the company’s stakeholders.
EV-EBITDA is a better measure for capital-intensive industries, as the timing could be different for different companies and provide a distorted view of net earnings–based measures. Based on an investor’s risk appetite and different gold price scenarios, investors could consider the following.
Go for gold miners with healthy balance sheets
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 the right boxes for senior gold miners. So does Agnico Eagle Mines (AEM) in the intermediate gold space. This is most likely why GG and AEM currently come at a premium to other miners.
Yamana Gold (AUY), Iamgold (IAG), and Kinross Gold (KGC) fall on the other end of the spectrum with higher costs and an unstable production profile. Yamana Gold is battling with diluted equity issuance to reduce the debt incurred for acquisitions. Kinross is most likely factoring in a discount for exposure to emerging markets, especially Russia, and a declining production profile.
A look at low all-in sustaining costs
Barrick Gold (ABX) and Newmont Mining (NEM) are senior gold miners with low all-in sustaining costs (or AISC). Newmont is cutting its costs significantly and at the same time paying down its debt. Barrick also has debt reduction as a number-one priority. But its debt loads could be cause for concern among investors in the weaker gold price environment. But given the leverage of these companies, they should be outperforming other gold miners once gold prices start rising.
Barrick and Newmont constitute 6.6% and 6.5%, respectively, of the Market Vectors Gold Miners ETF (GDX).
Invest according to your risk appetite
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, you can visit Market Realist’s series Everything you need to know about gold and gold companies. You can also visit our Gold ETFs page for the latest analysis of gold.
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