Is South African Miners’ Valuation Discount Justified?
Enterprise value ratio
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio is a good measure for capital-intensive industries. It helps you compare companies based on various capital structures.
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The above graph compares gold miners’ EV-to-forward-EBITDA to the EBITDA margin from 2017.
Breakdown of miners’ valuations
AngloGold Ashanti (AU), one of the largest gold mining players, has an EV-to-EBITDA multiple of 5.2x, the highest among South African miners. Its estimated EBITDA margin for 2017 is 35.0%. Its diversified production base and lower exposure to risky mining prospects in South Africa are the major reasons for the higher multiple.
Its recent attempts to cut debt have encouraged investors. Further steps in this regard and addressing long-term production growth concerns could lead to more rerating.
Gold Fields (GFI) has the highest estimated EBITDA margin of 46.0%, but it’s trading at 4.9x, a discount to AngloGold, due to the uncertainty regarding its South Deep Project. If it fails to meet the company’s expectations, the miner’s production could fall. Guidance on South Deep is a key catalyst for Gold Fields stock.
Sibanye Gold (SBGL) is trading at a multiple of 2.7x. It’s most likely factoring in a discount due to its full exposure to South Africa. The company expects a significant valuation rerating after its Stillwater Mining (SWC) acquisition closes.
Sibanye’s CEO (chief executive officer) Neal Froneman said during the conference call on December 9, 2016, “We suffer from low multiples when you look at our relative ratings compared to our peers; and one of the aspects is that Sibanye has all its assets in South Africa. And I think having exposure into a more stable jurisdiction with Tier 1 assets should see an improvement on the multiples.”
Harmony Gold (HMY) is currently trading at the lowest multiple of 2.1x. It also has the lowest estimated EBITDA margin of 31.0%.
Is the discount to global peers justified?
It’s worth noting that South African miners are trading at a significant discount to global peers such as Barrick Gold (ABX) and Newmont Mining (NEM). Much of the discount is due to the geographical exposure of these miners versus seniors.
Problems facing the South African mining industry, as we’ve already seen in this series, have worsened lately. Investors have started giving higher premiums to miners with assets in safe mining jurisdictions. This trend is expected to continue, especially in light of the higher interest rate scenario going forward, which is negative for the gold price outlook.
Investors usually look for quality names with high growth, low costs, optimal leverage, and stable operating assets in a weak or falling gold price environment.