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Gold Sector's 1Q17 Earnings Preview: What to Expect

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Part 14
Gold Sector's 1Q17 Earnings Preview: What to Expect PART 14 OF 14

Gold Miners’ Key Valuation Catalysts as 1Q17 Results Draw Near

Valuation multiple

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries. This metric helps investors to compare companies with various capital structures.

Gold Miners’ Key Valuation Catalysts as 1Q17 Results Draw Near

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Higher multiples

The chart above compares gold miners’ EV-to-forward EBITDA multiples and EBITDA margins for 2017. Among North American intermediate gold miners, Agnico Eagle Mines (AEM) has the highest forward EV-to-EBITDA multiple of 13.2x. It has a low-cost, long-mine-life portfolio and a strong balance sheet.

Agnico also has one the widest EBITDA margins among its peers at 45.3%, and it’s one of the best-managed gold companies in the industry. High-quality growth is hard to come by, so a bit of a premium seems justified.

Valuation catalysts

Barrick Gold’s (ABX) high financial leverage has been a cause for concern for investors. Despite its having the widest EBITDA margin among its peers at 48.7%, ABX is trading at a multiple of 7.6x, lower than Goldcorp’s (GG) 10.1x and Newmont Mining’s (NEM) 9.1x. 

Barrick’s further debt reduction specifics, as well as its growth plans, could lead to a rerating.

Lower multiples

Yamana Gold’s (AUY) valuation multiple of 7.1x is 20% lower than the group average. Although Yamana’s operational inconsistency has been a major investor worry, the company has started to deliver consistently at all of its mines during the last few quarters. However, given gold’s weak price outlook, investors may wish to consider more operationally consistent and low-cost names.

IAMGOLD (IAG) has consistently traded at lower multiples than its peers (JNUG) (GDXJ). Currently, it has a forward EV-to-EBITDA multiple of 5.7x, 35% lower than the peer average. Its lower multiple is mainly the result of its above-average all-in sustaining costs and concerns regarding production falls in the medium term. In a weaker gold price environment, IAG’s multiple could fall further. Investors should watch IAG’s 1Q17 results for an update on its cost-reduction initiatives.

Kinross Gold (KGC) is trading at the lowest forward multiple among its peers at 5.0x. However, its EBITDA margin estimate is among the narrowest among its peers at 37%, mainly due to its higher unit costs and lower grades. Geopolitical risks and KGC’s unstable production profile are also weighing on investors’ minds.

Keep following Market Realist’s Precious Metals page to get the latest updates on these miners’ 1Q17 results.

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