How Gold Miners Rank Based on Repayment Capacity
Having high debt isn’t always bad if a company has the capacity to pay it back with its earnings. The net-debt-to-EBITDA1 ratio indicates how many years it would take for a company to repay its debt if its net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.
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A company’s EBITDA is considered as core business profit because it’s not affected by capital structure, tax, and non-cash items. EBITDA is useful in comparing firms with different capital structures.
A lower ratio is generally better for a company. However, if a gold mining company consistently generates enough EBITDA to pay its debt liability, a higher leverage wouldn’t be considered a negative factor until it consistently maintains its net debt-to-EBITDA ratio on par with its peers and historical averages.
Yamana Gold’s (AUY) net-debt-to-forward EBITDA ratio is 2.7x. This is higher than its peers’ ratios, as you can see in the chart above. Barrick Gold and Goldcorp (GG) have net-debt-to-forward EBITDA ratios of ~1.3x and ~1.8x, respectively.
Combined, Newmont Mining (NEM) and Barrick Gold (ABX) make up 13% of the VanEck Vectors Gold Miners ETF (GDX). Investors can access the gold industry by investing in gold-backed ETFs like the SPDR Gold Shares ETF (GLD). Leveraged ETFs such as the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT) provide high leverage to changes in precious metal prices.
Next, let’s move to an analysis of the free cash flow upsides for our four senior gold mining companies.
- earnings before interest, tax, depreciation, and amortization ↩