Why Liquidity Isn’t a Current Concern for Gold Miners
Although financial leverage is important in gauging a company’s long-term solvency, short-term liquidity profiles are also important. In a weaker commodity price environment, short-term liquidity could come under more pressure, and some companies could be forced to take more drastic measures.
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The current ratio is one way to estimate a company’s liquidity. The chart above shows five gold miners’ current ratios, which show the companies’ respective abilities to pay their short-term obligations using short-term assets.
The higher the ratio, the better the company can service its short-term liabilities, and vice versa. Kinross Gold (KGC) and Newmont Mining (NEM) are doing the best in this parameter with ratios of 4.4x and 3.1x, respectively. Yamana Gold (AUY), on the other hand, is doing the worst with a liquidity ratio of 1.2x.
Barrick Gold’s (ABX) liquidity is also comfortable with a ratio of 2.9x.
As far as liquidity is concerned, there isn’t much to worry about regarding these miners. Their liquidity positions at the end of 1Q17 were quite comfortable, with significant debt not maturing for the next few years. About 64.0% of Barrick Gold’s outstanding debt doesn’t mature until after 2032.
Newmont Mining ended 1Q17 with $2.9 billion in cash on hand, and it has one of the best credit ratings in the mining sector.
Kinross Gold has no maturities until 2020, and it had $2.3 billion in total liquidity at the end of 1Q17.
Combined, Newmont Mining and Barrick Gold 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 Trust ETF (GLD).