Why debt profiles are important
A company’s debt profile is important in good times, and even more so in an environment where commodity prices are falling. Stocks are very sensitive to commodity prices. In this article, we’ll review Newmont Mining’s (NEM) debt standing.
The debt-to-EBITDA (or enterprise value to earnings before interest, tax, depreciation, and amortization) ratio is a common metric that credit rating agencies use to assess the probability of default on issued debt. A higher number suggests a firm may not be able to service its debt. Barrick has a high debt-to-EBITDA ratio of 3.32. By comparison, Newmont Mining Corporation’s (NEM) ratio is 2.88 and Kinross Gold Corporation’s (KGC) is 1.98.
High net-debt-to-equity ratio
The net-debt-to-equity ratio is a measure of a company’s financial leverage. The metric indicates what proportion of equity and debt a company uses to finance its assets. Generally, with lower net debt, the company has lower financial risk. The above chart shows that Barrick Gold Corp. (ABX) has the highest ratio. Barrick is followed by Newmont, while Goldcorp (GG) has the lowest net-debt-to-equity ratio.
Moody’s and Standard & Poor’s have a negative outlook on Newmont. Moody’s has a Baa2 rating while Standard & Poor’s has a BBB rating. These ratings mainly reflect weaker credit protection measures, which in agencies’ view, are likely to persist for some time due to weaker gold prices.
The analysis above shows that Newmont’s debt position is relatively on the riskier side in the industry. While the market is not concerned about the debt repayment ability of the company, the debt servicing will put pressure on the margins, which investors should be concerned about.