Debt load: A problem for Barrick Gold
Barrick Gold (ABX) ranks first among gold miners when it comes to overall debt. At the peak of copper prices in 2011, it acquired Equinox Minerals for $7.1 billion. The acquisition and escalating capital costs at its Pascua-Lama project on the Argentina-Chile border contributed to Barrick’s current debt state. Barrick has now put the Pascua-Lama project on care and maintenance after spending more than $5 billion on it. Neither Equinox Minerals nor Pascua-Lama were able to generate cash flows as management originally envisioned. This added to Barrick’s cash-flow woes.
Barrick has announced a debt reduction target of $3 billion for 2015. To reach this target, Barrick has already sold non-core assets to the tune of $850 million. However, the assets sold and earmarked for sale are producing assets. Selling them would lead to a decline in Barrick’s production profile going forward.
Barrick’s financial leverage is among the highest in the industry. Barrick has a high debt to capitalization of 85% compared to Newmont Mining’s (NEM) 51% and Kinross Gold’s (KGC) 73%, as you can see in the above graph. Barrick’s net debt to equity shows a debt-equity mix in the company’s capital structure. It’s also the highest at 80.7%.
Newmont’s debt is also a concern
Newmont Mining’s (NEM) debt ranking is also high in the overall gold sector. Its net to equity is also high at 31.9% compared to other senior and intermediate gold miners, except Barrick. Recently, Newmont attempted to reduce its debt by non-core asset sales. The most recent was the sale of its Waihi mine in New Zealand to Oceana Gold. While the market is not concerned about the company’s debt repayment ability, debt servicing will put pressure on the margins, which investors should be concerned about.
Discipline is the best bet
Goldcorp’s (GG) approach of quality over quantity has spared it the pain of huge write-downs. Its restraint in outbidding Agnico Eagle Mines (AEM) and Yamana Gold (AUY) for Osisko showed its above-par capital discipline. Agnico Eagle and Yamana Gold make up 9.1% of the VanEck Vectors Gold Miners ETF (GDX).
In the next part of this series, we’ll look at which miners have the potential to generate free cash flows going forward.