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Comp: Can Gold Miners Generate Significant Free Cash Flow?

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Free cash flow

Under a weaker gold price environment, miners’ ability to generate FCF (free cash flow) is coming under more pressure. However, miners are reducing costs and capital expenditure to generate FCF. In this part, we’ll see which gold miners can generate cash in this market environment.

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Ability to generate FCF

Newmont Mining (NEM) remains confident about maintaining its dividend due to its strong balance sheet, despite the weak gold price environment. Cost reductions have allowed Newmont to report positive FCF for the fifth consecutive quarter in 2Q15. The company’s FCF was $119 million in 2Q15—compared to $124 million in 2Q14.

Barrick Gold (ABX) is taking several steps to reduce costs and increase it FCF free cash flow in 2015 and 2016. First, the firm reduced its dividends by 60% to $0.02 per share to conserve cash and increase its financial flexibility. Second, Barrick Gold is cutting its capex by $300 million in 2015. It’s also reviewing its capex plans for 2016 based on its capital allocation objectives. Barrick Gold generated $23 million in FCF in 2Q15. In contrast, it burned free cash worth $128 million in 2Q14. All of its operating and capital savings are flowing to FCF. Management maintains that all of its mines are free cash positive given a gold price of $1,100 per ounce.

While Kinross Gold (KGC) is generating decent FCF right now with the 2015 FCF yield estimated at 6%, its ability to generate FCF is expected to come under pressure going forward due to limited growth options.

Yamana Gold’s (AUY) cash flow generated per dollar of revenue rose by 57% quarter-over-quarter. The cash flow generation is expected to accelerate going forward as production starts from high-grade areas.

FCF trend started turning positive for Goldcorp

After reporting a negative FCF of $374 million in 1Q15, Goldcorp (GG) has delivered a positive FCF of $174 million in 2Q15. The reduction of dividends by 60% should save the company another $300 million annually. The positive trend on FCF could continue going forward, given the scheduled ramp-ups of its mines.

Investors can get access to the gold sector by investing in the VanEck Vectors Gold Miners ETF (GDX). GDX invests in intermediate and senior gold producers. Goldcorp accounts for 7.20% of its holdings. The SPDR Gold Trust (GLD) tracks spot gold prices.

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