Analyzing the Valuations and Returns of Intermediate Gold Miners



EV-to-EBITDA ratio

A company’s enterprise value-to-EBITDA (EV-to-EBITDA) multiple is an important relative valuation multiple for capital-intensive industries like gold mining. The multiple is widely used by analysts and investment bankers to evaluate companies.

For this analysis, we compared gold miners’ 2015 EV-to-EBITDA multiples to their expected EBITDA growths between 2014 to 2016. Gold mining companies appear to have better future EBITDA growth potentials, even though they are trading at lower multiples.

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Investing in financially sound gold companies

Investors would do well to monitor gold mining companies that have strong balance sheets, better margins, and sustainable future growth potentials. Generally, a financially sound company with better future prospects trades at a higher multiple than its peers, and such companies can be found at a discount during an industry downturn.

Here’s a breakdown of the intermediate gold mining companies we’ve been evaluating in this series:

  • Tahoe Resources (TAHO) is expected to grow its EBITDA at a high growth rate of 30% CAGR (compound annual growth rate) during 2014–2016. It has low leverage and is trading at a multiple (10.5x) higher than the industry average of 7.8x.
  • Agnico Eagle Mines (AEM) has relative multiple of 9.9x. Agnico’s EBITDA is expected to grow by 5% CAGR during 2014–2016. The company is probably trading at higher multiple due to its high liquidity and good leverage.
  • Anglogold Ashanti (AU), one of the largest gold mining players, has an EV-to-EBITDA multiple of 5.8x, which is 26% lower than the industry average. This is because the company has high leverage and a negative EBITDA growth projection, although the company reduced its debt through an asset sale in 2015.
  • Gold Fields (GFI) and Sibanye Gold (SBGL) have relatively higher debt and negative revenue growth projection. They are currently trading at lower multiples of 4.1x and 4.0x, respectively.

Higher multiples despite negative revenue growth

Among the five peers we’ve been evaluating in this series, Eldorado Gold Corporation (EGO) is trading at the highest EV-to-EBITDA multiple, at 12.5x. But the company is expected to post negative EBITDA growth in 2017–2018.

Agnico and Eldorado account for 5.20% and 3.50%, respectively, of the VanEck Vectors Gold Miners ETF (GDX). Investors can also invest in the SPDR Gold Trust (GLD) to gain exposure to gold.


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