Importance of free cash flow
FCF (free cash flow) is very important for gold miners as it is used for debt repayment, capital expenditures, and dividends or buybacks. FCF is directly correlated with the industry prospects.
During an industry downturn, the gold miners generally report lower FCF due to lower profits and huge inventory buildup, and vice-versa. However, gold miners who maintain strong FCFs even in downturns—by reducing costs and capital expenditures, for example—tend to outperform other miners. Let’s take a look at the FCFs of six intermediate gold mining companies during this challenging market environment.
Lower FCFs in 2015
Agnico Eagle Mines’ (AEM) FCF fell by 36%, from $216 million in 1H14 to $137 million in 1H15, as its profits were severely impacted by lower gold prices (around 8% lower). This fall was partially offset by lower cash costs and higher gold production. Considering it had a lower FCF in the first half of 2015, in conjunction with unfavorable gold prices, the companies FCF in 2015 is estimated to be $135 million, with an FCF yield of ~2.1%.
Eldorado Gold Corporation (EGO) reported negative free cash flow in 1H14 as well as in 1H15. The negative free cash flow in 1H15 was due to lower production, higher costs, and lower gold prices. The company’s negative FCF is estimated to be at $170 million in 2015. But Eldorado has strong liquidity and lower leverage. It will have to turn its FCF positive in the long-term period in order to maintain its leverage and liquidity.
Sibanye Gold (SBGL), Tahoe Resources (TAHO), and Gold Fields (GFI) are expected to record positive but lower FCFs in 2015 compared to 2014, primarily due to lower gold prices. Wall Street analysts estimate that the free cash flow yields for SBGL, TAHO, and GFI’s free cash flow yields should be 9.1%, 2.3%, and 4.3%. respectively, in 2015.
Higher FCF for Anglogold
On the other hand, Anglogold Ashanti (AU) reduced its costs as well as capital expenditure and improved its free cash flow. The company reduced its capex by 21%, from $395 million in 1H’14 to $313 million in 1H15, and maintained the liquidity profile. Anglogold’s FCF is expected to turn positive in 2015 to $460 million from negative free cash flow in 2014, driven by lower costs and capex. Anglogold’s FCF yield is estimated at 11.6%.
The VanEck Vectors Gold Miners ETF (GDX) invests in intermediate and senior gold miners. Another major gold ETF, the SPDR Gold Trust (GLD), mirrors spot gold prices. Anglogold accounts for 4.8% of GDX’s portfolio holdings.
Continue to the next part of this series for a look at analyst ratings for the six intermediate gold mining companies in our evaluation.