It’s very important to look at gold miners’ debt structures and liquidity. Gold miners should have enough liquidity to repay their debts, and if mining companies have higher debt and less liquidity, they may face cash problem.
Higher debt concerns
Compared to the six intermediate gold mining companies we’ve been evaluating in this series, Anglogold Ashanti (AU) has high leverage, with a total debt of $3.7 billion, which could be seen as a major concern for investors. It has planned to reduce the debt by $1 billion in this financial year. To reduce debt, Anglogold has sold its CC&V mine for $820 million.
Assuming it pays down $1 billion on its debt this year, Anglogold will still have around $2.5 billion in long-term debt. However, it has largely long-term debt with maturity until 2020. Consider $1 billion capital expenditure plan, Anglogold would find it difficult to reduce its debt level significantly post this financial year.
By comparison, Gold Field’s (GFI) too has higher debt of $1.9 billion with the mid-term maturity of $800 million in 2017. The company has total liquidity of around $1.7 billion including credit facility and cash. Gold Field is expected to generate lower free cash flow in this year, thus it may cause a concern for the company.
Agnico Eagle (AEM) has higher debt but relatively placed better than Anglogold and Agnico in terms of financial health. It has largely long-term debt of $1.2 billion, with more than $1 billion liquidity. The company posted a strong performance in 2Q15 and is expected to generate solid operating cash flow in fiscal 2015. With higher liquidity and long-term debt maturity, Agnico may not find it difficult to repay its debt and fund its future capex.
Strong financial health
Tahoe Resources is a relatively small gold mining player, having entered into gold mining with its acquisition of the Rio Alto mine. It has total debt of $35 million, with strong liquidity and enough free cash flow. It posted strong quarterly performance in 2Q15.
Investors can get exposure to gold by investing directly in gold miners’ stocks or by investing in gold-backed ETFs like the VanEck Vectors Gold Miners ETF (GDX). Anglogold and Gold Field account for 7.9% of GDX’s portfolio holdings.
Continue to the next part of this series for a discussion of the importance of liquidity as leverage for gold miners.