Investors in the gold mining industry need to know a company’s debt levels. High debt can strain a company’s credit rating. It’s important to note that during an industry downturn, companies with higher leverage usually underperform. If gold prices recover, companies with higher leverage ratios can generally outperform those with lower leverage.
Comparisons of gold companies’ leverage ratios
Among the companies under discussion, AngloGold Ashanti (AU) has the highest debt-to-assets ratio at 37%. By comparison, Gold Fields (GFI) has a debt-to-assets ratio of 30%, while New Gold’s (NGD) ratio stands at 20%. On the low end, Sibanye Gold (SBGL) has a ratio of 13% while Eldorado Gold (EGO) has a ratio of just 8%.
If we compare the same gold mining companies using another leverage measurement, the DE (or debt-to-equity) ratio, we see a similar ranking as the graph above depicts.
To lower its debt profile, AngloGold has been considering the following options to reduce its debt level:
- joint ventures
- asset sales
- rights issues
In continuing with this, AngloGold sold its order to reduce its debt. The company sold its Cripple Creek & Victor mine for $820 million. Also, the company has planned to reduce its net debt by $1 billion by the end of 2015.
Gold Fields is another relatively higher debt candidate and has also vowed to focus on debt reduction. The company has an objective of getting the net-debt-to-EBITDA[1. Earnings before interest, tax, depreciation, and amortization] ratio down to 1:1 by the end of 2016 from 1.47:1 at the end of 3Q15.
AngloGold and New Gold account for 4.5% and 1.8%, respectively, of the VanEck Vectors Gold Miners Index (GDX). Rather than investing directly in gold miners or GDX, investors can also invest in the SPDR Gold Trust (GLD) to get exposure to the spot gold prices.
During the industry downturn, low-leveraged companies generally outperform high-leveraged companies. Therefore, investors could do well to focus on the financial strength of the individual company when investing in gold.
In the next part of this series, we’ll look at the liquidity ratios for these intermediate gold miners.