Free cash flow
The ability to generate free cash flow is key in a weaker gold price environment. While miners’ ability to generate FCF (free cash flow) comes under more and more pressure, they reduce costs and capital expenditure. In this part of our series, we’ll see the gold miners that can generate cash in this market environment.
Ability to generate FCF
AngloGold Ashanti’s (AU) free cash flow for 3Q15 was $3 million after one-offs as compared to $30 million in 3Q14. The company remains focused on FCF generation by reducing costs and operational improvements. Though, the challenges in South Africa might not let the costs come down to the extent necessary for it to generate significant cash flow. On the other hand, further currency weakness could be one of the significant tailwinds for the company.
Sibanye Gold (SBGL) generates positive FCF that supports its above-average distribution paying ability.
Gold Fields (GFI) has been positioning the business to focus on generating FCF. While a fall in costs and operating efficiencies are driving FCFs, its troubled South Deep mine has been a drag on the company’s cash flows for some time. This is due to the mine’s costs, as they’re higher than average.
Negative FCF isn’t all that bad
Eldorado Gold (EGO) is generating negative FCF mainly because of high capital spending on development projects, unlike most of its peers (GDX). For the first nine months of 2015, the company generated negative FCF to the tune of $78 million. Going forward, the completion of growth capex is expected to see Eldorado generate positive FCF given stable gold prices.
New Gold (NGD) has also been generating negative FCFs mainly on the back of its elevated capex profile due to the development of New Afton earlier and now the Rainy River project. The company is expected to continue generating negative FCFs going forward a few years as capex on Rainy River unwinds.
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 Fields account for 7.4% of GDX’s portfolio holdings.