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Relative Valuation: New Gold Has the Highest EBITDA Margin

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EV-to-EBITDA ratio

The EV/EBITDA [1. Enterprise value to earnings before interest, tax, depreciation, and amortization] multiple is a good measure for capital-intensive industries, as it helps investors compare companies with different capital structures.

The graph above compares gold miners’ EV-to-forward-EBITDA to the EBITDA margin from 2016. EV is the total market value of a company’s debt, equity, preferred shares, and minority interests, net of cash and equivalents, and investment in associates. EBITDA is a fundamental measure for the company’s stakeholders.

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Investing in intermediate miners

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 prospects trades at a higher multiple than its peers, and such companies can be found at a discount during an industry downturn.

Breakdown of intermediates’ valuation

Here’s a breakdown of the intermediate gold mining companies we’ve been evaluating in this series. Eldorado Gold (EGO) is expected to grow its EBITDA at a high growth rate of 32% CAGR (compound annual growth rate) during 2015–2017. Its 2016 EBITDA margin is also high at 43%. These factors coupled with a low leverage are the reason it’s trading at a multiple (at 9x) higher than the industry average of 5.5x.

New Gold (NGD) has a relative multiple of 5.8x. It has the highest EBITDA margin of the companies discussed here, standing at 45%. The development of its Rainy River project appears to be the biggest catalyst for stock price performance going forward.

AngloGold Ashanti (AU) is one of the largest gold mining players and has an EV-to-EBITDA multiple of 4.9x, or 11% lower than the industry average. This is probably because the company has high leverage and limited future growth prospects.

Gold Fields (GFI) and Sibanye Gold (SBGL) have relatively higher debt and limited revenue growth. They’re currently trading at lower multiples of 4.0x and 3.5x, respectively. Sibanye is also most likely factoring in a discount for entire exposure to South Africa, as the latter is currently going through extended wage negotiations that could lead to cost escalation and disruption of work. Golf Fields’ only South African asset, South Deep, has been consistently underperforming market expectations and is weighing on its stock price.

AngloGold and Eldorado account for 4.5% and 3.8%, respectively, of the VanEck Vectors Gold Miners ETF (GDX). Investors can also consider the SPDR Gold Trust (GLD) to gain exposure to gold.

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