The EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries. It helps investors compare companies with various capital structures.
The above chart compares gold miners’ EV to forward EBITDA to the EBITDA margin from 2017. EV is the total market value of a business’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. Based on an investor’s risk appetite and various gold price scenarios, investors could consider the following possibilities.
While companies with higher financial and operational leverage outperform the ones with lower leverage in times of higher gold prices, for fundamental investors, the best strategy is to go for miners with healthy balance sheets, increasing production profiles, low costs, and good cash flows.
While Goldcorp (GG) checks almost all the right boxes for senior gold miners, its recent production guidance disappointed the markets. Its recent acquisition highlights that its management is focused on growth. However, markets will want to see more evidence before the stock gets re-rated any further. It’s trading at a forward EV/EBITDA multiple of 9.8x, which is the highest among senior miners. Goldcorp’s high EV/EBITDA multiple is probably due to its lower leverage and quality assets in safe jurisdictions. Its premium valuation is most likely already factoring in all these positives along with its lower leverage.
Newmont Mining (NEM) has a multiple of 7.4x with an EBITDA margin of 43%. A higher gold price leverage and its declining financial leverage have been the main drivers behind its significant rerating in the last five months. Its EBITDA margin estimate has also increased considerably on the back of its impressive cost-cutting efforts. This positions it well for the volatile metals price environment. It also provides a further upside in case gold prices (GLD) (IAU) keep recovering.
The financial leverage for Barrick Gold (ABX) has been a cause of concern for investors. Despite having a higher EBITDA margin of 46%, it’s trading at a lower multiple than Goldcorp and is almost equivalent to that of Newmont. Although investors may still be concerned about Barrick’s high leverage, its management’s focus on reducing its leverage could act as a positive catalyst. Going forward, execution of project development could be key for Barrick. This could lead to a further upside for its stock.
Yamana Gold (AUY) has also been reducing its costs significantly. However, the market isn’t very fond of its inconsistent operational performance and balance sheet concerns. The company has started delivering considerably improved results, but the market might need more evidence before a re-rating.
Kinross Gold (KGC) is trading at the lowest forward multiple of 6x. However, investors should note that its EBITDA margin estimates are also the lowest among the peer group at 37%. This is mainly due to its higher unit costs and lower grades. Its unstable production profile and geopolitical risk are also factors weighing on investors’ minds. To read more about Kinross’s valuation gap, please read Could Kinross Gold Narrow Its Valuation Gap versus Peers?
Barrick and Newmont account for 6.2% and 6.7%, respectively, of the VanEck Vectors Gold Miners ETF (GDX).
What’s your risk appetite?
Investors with a high risk appetite can go for gold miners (GDX) (GDXJ), even the leveraged names. Investors who prefer a low risk environment might want to invest in physical gold or ETFs that track gold prices like the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU).