Pruning balance sheets
As gold miners’ (GDX) (GDXJ) debts ballooned post-2011 due to expensive acquisitions at the peak of the cycle and consequent write-downs, investors grew wary of companies having too much financial leverage. Barrick Gold (ABX) and Newmont Mining (NEM), two of the largest gold mining companies by market capitalization, were the first ones to be punished by investors due to their high financial leverage.
Now, after two to three years of asset sales, cost cutting, dividend reduction, and cash generation, some discipline has returned to miners’ balance sheets. 2015 marked a transition to debt reduction for these companies.
Significant improvement: Barrick and Newmont
Newmont continues to target between $800 million–$1.3 billion in debt reduction through 2018. The company has been successful in reducing its debt by 35% since 2013 to reach $3.4 billion at the end of 2015.
After achieving the target debt reduction of $3 billion in 2015, Barrick Gold committed to reducing its debt by another $2 billion in 2016. During the 1Q16 earnings call, management mentioned that it has already achieved 42% of this target through the sale of its Nevada assets.
Kinross Gold (KGC) is financially comfortable with $750 million in cash and cash equivalents and $2.3 billion in total liquidity at the end of 1Q16. The company maintained that after two significant capital requirements during the year, it should be able to have a cash position of $700 million.
While Yamana Gold’s (AUY) net debt rose by 3% to $1.6 billion in 1Q16, it should fall going forward. The increase was mainly due to the $53 million used for closing the RDM (Riacho dos Machados) acquisition. This should be offset by the $52 million it received from its copper stream agreement with Altius Minerals. The company expects to reduce its net debt by $300 million by 2017. The company seems comfortable as far as its debt maturity schedule is concerned. It has only $113 million in debt repayments by the end of 2017.
Next, let’s look at gold miners’ liquidity profiles and what we can learn from them.