Which South African Gold Miner Can Offer a Valuation Upside?


Jul. 8 2016, Updated 7:05 p.m. ET

Enterprise value ratio

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio is a good measure for capital-intensive industries. It helps investors compare companies based on various capital structures.

The graph above compares gold miners’ EV-to-forward-EBITDA to the EBITDA margin for 2017.

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Breakdown of miners’ valuations

AngloGold Ashanti (AU), one of the largest gold mining players, has an EV-to-EBITDA multiple of 5.2x. That’s the highest among South African miners. Its estimated EBITDA margin for 2017 is 38%.

AU’s diversified production base and lower exposure to risky mining prospects in South Africa are the major reasons for the higher multiple. Its recent attempts to reduce debt have encouraged investors. Further efforts to reduce debt and addressing long-term production growth could lead to more rerating.

Investors should note that AU is trading at a significant discount to global peers such as Barrick Gold (ABX) and Newmont Mining (NEM), which have multiples of 8.7x and 8.0x, respectively. Much of the discount is due to the geographical exposure of AU compared to seniors.

Gold Fields (GFI) has the highest expected EBITDA margin of 43%. But it’s trading at 4.3x, a 17% discount to AngloGold. This is due mainly to the uncertainty regarding its South Deep project. Guidance for South Deep is a key catalyst for Gold Fields stock.

Harmony Gold (HMY) is trading at a multiple of 3.4x with an EBITDA margin of 31%. It has seen a rerating of 32% in the last one month alone. Due to its higher leverage to gold prices in a rising gold rate environment, it has been significantly rerated since the start of the year. Because of its higher leverage, any weakness in gold prices could have a magnified impact on Harmony Gold.

Sibanye Gold (SBGL) is currently trading at the lowest multiple of 3.2x. It’s most likely factoring in a discount due to its full exposure to South Africa. AngloGold accounts for 4.5% of the VanEck Vectors Gold Miners ETF (GDX). Investors could also consider the SPDR Gold Shares (GLD) to gain exposure to gold.


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