The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a good measure for capital-intensive industries. It helps investors compare companies with various capital structures.
Yamana Gold’s (AUY) valuation multiple has varied widely between 5.1x and 15.1x. Valuation multiples signify what investors are willing to pay for a stock based on analyst estimates. The company’s multiple reached its highest point when gold prices rose significantly in the aftermath of the global financial crisis. This also led to a rise in the multiples of other gold companies, including Barrick Gold (ABX) and Newmont Mining (NEM).
Narrowing the valuation gap
Currently, Yamana Gold is trading at a forward EV-to-EBITDA multiple of 7.3x. By comparison, Goldcorp’s (GG) multiple is 8.1x, while Kinross Gold (KGC) has a lower multiple of 4.8x. As gold prices became more volatile, investors probably hesitated at Yamana Gold’s balance sheet concerns and inconsistent operational performance.
While the short-term concerns for production and costs could continue to weigh on Yamana’s stock, in the medium-term, its focus on cost cutting and deleveraging could lead to a rerating.
Earlier, Yamana’s operational inconsistency was a major investor worry. But for the last few quarters, the company has started to deliver consistently on all its mines. This could go a long way in restoring investor confidence in the company. Yamana’s non-core asset sales could also unlock value. However, investors should keep an eye on the execution challenges in its new projects.
Investors who want to diversify their risk can invest in gold miners through the VanEck Vectors Gold Miners ETF (GDX). GDX invests in senior and intermediate gold miners. Newmont Mining forms 6.9% of its portfolio. The SPDR Gold Shares (GLD) provides exposure to spot gold prices.
You can also visit Market Realist’s Gold ETFs page for the latest analysis of the gold sector.