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These Gold Miners Could Offer Free Cash Flow Upside in 2016

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Aug. 26 2016, Updated 10:05 a.m. ET

Free cash flow

The generation of FCF (free cash flow) is important for gold mining companies (RING) (GDX). It helps them invest in projects that can drive long-term value, optimize their financial leverage, and provide shareholder returns. Gold mining companies are constantly trying to reduce their costs and capital expenditures in order to generate FCF.

Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM) have favorable positions on the global gold industry cost curve. With the rise in gold prices and lower cost profiles, these companies should be able to generate significant FCF over the coming quarters and years.

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FCF generation

Barrick Gold (ABX) delivered FCF of $274 million in 2Q16, marking the fifth consecutive quarter of positive FCF. The company intends to maximize FCF by allocating capital to opportunities that offer the highest returns. During its 2Q16 earnings call, Barrick Gold said it has reached a break-even level of $1,020 per ounce. It’s working to achieve $1,000 per ounce toward the end of the year.

Kinross Gold (KGC) generated FCF of more than $200 million in 2Q16 in addition to $75 million in 1Q16. The important thing to note here is that the average gold price at this FCF was lower than the current spot price, which implies a further upside to FCF if gold prices remain at elevated levels.

Of the companies mentioned, only Goldcorp wasn’t able to generate positive FCF in the first half of 2016. But that’s mainly due to a normal seasonal working capital buildup.

Consistently delivering FCF

Yamana Gold (AUY) generated net FCF of $37 million in 2Q16 and $85 million in the first half of 2016. This represents an increase of $117 million over the first half of 2015. As planned production increases start delivering over the second half of the year, the company expects further increases in FCF. This should strengthen its balance sheet and reduce net debt.

Newmont Mining generated positive FCF of $486 million in 2Q16. This represents a fourfold increase compared to the same period last year. Newmont’s strong operational performance, higher commodity prices, and the timing of capital expenditure helped it achieve a strong cash flow in the first half of 2016. In its 2Q16 conference call, Newmont said the increase in FCF should allow it to self-fund its best projects, pay dividends, and pay down debt.

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