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Gold Miners and Their Financial Leverage after 2Q16

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Leverage ratios

Investors in the gold mining industry need to know a company’s debt levels. High debt can strain a company’s credit rating. It’s important to note that during an industry downturn, companies with higher leverage usually underperform.

If gold prices recover, companies with higher leverage ratios can generally outperform those with lower leverages. This has been the case for gold miners since the start of 2016. Highly leveraged miners such as Barrick Gold (ABX) have outperformed its less leveraged peers.

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Barrick Gold has the highest financial leverage

While Barrick Gold (ABX) has reduced its debt meaningfully over the last few years, its financial leverage level is still one of the highest in the industry. It has a high debt-to-asset ratio of 35% compared to its peers below:

Barrick’s debt-to-equity ratio shows a debt-to-equity mix in the company’s capital structure. Newmont’s debt ranking has come down significantly. Its debt-to-equity ratio is high at 39% but lower than Kinross Gold’s ratio.

Beginning of financial indebtedness

Poor acquisition decisions at the peak of the cycle have led to debt escalation for Barrick, Newmont, and Kinross. Goldcorp and Agnico-Eagle Mines (AEM), on the other hand, have followed a prudent M&A (merger and acquisition) strategy.

Goldcorp and Newmont form 13.4% of the VanEck Vectors Gold Miners ETF (GDX). The SPDR Gold Shares (GLD) is a good way to gain exposure to spot gold prices.

Companies with the strongest balance sheets can weather weakness longer than their highly leveraged peers. In the next part, we’ll look at gold mining companies’ cash holdings and their near-term and long-term needs.

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