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These Are the Drivers of Free Cash Flow for Intermediate Gold Miners

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Sep. 30 2016, Updated 10:04 a.m. ET

Importance of 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.

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Free cash flow

Iamgold (IAG) generated negative FCF for 2Q16. During the 2Q16 earnings call, the company noted that if gold prices remains above $1,300 per ounce, it could have a positive free cash flow in 2H16. At a higher gold price of $1,350 per ounce for the balance of the year, it could have a positive FCF for fiscal 2016.

Analysts are forecasting FCF of -$2 million for the company for 2016. They also expect the company to turn a corner and report $101 million in FCF for 2017.

Agnico Eagle Mines (AEM) declared a $0.10 quarterly dividend in 2Q16. The previous quarterly dividend was $0.08. AEM is an FCF-positive company. Analysts are forecasting FCF of $325 million and $319 million for 2016 and 2017, respectively, for the company.

Negative FCF isn’t all that bad

FCF after total capex was approximately -$32 million in 2Q16 for Eldorado Gold (EGO). It is generating negative FCF mainly due to high capital spending on development projects, unlike most of its peers (GDX). Given that it plans to restart some of its growth projects, its capex should increase, which could lead to negative FCF in 2017 as well. The analysts are projecting FCF of -$8 million for 2016 and -$200 million for 2017.

New Gold (NGD) has also been generating negative free cash flow mainly on the back of its elevated capex profile due to the development of New Afton and the Rainy River project. The company is expected to continue generating negative free cash flow going forward a few years as the capex on Rainy River unwinds.

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