Investors in the precious metal 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 metal prices recover, companies with higher leverage ratios can generally outperform those with lower leverages. This trend has been the case for silver miners since the start of 2016. Highly leveraged miner Coeur Mining (CDE) has outperformed its less leveraged peer.
Coeur Mining has the highest financial leverage
While Coeur’s management has been trying to reduce its debt over the last year, its financial leverage is still among the highest in the industry. It has a high debt-to-asset ratio of 36% compared to its peers below:
- Hecla Mining (HL): 23%
- First Majestic Silver (AG): 7.5%
- Pan American Silver (PAAS): 2.4%
- Tahoe Resources (TAHO): 2.2%
Coeur’s debt-to-equity ratio shows a debt-to-equity mix in the company’s capital structure. While silver producers have significantly deleveraged over the last six months to a year, Hecla Mining (HL) has been slow as far as deleveraging is concerned.
Beginning of financial indebtedness
Poor acquisition decisions at the peak of the cycle have led to debt escalation for companies such as Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC), and Coeur.
Goldcorp and Newmont form 13.4% of the VanEck Vectors Gold Miners ETF (GDX). The iShares Silver Trust ETF (SLV) is a good way to gain exposure to spot silver prices.
Companies with the strongest balance sheets can weather weakness longer than their highly leveraged peers. In the next part of this series, we’ll look at silver mining companies’ cash holdings and their near-term and long-term needs.