Valuation for capital-intensive industries
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries. It helps investors to compare companies with varying capital structures.
The chart above compares gold miners’ EV-to-forward EBITDAs and their EBITDA margins for 2017.
Companies with higher financial and operational leverages outperform companies with lower leverages in times of higher gold prices. However, for fundamental investors, the best strategy may be to invest in miners with healthy balance sheets, increasing production profiles, low costs, and strong cash flows.
Goldcorp’s recent production and cost performance has disappointed the markets. Its long-term production profile, however, might still attract fundamental investors. Its relative underperformance year-to-date could also present an investment opportunity for investors.
Agnico has a strong project pipeline and a strong management execution track record, but most of these positives may already be factored into its premium valuation.
Newmont Mining (NEM) has a multiple of 8.0x and an EBITDA margin of 43%. Its higher gold price leverage and its falling financial leverage have been the main drivers behind its significant rerating since the beginning of 2016. Its EBITDA margin estimate has also risen considerably on the back of its impressive cost-cutting efforts. This positions it well in the volatile metal price environment. It also provides further upside in the event that gold prices (GLD) (IAU) keep recovering.
Barrick Gold’s (ABX) financial leverage has been a cause for concern for investors. Despite having the highest EBITDA margin of 50%, it’s trading at a multiple of 6.7x, lower than those of Goldcorp or Newmont. Its management’s focus on reducing its leverage could act as a positive catalyst. Going forward, project development execution could be key for Barrick.
While Yamana Gold’s (AUY) valuation multiple has improved since the start of 2016, it would take consistent operational improvements for the stock to rerate further.
Kinross Gold (KGC) is trading at the lowest forward multiple among its peers at 4.8x. However, investors should note that its EBITDA margin estimates are also the lowest among its peer group at 40%. This is mainly due to its higher unit costs and its lower product grades. Geopolitical risks and KGC’s unstable production profile are also factors weighing on investors’ minds.
Barrick and Newmont account for 6.2% and 6.7% of the VanEck Vectors Gold Miners ETF (GDX), respectively.
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