The EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] valuation multiple is a good measure for capital-intensive industries. This metric helps investors compare companies with various capital structures.
The chart above compares gold miners’ EV-to-forward-EBITDA to the EBITDA margin from 2017. EV is the total market value of a company’s debt, equity, preferred shares, and minority interests, net of cash and equivalents, and investments in associates.
EBITDA is a fundamental measure for the company’s stakeholders. Based on an investor’s risk appetite and various gold price scenarios, investors could consider the following possibilities.
Companies with higher financial and operational leverages outperform companies with lower leverages in times of higher gold prices. For fundamental investors, the best strategy might be to invest in miners with healthy balance sheets, increasing production profiles, low costs, and good cash flows.
While Goldcorp (GG) checks almost all the right boxes for senior gold miners, its recent production and cost performance disappointed the markets. Most of the issues, however, are transitory in nature.
Goldcorp’s recent acquisition highlights that its management is focused on growth. This could be a reflection of all these positives that the stock is trading at a forward EV-to-EBITDA multiple of 7x. That’s the highest among senior miners. More positive catalysts would be needed for the stock to rerate any further.
Newmont Mining (NEM) has a multiple of 6.9x with an EBITDA margin of 41%. A higher gold price leverage and declining financial leverage have been the main drivers behind its significant rerating since the beginning of 2016.
NEM’s EBITDA margin estimate has also increased considerably on the back of its impressive cost-cutting efforts. This positions it well for the volatile metals price environment. It also provides a further upside in the event gold prices (GLD) (IAU) keep recovering.
The financial leverage for Barrick Gold (ABX) has been a cause of concern for investors. Despite having the highest EBITDA margin of 50%, it’s trading at a multiple of 5.4x, which is lower than Goldcorp and Newmont Mining.
Although investors may still be concerned about Barrick Gold’s high leverage, management’s focus on reducing its leverage could act as a positive catalyst. Its unit costs are also among the lowest in the industry, which should work in its favor going forward.
Although 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 of 3.8x. 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 lower grades. Its unstable production profile and geopolitical risks are also factors weighing on investors’ minds.
Barrick and Newmont account for 6.2% and 6.7%, respectively, of the VanEck Vectors Gold Miners ETF (GDX).