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A Look at the Financial Leverage for South African Miners

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Dec. 21 2016, Updated 9:07 a.m. ET

Financial leverage

Investors in the gold mining industry need to know a company’s debt levels. High debt can strain a company’s credit rating. During an industry downturn, companies with higher leverage ratios usually underperform. If gold prices recover, companies with higher leverage ratios can generally outperform those with lower leverages.

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AngloGold Ashanti: The highest leverage

As you can see in the above graph, AngloGold Ashanti (AU) has the highest financial leverage among all the South African gold miners. However, it has significantly deleveraged over the last year.

In 2015, it sold its Cripple Creek & Victor Gold Mine to Newmont Mining (NEM) for $820.0 million and used the proceeds to reduce its debt. Its net debt fell 14.0% in 3Q16 compared to 3Q15. A large part of this reduction was due to improvement in the company’s generation of free cash flow. As its free cash flow improves, further debt reduction remains a priority. Further deleveraging remains a clear positive catalyst for the company.

Gold Fields’ financial leverage

Gold Fields (GFI) is moderately leveraged, with a debt-to-equity ratio of 60.0%. It’s targeting a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) level of 1.0x by the end of 2016, compared to 1.2x at the end of 2Q16.

In February 2016, Gold Fields bought back $148.0 million of its $1.0 billion notes that are due October 7, 2020, through a tender offer at 88.0% of the nominal value. These efforts should help the company achieve its targeted leverage.

On the other hand, Sibanye Gold (SBGL) and Harmony Gold (HMY) have lower financial leverages. AngloGold forms 4.5% of the VanEck Vectors Gold Miners ETF (GDX). Rather than investing directly in gold miners or GDX, you could invest in the SPDR Gold Shares (GLD) to get exposure to spot gold prices.

During an industry downturn, low-leveraged companies generally outperform high-leveraged companies. So you may want to focus on the financial strength of an individual company when investing in gold.

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