High debt isn’t always bad if a company has the capacity to pay it back with its earnings. The net debt-to-EBITDA1 ratio indicates how many years it will take for a company to repay its debt if net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.
A company’s EBITDA is considered a core business profit because it’s not affected by capital structure, tax, and non-cash items. EBITDA is useful in comparing firms with different capital structures.
A lower ratio is generally better for a company. However, if a gold mining company consistently generates enough EBITDA to pay its debt liability, then higher leverage wouldn’t be considered bad until it consistently maintains its net debt-to-EBITDA ratio on par with its peers and historical averages.
New Gold (NGD) has the highest net-debt-to-forward-EBITDA ratio of 2.1x currently. This also means that it has the lowest debt repaying capacity based on its forward EBITDA. Eldorado Gold’s (EGO) has reduced its debt significantly with the divestment of its assets. This move has reduced its net debt to forward EBITDA ratio from 1.5x at the end of 2Q16 to 0.90x currently. This is still higher than its peers’ ratios, as you can see in the above graph. Agnico-Eagle Mines (AEM) has net-debt-to-forward EBITDA ratios of 0.54x. IAMGOLD (IAG), on the other hand, has transitioned to a net cash position.
Investors can access the gold industry by investing in gold-backed ETFs such as the SPDR Gold Shares ETF (GLD). Leveraged ETFs such as the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT) provide high leverage to changes in the prices of precious metals.
Next, let’s move to an analysis of the free cash flow upsides for our four intermediate gold mining companies.