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Senior Gold Miners’ Potential Upsides in Higher Interest Rates Scenario



Senior gold miners

Senior gold miners are large miners with established positions. They’re usually less risky, with highly liquid stocks. While the performances of these miners differ due to company-specific factors, they usually follow gold prices as a group.

Please read Which Gold Miners Offer a Potential Upside after 3Q16 Results? for an in-depth analysis of senior miners.

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Is Goldcorp becoming overvalued?

Among senior gold miners, Goldcorp (GG) is trading at the highest multiple of 9.5x. However, investors should note that its premium to other miners has narrowed substantially. Going forward, the current premium is also expected to narrow further. Its production and cost performance have disappointed the markets in 2016.

Goldcorp currently has assets with a lower reserve grade. Most of the positives such as assets in safe jurisdictions, the project pipeline, and execution are most likely reflected in the current valuation.

The increase in costs for Goldcorp in the first nine months of 2016 is in contrast to the effective cost-cutting done by its closest peers, Newmont Mining (NEM) and Barrick Gold (ABX).

Newmont Mining

Newmont Mining (NEM) has a multiple of 8.2x with an EBITDA[1. earnings before interest, tax, depreciation, and amortization] margin of 40%. Higher gold price leverage and declining financial leverage have been the main drivers behind its significant rerating since the beginning of 2016.

At the start of 2016, Newmont Mining was trading at a multiple of just 5.6x. The lower unit cost as well as its lower leverage could justify its multiple. This positions NEM well for the volatile metals price environment. It also provides a further upside if gold prices (GLD) (IAU) rise.

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Barrick Gold

The higher 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 6.5x, which is lower than Goldcorp and Newmont Mining.

Its management’s focus on reducing its leverage has acted as a positive catalyst over the last two years. Its unit costs are also among the lowest in the industry, which should work in its favor going forward. This could also lead to a rerating of the stock.

Kinross Gold

Kinross Gold (KGC) is trading at the lowest forward multiple of 4.6x. However, investors should note that its EBITDA margin estimates are also the lowest among its peer group at 39%. 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.

While its stock enjoyed a good run in 2016 on the back of higher gold prices and its high gold price leverage, it could underperform in a weaker gold price environment. The Tasiast Expansion could provide an upside to its valuation. Until then, its valuation seems more or less full.

Barrick Gold and Newmont Mining account for 6.2% and 6.7%, respectively, of the VanEck Vectors Gold Miners ETF (GDX).


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