The EV-to-EBITDA (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 2017 EBITDA margin. 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.
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. A higher EBITDA margin would position the company well for the volatile metals price environment. The company could see further upside in the event gold prices (GLD) (IAU) keep recovering. After its recent non-core asset sales, Newmont is left with high-quality assets and a longer mine life, which could also boost its position.
Newmont’s sequenced project pipeline provides an upside to production as well as costs. At the same time, the pipeline gives the company the flexibility to develop projects according to its financial considerations and gold price outlook. Having said that, in the short term, the weakness in gold prices could result in depressed valuations for gold miners like Newmont.
Not every gold miner (GDX) in the industry has a project pipeline like Newmont’s. Barrick Gold’s (ABX) production profile was more or less flat after 4Q15, and Kinross Gold’s (KGC) profile might fall. On the other hand, Agnico Eagle Mines (AEM) and Goldcorp (GG) both have growth projects with strong potential.