Valuation for capital-intensive industries
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a good valuation measure for capital-intensive industries. It helps investors compare companies with varying capital structures.
The chart above compares gold miners’ EV-to-forward EBITDA multiples and EBITDA margins for 2017. Among North American intermediate gold miners, Eldorado Gold (EGO) has the highest EV-to-forward EBITDA multiple of 13.5x. It has a low-cost, long-mine-life portfolio and a strong balance sheet. It underperformed its peers substantially in 2016, mainly due to regulatory and geographical concerns.
Agnico Eagle Mines (AEM) has a forward multiple of 12.7x. It has one the widest EBITDA margins among peers at 44%, and it’s one of the best-managed gold companies. Agnico Eagle is trading at a 44% premium to the group average. High-quality growth is hard to come by, so a bit of a premium seems justified. The company’s exploration update in February 2017 could lead to further re-rating of its stock.
Barrick Gold’s (ABX) high financial leverage has been a cause of concern for investors. Despite having the widest EBITDA margin among peers at 48%, it’s trading at a multiple of 7.4x, lower than Goldcorp’s (GG) 11.5x and Newmont Mining’s (NEM) 9.2x. The company could provide another target for debt reduction in its 4Q16 results, which could lead to re-rating.
Yamana Gold’s (AUY) valuation multiple of 7.1x is 20% lower than the group average. Although Yamana’s operational inconsistency has been a major investor worry, the company has started to deliver consistently at all of its mines during the last few quarters. However, given the weak gold price outlook, investors may wish to consider more operationally consistent and low-cost names.
IAMGOLD (IAG) has consistently traded at lower multiples than peers (JNUG) (GDXJ). Currently, it has a forward EV-to-EBITDA multiple of 6.3x, 29% lower than the peer average. Its lower multiple is mainly due to its above-average all-in sustaining costs and concerns regarding production falls in the medium term. In a weaker gold price environment, the multiple could further de-rate. Investors should watch IAG’s 4Q16 results for an update on its cost-reduction initiatives.
Kinross Gold (KGC) is trading at the lowest forward multiple of 5.3x. However, its EBITDA margin estimate is among the narrowest among peers at 36%, mainly due to its higher unit costs and lower grades. Geopolitical risks and KGC’s unstable production profile are also weighing on investors’ minds. Keep following Market Realist’s Precious Metals page to get the latest updates on these miners’ 4Q16 results.