Investors in the precious metal mining industry need to know companies’ debt levels. High debt can strain a company’s credit rating. It’s important to know that during an industry downturn, companies with higher leverage usually underperform.
However, if metal prices recover, companies with higher leverage ratios can outperform those with lower leverages. This trend was seen in 2016 when highly leveraged miner Coeur Mining (CDE) outperformed its less leveraged peers.
The highest financial leverage
Coeur’s management has done a commendable job of reducing its financial leverage in the last year or so. Its debt-to-equity used to be the highest among industry peers, which is not the case anymore. Its leverage ratio at the end of 4Q16 was 27.4%, which is lower than Hecla Mining’s. Peers’ debt-to-equity ratios were as follows:
- Hecla Mining (HL): 35%
- First Majestic Silver (AG): 8.4%
- Pan American Silver (PAAS): 3.1%
- Tahoe Resources (TAHO): 2.0%
While most silver producers have been significantly deleveraged over the past several months, Hecla Mining (HL) has been slow to deleverage.
Poor acquisition decisions at the peak of the cycle have led to debt escalation for companies such as Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC), and Coeur. Remember, companies with strong balance sheets can weather weakness longer than their highly leveraged peers.
Goldcorp and Newmont make up 13.4% of the VanEck Vectors Gold Miners ETF (GDX). The iShares Silver Trust ETF (SLV) is a good way to gain exposure to spot silver prices. In the next part of this series, we’ll look at silver mining companies’ cash holdings.