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Gold Miner Leverage: Comparing the Books after 4Q16

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Leverage ratios

Investors in the gold mining industry need to know a company’s debt levels, as high debt can strain a company’s credit rating. It’s important to note that during an industry downturn, companies with higher leverage usually underperform. If gold prices recover, companies with higher leverage ratios can generally outperform those with lower leverage ratios.

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Barrick Gold has the highest financial leverage

Although Barrick Gold (ABX) has reduced its debt meaningfully over the last few years, its financial leverage level is still one of the highest in the industry. It has a high DE (debt-to-equity) ratio of 100%, as compared to the following from its peers:

  • Newmont Mining (NEM): 43%
  • Kinross Gold (KGC): 40%
  • Yamana Gold (AUY): 39%
  • Goldcorp (GG): 21%

Barrick Gold’s DE ratio shows a DE mix in the company’s capital structure. Newmont Mining’s debt ranking has come down significantly.

Financial indebtedness

Poor acquisition decisions at the peak of the cycle have led to debt escalation for Barrick Gold, Newmont Mining, and Kinross Gold. Goldcorp and Agnico-Eagle Mines (AEM), on the other hand, have followed a prudent M&A (mergers and acquisitions) strategy. After 2013, miners have emerged as leaner organizations in terms of cost structure and financial leverage.

Goldcorp and Newmont Mining form 13.4% of the VanEck Vectors Gold Miners ETF (GDX). The SPDR Gold Shares ETF (GLD) is another good way to gain exposure to spot gold prices.

Remember, the companies with the strongest balance sheets can usually weather weakness longer than their highly leveraged peers. In the next part, we’ll look at gold mining companies’ cash holdings and their near-term and long-term needs.

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