Because high debt levels can put a strain on a company’s credit rating and its growth decisions, it’s important to look at a company’s financial leverage. During an industry downturn, companies with higher leverage usually underperform. However, if gold prices recover, companies with higher leverage ratios can outperform those with lower leverage ratios.
Barrick Gold (ABX) and Newmont Mining (NEM) have significantly improved their balance sheets by paying off debt through their cash flows and proceeds from selling non-core assets. While these two companies are following through on their debt reduction targets nicely, they still hold the highest financial leverage levels in the sector.
Barrick Gold has a high DE (debt-to-equity) ratio of 77.0% compared to the following ratios for its peers:
The debt-to-equity ratio shows a debt equity mix in the company’s capital structure. Newmont Mining’s debt ranking has fallen significantly.
These miners’ indebtedness started with their acquisition decisions, which were taken at the peak or near the peak of the mining cycle. Most of the value of these acquisitions had to be written off, which led to increased financial leverage. Miners are now focused on reducing their debt and pruning their balance sheets in any way possible. This is now visible in the improved balance sheets of miners, especially Newmont Mining and Barrick Gold.
In the next part, we’ll look at gold mining companies’ cash holdings and their near-term and long-term needs.