It isn’t always a bad situation to have debt if the company has the ability to repay it through its earnings. We can gauge this repayment capacity for miners by using certain ratios.
The net-debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] ratio is one such measure, which indicates how many years it would take for a company to repay its debt if its net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.
A lower ratio is better for a company. It’s usually better to use forward EBITDA, as investors concentrate on future earnings potential rather than the trailing earnings capacity.
The chart above shows this ratio for the miners under discussion. Yamana Gold’s (AUY) net-debt-to-forward EBITDA ratio is 2.8x, which is higher than its peers’ ratios. Barrick Gold and Goldcorp (GG) have net-debt-to-forward EBITDA ratios of ~1.0x and ~2.0x, respectively.
Because this ratio is based on a company’s future earnings capacity, a change in guidance or any new flow would impact this ratio. As a result, this ratio could change quickly to depict the latest analyst earnings estimates.
Together, Newmont Mining (NEM) and Barrick Gold (ABX) comprise ~19% of the VanEck Vectors Gold Miners ETF (GDX). Leveraged ETFs like the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT) also provide leverage to precious metal prices. However, they carry a higher risk than nonleveraged ETFs such as the SPDR Gold Shares ETF (GLD).
Next, let’s move to an analysis of the free cash flow upsides for our four senior gold mining companies.