EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] is a useful multiple to value gold equities. It is a good measure to compare capital-intensive industries, as it can be used to compare companies with different capital structures.
Kinross Gold’s relative valuation
Currently, Kinross Gold (KGC) has a forward EV-to-EBITDA multiple of 5.5x. Despite appreciating by 25% in 2017 year-to-date (or YTD), this is the lowest among its closest peers (GDX) (SGDM). Historically, Kinross Gold’s stock has traded at a discount to its peer average.
The current discount, however, has declined. While the last five-year average discount for Kinross was 35%, it is currently trading at a 29% discount.
KGC’s historical discount was mainly due to its higher costs and relatively riskier geographical asset base. With the acquisition of assets in Nevada from Barrick Gold (ABX), Kinross Gold allayed some of those concerns. KGC is working to take care of the production growth decline and cost concerns through its latest announcements.
As is clear from the chart above, Kinross Gold’s EBITDA margin is lower than most of its peers’ margins. Barrick Gold (ABX), Newmont Mining (NEM), and Goldcorp (GG) are trading at higher multiples of 6.3x, 9.0x, and 10.3x, respectively.
Kinross Gold’s discount started falling in 2017, as it has demonstrated that it can cut costs, improve its production growth profile, and reduce its risk exposure.
A timely and on-budget execution of its latest projects could help narrow its valuation gap.