Usually, companies try to optimize debt-to-equity levels in order to minimize risk and reduce the cost of capital. However, debt levels can create problems for companies—especially when the commodity markets aren’t doing well. Since high debt levels can strain a company’s credit rating and growth decisions, it’s important to look at a company’s financial leverage.
While Barrick Gold (ABX) and Newmont Mining (NEM) were regarded as the companies with high financial leverage ratios, things are changing. These companies have significantly improved their balance sheets by paying off debt through their cash flows and proceeds from selling non-core assets. Even after following through their debt reduction targets, these companies have high debt levels.
Barrick Gold has a high DE (debt-to-equity) ratio of 67.0%, 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.
Miners (GDX) usually take up more debt when metal prices are doing well. Some of the above-mentioned miners made acquisition decisions funded mainly by debt at the peak of the mining cycle. The majority of these acquisitions were eventually written off due to poor economics and low metal prices (GLD)(SLV), which led to increased financial leverage for miners without a corresponding rise in production. Miners have pulled up their socks over the last two to three years. The major focus has been debt reduction and strengthening balance sheets, which are now visible in miners’ improved balance sheets—especially Newmont Mining and Barrick Gold.
In the next part of this series, we’ll look at gold mining companies’ cash holdings and their near-term and long-term needs.