Up to a point, companies try to optimize their debt-to-equity mixes. In fact, it isn’t always negative to carry debt if a company can repay it through earnings. We can gauge this repayment capacity for miners using certain ratios.
One of these ratios indicates the number of years it would take for a company to repay its debt: it’s known as the net-debt-to-forward EBITDA (earnings before interest, tax, depreciation, and amortization) ratio. A lower ratio is better and indicates higher debt-repayment capacity. It’s also usually preferable to use forward EBITDA because investors concentrate more on future earnings potential than on trailing earnings.
Gold miners’ repayment capacities
The chart above shows this ratio for the miners (GDX) (NUGT) under discussion in this series. Newmont Mining (NEM) has the lowest net-debt-to-forward EBITDA ratio of 0.27x, which indicates high debt-repayment capability from its forward earnings. This ratio has improved tremendously from 0.7x at the end of 1Q17 and 1.3x at the end of 2015. Higher EBITDA and lower debt helped this ratio improve.
Yamana Gold’s (AUY) net-debt-to-forward EBITDA ratio is 2.2x, which is higher than its peers’ ratios. Barrick Gold (ABX) and Goldcorp (GG) have net-debt-to-forward EBITDA ratios of ~1.1x and 1.5x, respectively. Barrick’s debt-repayment capacity has risen in the last two to three years.
Kinross Gold (KGC) also seems to be comfortably placed as far as this metric is concerned. It has a ratio of 0.58x.
The net debt-to-forward EBITDA ratio tends to change quickly following changes in a company’s earnings estimates. At any time, it reflects changes in earnings capacity.
In the next part of this series, we’ll analyze the free cash flow upsides for our four senior gold mining companies.