To a point, companies try to optimize their debt-to-equity mixes. In fact, it isn’t always bad 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 is the net debt-to-forward-EBITDA ratio, which indicates the number of years it would take for a company to repay its debt. A lower ratio is better and indicates a 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 the net debt-to-forward-EBITDA ratios of the miners (GDX) (NUGT) we’re covering in this series. Newmont Mining (NEM) has the lowest ratio of 0.38x, which indicates a high debt-repayment capability from its forward earnings. The ratio has improved tremendously from 0.7x at the end of the first quarter of 2017 and 1.3x at the end of 2015. Its net debt has fallen while its EBITDA has improved, resulting in an improved ratio.
Yamana Gold’s (AUY) net debt-to-forward EBITDA ratio is 2.2x, higher than those of its peers. Barrick Gold (ABX) and Goldcorp (GG) have ratios of 1.3x and 1.8x, respectively. Barrick’s debt-repayment capacity has risen in the last two to three years.
Kinross Gold (KGC) also seems comfortably placed in this metric with a ratio of 0.68x.
The net debt-to-forward EBITDA ratio tends to change quickly following changes in a company’s earnings estimates. The ratio reflects changes in earnings capacity.
In the next article, we’ll analyze the free cash flow upsides of our senior gold mining companies.