Valuation for capital-intensive industries
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a good valuation measure for capital-intensive industries. It helps investors compare companies with varying capital structures.
The chart above compares gold miners’ EV-to-forward-EBITDA multiples and EBITDA margins one-year forward. Among the senior and intermediate gold miners, Agnico Eagle Mines (AEM) has the highest forward multiple of 10.3x, almost in line with its last-five-year average multiple. Its current multiple also implies a premium of 68% to its close peers (GDX)(GDXJ).
The company offers strong production growth, which is supported by a strong project pipeline. AEM’s strong operational consistency and its exploration program support a higher multiple for the stock.
Newmont Mining (NEM) has the second-highest valuation multiple among these miners at 7.2x. Its multiple also implies a discount of 12.6% to its historical multiple and a premium of 18% to its peers’ average multiple.
NEM’s multiple has expanded compared to those of its peers, most likely due to its strong operational performances in 2017 and year-to-date. Its impressive project pipeline is also encouraging analysts to revise their estimates upward.
Barrick Gold and Goldcorp
Barrick Gold’s (ABX) financial leverage has been a cause for concern for investors. Despite having a higher EBITDA margin of 43%, it’s trading at a multiple of 6.5x, which is lower than Newmont’s EBITDA margin. Its management’s focus on reducing its leverage could act as a positive catalyst. Going forward, project development execution could be key for Barrick.
Goldcorp (GG) follows Barrick with a forward multiple of 6.2x. Goldcorp’s multiple has dropped 23.0% to its current level in the last three months on disappointing operational performance. Its fundamentals, however, remain strong.
Yamana Gold and Kinross Gold
While Yamana Gold’s (AUY) valuation multiple has improved since the start of 2018 due to Cerro Moro’s start, it would take consistent operational improvements for the stock to rerate further.
Kinross Gold (KGC) is trading at the lowest forward multiple of 3.8x, implying a discount of 39.0% to the peer average. Although its discount started to fall as it addressed production growth concerns, geopolitical concerns have weighed down the stock and its multiple in 2018. Moreover, if the recent Tasiast Expansion Phase Two issue isn’t resolved as soon as possible, the company could see further downside.
You can also read Analysts’ Views: Is It Time to Look at Gold Miners for more on analysts’ recommendations and rating changes for these gold miners.