Valuation for capital-intensive industries
The EV-to-EBITDA (enterprise value-to-EBITDA) multiple is a good measure of valuation for capital-intensive industries. It helps investors compare companies with varying capital structures.
The chart above compares gold miners’ forward EV-to-EBITDA multiples and forward EBITDA margins. Among senior and intermediate gold miners, Agnico Eagle Mines (AEM) has the highest forward multiple of 10.8x, 15% higher than its trailing-five-year average multiple. Its current multiple also implies a premium of 79% to its peers (GDX) (GDXJ). AEM enjoys this premium due to its strong production growth, which is supported by its impressive project pipeline. AEM’s operational consistency and exploration program support its higher multiple.
Newmont Mining (NEM) has the second-highest valuation multiple among these miners at 7.8x. Its multiple implies a discount of 5% to its historical multiple and a premium of 18% to the peer average.
The Newmont-Goldcorp merger has had significant synergies, which could help the combined company command a premium. However, much of the outcome will depend on its post-merger project execution. Also, Newmont will need to assure the markets that it can turn around Goldcorp’s weaker assets or sell them for a reasonable price.
Barrick Gold and Goldcorp
Barrick Gold (GOLD) has a forward EV-to-EBITDA multiple of 7.4x, implying a 14% premium to its historical multiple and a 12% premium to the peer average. Between the merger’s announcement on September 24 and January 2, GOLD’s valuation multiple rose 14% in anticipation of synergies, cost savings, and increased returns. The resolution of the company’s dispute with the Tanzanian government could be another major catalyst for its stock.
Goldcorp (GG) follows Barrick with a forward multiple of 6.9x. Its multiple has expanded 10% since its merger announcement with Newmont on January 14.
Yamana Gold and Kinross Gold
Yamana Gold (AUY) is trading at a multiple of 5.8x, which implies a discount of 11% to its senior and intermediate peers. The company has, however, narrowed its discount to its peers to a large extent. With the startup of its Cerro Moro mine, Yamana Gold’s production and costs are expected to improve significantly.
Kinross Gold (KGC) is trading at a forward multiple of 4.9x, implying a discount of 26.0% to the peer average. Although its discount started to fall as it addressed production growth concerns, geopolitical concerns 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.
Read Which Gold Miners Are Looking Attractive in 2019? for more on analysts’ recommendations and rating changes for these gold miners.