Investors are usually interested in gold miners’ ability to generate FCF (free cash flow), as it helps them invest in future growth. Analysts expect Barrick Gold’s (GOLD) FCF to rise significantly YoY this year to $650 million from $365 million. This expectation is mainly due to higher post-merger production driving revenue.
Analysts’ estimates for gold miners’ FCF
Kinross Gold’s (KGC) FCF has remained negative for the last few years due to the construction of new projects. Even this year, the consensus is for the FCF to remain negative at $23.4 million. However, from 2020 onwards, analysts are expecting KGC to achieve positive FCF. Analysts estimate the company will generate FCF of $283 million in 2020 and $567 million in 2021.
Yamana Gold and Agnico Eagle Mines
In contrast to Kinross, analysts expect Yamana Gold’s (AUY) FCF to turn positive this year after negative FCF for a few years. In 2019, analysts are projecting FCF of $8.65 million, rising to $195.0 million and $264 million in 2020 and 2021, respectively. With its Cerro Moro mine complete, its FCF should recover. The company also mentioned during its preliminary second-quarter production results that its FCF should rise in the second half. This improvement is mainly due to its operational results combined with recently announced reductions in general and administrative expenses. Lower interest rate expenses due to anticipated debt reduction should also contribute to higher FCF.
Analysts expect Agnico Eagle Mines (AEM) to generate positive FCF of $87 million this year after a few negative years. Several of its projects are coming online this year as the company’s capex requirements decline and its projects start contributing to its cash flows. Thus, AEM’s FCF should grow. For 2020 and 2021, analysts are expecting still higher FCF of $477 million and $638 million, respectively.
Gold miners’ valuation multiples
Agnico Eagle Mines’ (AEM) forward multiple of 12.9x, the highest among senior and intermediate gold miners, is 24% higher than its trailing-five-year average and 87% higher than its peers. AEM enjoys this premium due to its strong production growth, which is supported by its impressive project pipeline. This development is expected to drive significant cash flows for it going forward.
Barrick and Newmont
Barrick Gold (GOLD) has the second-highest multiple of 9.9x. This multiple is 48% higher than its historical multiple, and 43% above the gold miners’ average. GOLD’s multiple has been expanding since its merger announcement last September due to expected synergies, cost savings, and increased returns. While the market has factored in most of the immediate synergy benefits and growth from the merger, the upside from here will depend on the execution after the merger.
Newmont Goldcorp’s (NEM) valuation multiple of 8.2x, the third-highest among the miners, is 8.3% above its historical multiple and 19% above the peer average. Newmont-Goldcorp’s significant synergies could command a premium multiple, though much depends on post-merger project execution. Newmont will also need to assure markets that it can turn around Goldcorp’s weaker assets or sell them for a reasonable price.
Yamana Gold and Kinross Gold
Yamana Gold’s (AUY) multiple of 7.3x implies a premium of 6.5% to its senior and intermediate peers. It has narrowed this discount recently. With the start-up of its Cerro Moro mine, Yamana Gold’s production and costs should improve significantly.
Kinross Gold (KGC) is trading at a forward multiple of 5.7x, 17.0% below the peer average. While the stock has strengthened as the company addresses production growth concerns, geopolitical concerns and challenges at its Tasiast expansion have weighed it down. It will be interesting to see the update on the Tasiast Expansion Phase 2 project from the company during its Q2 earnings call.
You can read more about gold miners’ valuation catalysts in Analyzing Gold Equities’ Valuation Upside and Downside Catalysts.