Worth Their Weight in Gold? Potential Upside for Gold Stocks
(Continued from Prior Part)
Valuation
The EV/EBITDA multiple is a good measure for capital-intensive industries, as it helps investors compare companies different capital structures.
The above chart compares gold miners’ EV to forward EBITDA to the EBITDA margin from 2016. EV is the total market value of a business’s debt, equity, preferred shares, and minority interests, net of cash and equivalents and investment in associates. EBITDA is a fundamental measure for the company’s stakeholders.
Based on an investor’s risk appetite and different gold price scenarios, investors could consider the following.
Quality names
The best strategy in a weak and volatile metals price environment is to go for miners with healthy balance sheets, increasing production profiles, low costs, and good cash flows. Agnico Eagle Mines (AEM) and Goldcorp (GG) check almost all of the right boxes for senior gold miners. That’s probably why they’re trading at a higher multiple than their peers at 9x and 7.3x, respectively.
Leveraged names
Newmont Mining (NEM) has a multiple of 6.5x with an EBITDA margin of 32%. Its recent cost-cutting and debt reduction efforts have started bearing fruit. However, its high absolute debt is still a concern for some investors.
Barrick Gold (ABX) also has debt reduction as its number-one priority. However, its debt loads could be a cause for concern among investors in the weaker gold price environment. Its production upside is also limited. Given the leverage for Newmont and Barrick, they should be outperforming other gold miners once gold prices start rising.
While Yamana Gold (AUY) has also been reducing its costs significantly, the market isn’t very fond of its inconsistent operational performance and balance sheet concerns.
Kinross Gold (KGC) has higher unit costs and an unstable production profile. Its exposure to the politically risky Russia is also a concern among investors. It’s trading at the lowest multiple of 3.5x
Barrick and Newmont account for 5.50% and 6.40%, respectively, of the Market Vectors Gold Miners ETF (GDX).
What’s your risk appetite?
According to their risk appetite, investors with high risk appetite can go for gold miners (GDX) (GDXJ)—even the leveraged names. Investors who prefer a low-risk environment might want to invest in physical gold or ETFs that track gold prices, including the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU).
To read more about gold and gold equities, read Everything you need to know about gold and gold companies.
You can also visit Market Realist’s Gold ETFs page for the latest analysis of gold.
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