How Do Gold Miners’ Financial Leverage Levels Look after 1Q16?

Where Can You Find Opportunities in the Senior Gold Miner Space?

(Continued from Prior Part)

Leverage ratios

Investors in the gold mining industry need to know a company’s debt levels. High debt can strain a company’s credit rating. It’s important to note that during an industry downturn, companies with higher leverage usually underperform. If gold prices recover, companies with higher leverage ratios can generally outperform those with lower leverage.

Barrick has the highest financial leverage

While Barrick Gold (ABX) has reduced its debt meaningfully over the last few years, its financial leverage level is still one of the highest in the industry. It has a high debt-to-asset ratio of 36% compared to its peers below:

• Newmont Mining (NEM): 23%

• Kinross Gold (KGC): 32%

• Yamana Gold (AUY): 26%

• Goldcorp (GG): 15%

Barrick’s debt-to-equity ratio shows a debt-to-equity mix in the company’s capital structure. Newmont’s debt ranking has come down significantly. Its debt-to-equity ratio is high at 40% but lower than Kinross Gold’s ratio.

Unfolding of financial leverage

Poor acquisition decisions at the peak of the cycle have led to debt escalation for Barrick, Newmont, and Kinross . Goldcorp and Agnico-Eagle (AEM), on the other hand, have followed a prudent M&A (mergers and acquisitions) strategy.

Goldcorp and Newmont form 13.4% of the VanEck Vectors Gold Miners ETF (GDX). The SPDR Gold Trust (GLD) is a good way to gain exposure to spot gold prices.

The companies with the strongest balance sheets can weather weakness longer than their highly leveraged peers. In the next part, we’ll look at gold mining companies’ cash holdings and their near-term and long-term needs.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Which Leveraged Miners Have Outperformed?

• Part 2 - Which Gold Miner Has Optimal Geographical Exposure?

• Part 3 - Why Investors Should Understand Gold Miners’ Commodity Exposure