Introduction
Figure 1_1 illustrates that we are in the second long-term gold bull phase since the early 2000s. The first phase ended in 2012 and the second phase started around 2017.
This author analysed in 2013 how well the ten largest gold producers by market capitalisation benefited from the gold price escalation from 2003 until 2012 and the conclusions from the study were:
- Total combined revenue increased by 6.1-fold compared to a gold price rise that was 4.6-fold. The explanation for the larger revenue increase is that gold sold by the sample group rose by 9.6% until 2012 and some large players (e.g., Barrick, Newcrest, and AngloGold Ashanti) closed out gold price hedges to benefit from the higher spot prices;
- Despite the impressive gold price increase since 2003, the profit margins of the gold producers measured by “adjusted earnings before interest, tax, depreciation and amortisation {“EBITDA”} increased only modestly from just below 50% to just above 50% over the 2003-2013 period, showing how the cost of sales rapidly escalated over the period as well;
- However, EBITDA does not account for taxes and investments to sustain/grow production. Due to optimistic perceptions about the future gold market companies aggressively pursued growth by investing more than earned from operations, requiring funding from financial institutions and their shareholders. Over the ten years, it amounted to US$18.8 billion equal to 7% of the gold revenue earned. In fact, instead of cashing in from raised dividends and share buy-backs, shareholders were called upon to be net contributors providing US$7.3 billion over the ten years.
The overall conclusion of the 2013 study was that the industry blew the opportunity provided by the gold bull period and wasted the large operational cash inflows.
The following sections will analyse whether lessons have been learned and shareholders better rewarded.
Information Used
Information Sources and Level of Accuracy
The information for the individual companies was derived from the annual financial statements, either provided on the company website, or from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) website, or the USA Security and Exchange Commission (“SEC”) filings on EDGAR.
The analysis is greatly complicated by the various companies using different reporting standards and measures (e.g. some companies report EBITDA, others not at all) and individual companies changing their reporting over time.
Other complications relate to the use of a currency different from the US Dollar (e.,g. Harmony reports its figures only in South African Rand and Northern Star and Evolution Mining only in Australian Dollar), and capital raisings are expressed only as net proceeds after the cost of equity placements.
Whereas the great majority have 31 December as financial year-end, some have 30 June as year-end. The reported numbers have been considered applicable to the calendar year.
Another complication is that certain companies have had considerable revenue from commodities other than gold. Examples are Barrick Gold, Newmont, Newcrest and Yamana. However, except for Kinross, it is possible to extract from the financial statements the revenue purely attributable to gold sales.
The figures in the following report sections should therefore only be taken as indicative. What matters most is identifying trends and extracting rules of thumb.
Company Sample
As was the case for the 2013 study, the starting point of the exercise is the selection of companies for the study. The selection of companies for the sample group was surprisingly complex. Large gold producers such as Freeport McMoran, Zijin Mining, and Sibanye Stillwater were rejected as most/much of the revenue is related to other commodities. Gold streaming companies such as Franco Nevada, Royal Gold Incorporated, and Wheaton Precious Metals Corporation were also excluded as being non-representative producers.
Table 2.2_1 shows the gold mining companies in the sequence of the size of gold production and the market capitalisation of these companies on 7 June 2024.
The table includes 15 companies that accounted in 2023 for 32.5 million ounces of gold production, equal to 27.7% of the total mined gold production in that year of 117.2 million ounces. Global gold production is therefore not dominated by a few companies, but determined by many producers.
The companies had a total market capitalisation on 7 June 2024 of US$223.8 billion. This equates to US$6,889/annual ounce production of the sample group. At the spot gold price of US$2,333/oz on 7 June 2024 this valuation equates to roughly three times annual gold revenue.
In the column on the right are highlighted in yellow the companies for which the market has a large premium (i.e., Agnico Eagle and Alamos Gold), much higher than three times gold revenue, and highlighted in brown companies trading at a large discount. Noticeable in the discounted category are the large number of companies with exposure to Africa. Another reason is the poor historical performance of other companies, which will become apparent in the later sections.
Results
Revenue Growth
Figure 3.1_1 shows the growth in total gold revenue for the sample group from 2018 until 2023.
The graph shows that revenue grew slightly ahead of the gold price, which is explained by gold production growing around 10% from 29.5 Moz to 32.5 Moz in 2023. Annual revenue increased by 67%.
Growth in EBITDA
A large number of the companies report EBITDA as a measure of their ability to generate liquidity by producing operating cash flow to fund working capital needs, service debt obligations, and fund capital expenditures. It is also a measure often used for covenants by financial institutions when extending loans.
There is however no standard in reporting EBITDA, some companies reporting the measure as is, others “adjusting” this metric to present a more favourable picture. These adjustments include removing the effect of “impairment charges” and the cost of closing out gold hedges. It is argued that such charges are not reflective of the ability to generate liquidity by producing operating cash flow and, therefore, these companies see this adjusted figure as a more meaningful valuation measure for investors and analysts to evaluate their performance in the period, and assess their future ability to generate liquidity.
The adjusted EBITDA figures also conveniently cover up the cost of mistakes of poor historical investments and hedging that have destroyed much shareholder value. For example, when Barrick first introduced “Adjusted EBITDA” in 2007, it made positive adjustments of US$1.06 billion for the years 2005-2007, which were settled according to the cash flow statement for US$2.04 billion in cash. The gold hedge close-out culminated with an adjustment of US$5.93 billion in 2009, the settlement of which was at a cash cost of US$5.22 billion in 2009 and US$0.56 billion in 2010. Fortunately, gold hedges got out of favour and are no longer an issue in the latest bull run.
This report has referred, where possible, to the EBITDA numbers calculated by Macrotrends (www.macrotrends.net) the logic being that their numbers will have been derived in a consistent manner. For some companies Macrotrend gives no numbers and Crux Investor had to refer to the company reports. In this group are Polyus, Newcrest, Northern Star and Endeavour Mining. The numbers for Evolution Mining were extracted from Trading Economics (https://tradingeconomics.com).
Figure 3.2_1 gives the EBITDA over time compared to the gold price performance, showing that it rose rapidly from 31% of revenue to fluctuate between 2019 and 2022 around 50% only to fall back to US$25 billion in 2022 and 2023, which was for 2023 equal to 39% of revenue.
It is remarkable that the profitability did not increase very much with the sharp gold price increase, after an early jump. Since 2020 there actually has been a considerable decline, from almost US$30 billion to below US$25 billion. It seems that history has repeated itself and the cost of sales has risen sharply.
Cash Generated by Operations
Figure 3.3_1 shows cash generated by the operations as reported in the annual financial statements and the gold price performance during the same period.
The graph follows Figure 3.2_1 closely except that approximately US$5 billion per annum is spent on items such as taxes, not accounted for in EBITDA. A total of US$117 billion was generated over the period, which amounts to 37% of the revenue over the same period. This is a very decent cash margin. It does not however capture the investments required to keep the company a going concern.
Figure 3.3_2 shows cash absorbed by investments compared to how much cash was generated by the operations.
The graph shows how the companies in general were prudent immediately following the start of the gold price bull run, but this changed after one year, with investments rapidly expanding reaching almost parity with cash generated in 2022. The net cash generated after investments made is shown in Figure 3.3_3, which has purposefully kept the y-axis scale the same as in Figure 3.3_2 to facilitate comparison. The diagram also shows how much funding accrued to shareholders in dividends and share buy-backs net of equity raisings.
The total amount of cash generated over the period was US$38.5 billion, equal to 12% of the revenue over the same period. As the bull market continued, companies became increasingly generous in returning cash. Of the total US$29.5 billion disbursed over the whole period, US$11.0 million was dispensed in 2023, mostly because of Polyus’s contribution of US$6.4 billion. The company financed this by raising debt of US$5.1 billion, something that in the longer run will be unsustainable.
When ignoring Polyus as non-representative, US$4.6 billion was returned to shareholders in 2023. At the market capitalisation of US$223.8 billion on 7 June 2024, this would indicate an average historical dividend yield for the sample group of 2.0%. This is not impressive and shareholders will require dividend growth of at least 3% per annum to achieve an overall 5% return or better. Figure 3.3_3 illustrates that the industry was unsuccessful in generating increasing amounts of cash during the later phase of the gold bull run period.
Finally, Table 3.3_1 compares the financial performance of the largest 15 gold producers during 2018-2023 with that of the ten largest gold producers over the period 2003 – 2012.
From the table, it is evident that lessons were learned and management was much less wasteful during the latest bull run compared to 2003 – 2012. Instead of a negative US$18.78 billion net cash and before financing activities in the early bull run, during 2018 – 2023 operations managed to generate US$38.48 billion. Almost all of the net cash was used to reward minority parties and shareholders. This is a huge improvement and a feather in the cap for the industry.
Value Creation For Shareholders
The above sections are interesting to get insight into overall industry performance. However, for investors, it is somewhat academic. For his reason, Crux Investor has reviewed in Table 3.4_1 how well individual companies in the sample group have performed in terms of:
- Distributing cash back to the shareholders. To standardise the results for the size of company the second column gives the numbers as US$/oz produced over the period;
- Growth achieved. This has been expressed as gold production change between 2018 and 2023; and
- The change in the gold reserve base as an indication of future prospects for the company.
Crux has subjectively highlighted any outperformance in a particular metric with a yellow colour and underperformance with a brown colour.
The best performers in terms of returning cash to shareholders are the four largest producers. For these mature companies, it is hard to increase production and they require large acquisitions to achieve this, or just to maintain production levels. Agnico Eagle achieved its spectacular growth by aggressively acquiring other producers: in 2022 it merged with Kirkland Lake Gold which itself has acquired Detour Gold in 2020. The latest addition to the Agnico Eagle stable were the Canadian assets of Yamana Gold, acquired in 2023.
Other high-growth companies in terms of reserve growth are Northern Star, Endeavour Mining, and Equinox Gold. Northern Star acquired Saracen Holdings in 2021 which consolidated the Kalgoorlie deposits and obtained the Pogo deposit. Endeavour Mining acquired Semafo in 2020 and Teranga Gold in 2021. Equinox appeared from nowhere and saw an enormous increase in production (and reserve base), partially through the merger with Leagold in 2020.
Companies that have been relatively inactive with acquisitions and mergers have found it difficult to replace reserves that have been mined, as is clear from the column showing the reserve change. Even so, the sample group as a whole has done excellently by growing reserves 36.5%. This is however not a reflection of the industry or in-house exploration success, but rather the success with which these larger companies managed to absorb other, generally smaller peers.
The column at the right is another version of the rightmost column in Figure 2.2_1. The results have been standardised by dividing all numbers by US$6,889, the average market capitalisation value per ounce of gold annual production. Numbers that differ considerably from 1.00, the industry average, have been highlighted yellow when at a premium, or brown when at a discount.
There are some surprising results here. The premium awarded to Agnico Eagle is fully warranted given its growth in production and reserves with the company still able to return considerable amounts of cash to its shareholders. However, the premium rating for Alamos Gold is an aberration, as the company’s performance has been stagnant, and the distribution of cash has been well below the industry average.
The companies with discounted values are all performing relatively poorly in terms of returning cash to shareholders, growing production, and expanding the reserve base, except for Endeavour Mining and Equinox Mining. The poor valuation of Endeavour Mining is possibly explained by the high exposure to West Africa. The poor rating of Equinox Mining is probably explained by it only being able to achieve production and reserve growth through much funding. Until the company proves it can from now onwards generate surplus cash, its share price will remain discounted.
Conclusions
- Based on the performance of the largest 15 gold producers the industry is performing a lot better during the current gold price bull run than in the 2003-2012 bull run. Instead of wasting large sums, in excess of cash generated from operations, in a wild dash for production and gold reserve growth, the sample group has achieved 10% production growth and considerable reserve growth, concurrent with generating net cash before financing activities equal to 12% of revenue.
- The greatest improvement in financial performance is early in the bull cycle. There are indications that the industry has found it difficult to sustain high cash margins. However, with the current gold price in excess of US$2,300/oz, which is almost 14% higher than the 2023 average gold price, it is unlikely the margins have deteriorated further.
- Based on the performance of the last six years Agnico Eagle is the star of the class. For distribution of cash to its shareholders the largest four producers are most attractive, but Polyus pay-out rate is unsustainable with the company needing debt financing to cover the large 2023 dividend. Being a Russian company, other considerations will play a role for the large dividend.
- Companies with exposure to Africa are relatively lowly rated, even when they achieve good growth, such as Endeavour Mining.
- Based on comparative ratings for cash return, production and reserve growth, Northern Star looks an attractive opportunity, which is reflected in the share price rating. Conversely, Alamos Gold seems to be heavily overrated.
Introduction
Figure 1_1 illustrates that we are in the second long-term gold bull phase since the early 2000s. The first phase ended in 2012 and the second phase started around 2017.
This author analysed in 2013 how well the ten largest gold producers by market capitalisation benefited from the gold price escalation from 2003 until 2012 and the conclusions from the study were:
- Total combined revenue increased by 6.1-fold compared to a gold price rise that was 4.6-fold. The explanation for the larger revenue increase is that gold sold by the sample group rose by 9.6% until 2012 and some large players (e.g., Barrick, Newcrest, and AngloGold Ashanti) closed out gold price hedges to benefit from the higher spot prices;
- Despite the impressive gold price increase since 2003, the profit margins of the gold producers measured by “adjusted earnings before interest, tax, depreciation and amortisation {“EBITDA”} increased only modestly from just below 50% to just above 50% over the 2003-2013 period, showing how the cost of sales rapidly escalated over the period as well;
- However, EBITDA does not account for taxes and investments to sustain/grow production. Due to optimistic perceptions about the future gold market companies aggressively pursued growth by investing more than earned from operations, requiring funding from financial institutions and their shareholders. Over the ten years, it amounted to US$18.8 billion equal to 7% of the gold revenue earned. In fact, instead of cashing in from raised dividends and share buy-backs, shareholders were called upon to be net contributors providing US$7.3 billion over the ten years.
The overall conclusion of the 2013 study was that the industry blew the opportunity provided by the gold bull period and wasted the large operational cash inflows.
The following sections will analyse whether lessons have been learned and shareholders better rewarded.
Information Used
Information Sources and Level of Accuracy
The information for the individual companies was derived from the annual financial statements, either provided on the company website, or from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) website, or the USA Security and Exchange Commission (“SEC”) filings on EDGAR.
The analysis is greatly complicated by the various companies using different reporting standards and measures (e.g. some companies report EBITDA, others not at all) and individual companies changing their reporting over time.
Other complications relate to the use of a currency different from the US Dollar (e.,g. Harmony reports its figures only in South African Rand and Northern Star and Evolution Mining only in Australian Dollar), and capital raisings are expressed only as net proceeds after the cost of equity placements.
Whereas the great majority have 31 December as financial year-end, some have 30 June as year-end. The reported numbers have been considered applicable to the calendar year.
Another complication is that certain companies have had considerable revenue from commodities other than gold. Examples are Barrick Gold, Newmont, Newcrest and Yamana. However, except for Kinross, it is possible to extract from the financial statements the revenue purely attributable to gold sales.
The figures in the following report sections should therefore only be taken as indicative. What matters most is identifying trends and extracting rules of thumb.
Company Sample
As was the case for the 2013 study, the starting point of the exercise is the selection of companies for the study. The selection of companies for the sample group was surprisingly complex. Large gold producers such as Freeport McMoran, Zijin Mining, and Sibanye Stillwater were rejected as most/much of the revenue is related to other commodities. Gold streaming companies such as Franco Nevada, Royal Gold Incorporated, and Wheaton Precious Metals Corporation were also excluded as being non-representative producers.
Table 2.2_1 shows the gold mining companies in the sequence of the size of gold production and the market capitalisation of these companies on 7 June 2024.
The table includes 15 companies that accounted in 2023 for 32.5 million ounces of gold production, equal to 27.7% of the total mined gold production in that year of 117.2 million ounces. Global gold production is therefore not dominated by a few companies, but determined by many producers.
The companies had a total market capitalisation on 7 June 2024 of US$223.8 billion. This equates to US$6,889/annual ounce production of the sample group. At the spot gold price of US$2,333/oz on 7 June 2024 this valuation equates to roughly three times annual gold revenue.
In the column on the right are highlighted in yellow the companies for which the market has a large premium (i.e., Agnico Eagle and Alamos Gold), much higher than three times gold revenue, and highlighted in brown companies trading at a large discount. Noticeable in the discounted category are the large number of companies with exposure to Africa. Another reason is the poor historical performance of other companies, which will become apparent in the later sections.
Results
Revenue Growth
Figure 3.1_1 shows the growth in total gold revenue for the sample group from 2018 until 2023.
The graph shows that revenue grew slightly ahead of the gold price, which is explained by gold production growing around 10% from 29.5 Moz to 32.5 Moz in 2023. Annual revenue increased by 67%.
Growth in EBITDA
A large number of the companies report EBITDA as a measure of their ability to generate liquidity by producing operating cash flow to fund working capital needs, service debt obligations, and fund capital expenditures. It is also a measure often used for covenants by financial institutions when extending loans.
There is however no standard in reporting EBITDA, some companies reporting the measure as is, others “adjusting” this metric to present a more favourable picture. These adjustments include removing the effect of “impairment charges” and the cost of closing out gold hedges. It is argued that such charges are not reflective of the ability to generate liquidity by producing operating cash flow and, therefore, these companies see this adjusted figure as a more meaningful valuation measure for investors and analysts to evaluate their performance in the period, and assess their future ability to generate liquidity.
The adjusted EBITDA figures also conveniently cover up the cost of mistakes of poor historical investments and hedging that have destroyed much shareholder value. For example, when Barrick first introduced “Adjusted EBITDA” in 2007, it made positive adjustments of US$1.06 billion for the years 2005-2007, which were settled according to the cash flow statement for US$2.04 billion in cash. The gold hedge close-out culminated with an adjustment of US$5.93 billion in 2009, the settlement of which was at a cash cost of US$5.22 billion in 2009 and US$0.56 billion in 2010. Fortunately, gold hedges got out of favour and are no longer an issue in the latest bull run.
This report has referred, where possible, to the EBITDA numbers calculated by Macrotrends (www.macrotrends.net) the logic being that their numbers will have been derived in a consistent manner. For some companies Macrotrend gives no numbers and Crux Investor had to refer to the company reports. In this group are Polyus, Newcrest, Northern Star and Endeavour Mining. The numbers for Evolution Mining were extracted from Trading Economics (https://tradingeconomics.com).
Figure 3.2_1 gives the EBITDA over time compared to the gold price performance, showing that it rose rapidly from 31% of revenue to fluctuate between 2019 and 2022 around 50% only to fall back to US$25 billion in 2022 and 2023, which was for 2023 equal to 39% of revenue.
It is remarkable that the profitability did not increase very much with the sharp gold price increase, after an early jump. Since 2020 there actually has been a considerable decline, from almost US$30 billion to below US$25 billion. It seems that history has repeated itself and the cost of sales has risen sharply.
Cash Generated by Operations
Figure 3.3_1 shows cash generated by the operations as reported in the annual financial statements and the gold price performance during the same period.
The graph follows Figure 3.2_1 closely except that approximately US$5 billion per annum is spent on items such as taxes, not accounted for in EBITDA. A total of US$117 billion was generated over the period, which amounts to 37% of the revenue over the same period. This is a very decent cash margin. It does not however capture the investments required to keep the company a going concern.
Figure 3.3_2 shows cash absorbed by investments compared to how much cash was generated by the operations.
The graph shows how the companies in general were prudent immediately following the start of the gold price bull run, but this changed after one year, with investments rapidly expanding reaching almost parity with cash generated in 2022. The net cash generated after investments made is shown in Figure 3.3_3, which has purposefully kept the y-axis scale the same as in Figure 3.3_2 to facilitate comparison. The diagram also shows how much funding accrued to shareholders in dividends and share buy-backs net of equity raisings.
The total amount of cash generated over the period was US$38.5 billion, equal to 12% of the revenue over the same period. As the bull market continued, companies became increasingly generous in returning cash. Of the total US$29.5 billion disbursed over the whole period, US$11.0 million was dispensed in 2023, mostly because of Polyus’s contribution of US$6.4 billion. The company financed this by raising debt of US$5.1 billion, something that in the longer run will be unsustainable.
When ignoring Polyus as non-representative, US$4.6 billion was returned to shareholders in 2023. At the market capitalisation of US$223.8 billion on 7 June 2024, this would indicate an average historical dividend yield for the sample group of 2.0%. This is not impressive and shareholders will require dividend growth of at least 3% per annum to achieve an overall 5% return or better. Figure 3.3_3 illustrates that the industry was unsuccessful in generating increasing amounts of cash during the later phase of the gold bull run period.
Finally, Table 3.3_1 compares the financial performance of the largest 15 gold producers during 2018-2023 with that of the ten largest gold producers over the period 2003 – 2012.
From the table, it is evident that lessons were learned and management was much less wasteful during the latest bull run compared to 2003 – 2012. Instead of a negative US$18.78 billion net cash and before financing activities in the early bull run, during 2018 – 2023 operations managed to generate US$38.48 billion. Almost all of the net cash was used to reward minority parties and shareholders. This is a huge improvement and a feather in the cap for the industry.
Value Creation For Shareholders
The above sections are interesting to get insight into overall industry performance. However, for investors, it is somewhat academic. For his reason, Crux Investor has reviewed in Table 3.4_1 how well individual companies in the sample group have performed in terms of:
- Distributing cash back to the shareholders. To standardise the results for the size of company the second column gives the numbers as US$/oz produced over the period;
- Growth achieved. This has been expressed as gold production change between 2018 and 2023; and
- The change in the gold reserve base as an indication of future prospects for the company.
Crux has subjectively highlighted any outperformance in a particular metric with a yellow colour and underperformance with a brown colour.
The best performers in terms of returning cash to shareholders are the four largest producers. For these mature companies, it is hard to increase production and they require large acquisitions to achieve this, or just to maintain production levels. Agnico Eagle achieved its spectacular growth by aggressively acquiring other producers: in 2022 it merged with Kirkland Lake Gold which itself has acquired Detour Gold in 2020. The latest addition to the Agnico Eagle stable were the Canadian assets of Yamana Gold, acquired in 2023.
Other high-growth companies in terms of reserve growth are Northern Star, Endeavour Mining, and Equinox Gold. Northern Star acquired Saracen Holdings in 2021 which consolidated the Kalgoorlie deposits and obtained the Pogo deposit. Endeavour Mining acquired Semafo in 2020 and Teranga Gold in 2021. Equinox appeared from nowhere and saw an enormous increase in production (and reserve base), partially through the merger with Leagold in 2020.
Companies that have been relatively inactive with acquisitions and mergers have found it difficult to replace reserves that have been mined, as is clear from the column showing the reserve change. Even so, the sample group as a whole has done excellently by growing reserves 36.5%. This is however not a reflection of the industry or in-house exploration success, but rather the success with which these larger companies managed to absorb other, generally smaller peers.
The column at the right is another version of the rightmost column in Figure 2.2_1. The results have been standardised by dividing all numbers by US$6,889, the average market capitalisation value per ounce of gold annual production. Numbers that differ considerably from 1.00, the industry average, have been highlighted yellow when at a premium, or brown when at a discount.
There are some surprising results here. The premium awarded to Agnico Eagle is fully warranted given its growth in production and reserves with the company still able to return considerable amounts of cash to its shareholders. However, the premium rating for Alamos Gold is an aberration, as the company’s performance has been stagnant, and the distribution of cash has been well below the industry average.
The companies with discounted values are all performing relatively poorly in terms of returning cash to shareholders, growing production, and expanding the reserve base, except for Endeavour Mining and Equinox Mining. The poor valuation of Endeavour Mining is possibly explained by the high exposure to West Africa. The poor rating of Equinox Mining is probably explained by it only being able to achieve production and reserve growth through much funding. Until the company proves it can from now onwards generate surplus cash, its share price will remain discounted.
Conclusions
- Based on the performance of the largest 15 gold producers the industry is performing a lot better during the current gold price bull run than in the 2003-2012 bull run. Instead of wasting large sums, in excess of cash generated from operations, in a wild dash for production and gold reserve growth, the sample group has achieved 10% production growth and considerable reserve growth, concurrent with generating net cash before financing activities equal to 12% of revenue.
- The greatest improvement in financial performance is early in the bull cycle. There are indications that the industry has found it difficult to sustain high cash margins. However, with the current gold price in excess of US$2,300/oz, which is almost 14% higher than the 2023 average gold price, it is unlikely the margins have deteriorated further.
- Based on the performance of the last six years Agnico Eagle is the star of the class. For distribution of cash to its shareholders the largest four producers are most attractive, but Polyus pay-out rate is unsustainable with the company needing debt financing to cover the large 2023 dividend. Being a Russian company, other considerations will play a role for the large dividend.
- Companies with exposure to Africa are relatively lowly rated, even when they achieve good growth, such as Endeavour Mining.
- Based on comparative ratings for cash return, production and reserve growth, Northern Star looks an attractive opportunity, which is reflected in the share price rating. Conversely, Alamos Gold seems to be heavily overrated.
Introduction
Figure 1_1 illustrates that we are in the second long-term gold bull phase since the early 2000s. The first phase ended in 2012 and the second phase started around 2017.
This author analysed in 2013 how well the ten largest gold producers by market capitalisation benefited from the gold price escalation from 2003 until 2012 and the conclusions from the study were:
- Total combined revenue increased by 6.1-fold compared to a gold price rise that was 4.6-fold. The explanation for the larger revenue increase is that gold sold by the sample group rose by 9.6% until 2012 and some large players (e.g., Barrick, Newcrest, and AngloGold Ashanti) closed out gold price hedges to benefit from the higher spot prices;
- Despite the impressive gold price increase since 2003, the profit margins of the gold producers measured by “adjusted earnings before interest, tax, depreciation and amortisation {“EBITDA”} increased only modestly from just below 50% to just above 50% over the 2003-2013 period, showing how the cost of sales rapidly escalated over the period as well;
- However, EBITDA does not account for taxes and investments to sustain/grow production. Due to optimistic perceptions about the future gold market companies aggressively pursued growth by investing more than earned from operations, requiring funding from financial institutions and their shareholders. Over the ten years, it amounted to US$18.8 billion equal to 7% of the gold revenue earned. In fact, instead of cashing in from raised dividends and share buy-backs, shareholders were called upon to be net contributors providing US$7.3 billion over the ten years.
The overall conclusion of the 2013 study was that the industry blew the opportunity provided by the gold bull period and wasted the large operational cash inflows.
The following sections will analyse whether lessons have been learned and shareholders better rewarded.
Information Used
Information Sources and Level of Accuracy
The information for the individual companies was derived from the annual financial statements, either provided on the company website, or from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) website, or the USA Security and Exchange Commission (“SEC”) filings on EDGAR.
The analysis is greatly complicated by the various companies using different reporting standards and measures (e.g. some companies report EBITDA, others not at all) and individual companies changing their reporting over time.
Other complications relate to the use of a currency different from the US Dollar (e.,g. Harmony reports its figures only in South African Rand and Northern Star and Evolution Mining only in Australian Dollar), and capital raisings are expressed only as net proceeds after the cost of equity placements.
Whereas the great majority have 31 December as financial year-end, some have 30 June as year-end. The reported numbers have been considered applicable to the calendar year.
Another complication is that certain companies have had considerable revenue from commodities other than gold. Examples are Barrick Gold, Newmont, Newcrest and Yamana. However, except for Kinross, it is possible to extract from the financial statements the revenue purely attributable to gold sales.
The figures in the following report sections should therefore only be taken as indicative. What matters most is identifying trends and extracting rules of thumb.
Company Sample
As was the case for the 2013 study, the starting point of the exercise is the selection of companies for the study. The selection of companies for the sample group was surprisingly complex. Large gold producers such as Freeport McMoran, Zijin Mining, and Sibanye Stillwater were rejected as most/much of the revenue is related to other commodities. Gold streaming companies such as Franco Nevada, Royal Gold Incorporated, and Wheaton Precious Metals Corporation were also excluded as being non-representative producers.
Table 2.2_1 shows the gold mining companies in the sequence of the size of gold production and the market capitalisation of these companies on 7 June 2024.
The table includes 15 companies that accounted in 2023 for 32.5 million ounces of gold production, equal to 27.7% of the total mined gold production in that year of 117.2 million ounces. Global gold production is therefore not dominated by a few companies, but determined by many producers.
The companies had a total market capitalisation on 7 June 2024 of US$223.8 billion. This equates to US$6,889/annual ounce production of the sample group. At the spot gold price of US$2,333/oz on 7 June 2024 this valuation equates to roughly three times annual gold revenue.
In the column on the right are highlighted in yellow the companies for which the market has a large premium (i.e., Agnico Eagle and Alamos Gold), much higher than three times gold revenue, and highlighted in brown companies trading at a large discount. Noticeable in the discounted category are the large number of companies with exposure to Africa. Another reason is the poor historical performance of other companies, which will become apparent in the later sections.
Results
Revenue Growth
Figure 3.1_1 shows the growth in total gold revenue for the sample group from 2018 until 2023.
The graph shows that revenue grew slightly ahead of the gold price, which is explained by gold production growing around 10% from 29.5 Moz to 32.5 Moz in 2023. Annual revenue increased by 67%.
Growth in EBITDA
A large number of the companies report EBITDA as a measure of their ability to generate liquidity by producing operating cash flow to fund working capital needs, service debt obligations, and fund capital expenditures. It is also a measure often used for covenants by financial institutions when extending loans.
There is however no standard in reporting EBITDA, some companies reporting the measure as is, others “adjusting” this metric to present a more favourable picture. These adjustments include removing the effect of “impairment charges” and the cost of closing out gold hedges. It is argued that such charges are not reflective of the ability to generate liquidity by producing operating cash flow and, therefore, these companies see this adjusted figure as a more meaningful valuation measure for investors and analysts to evaluate their performance in the period, and assess their future ability to generate liquidity.
The adjusted EBITDA figures also conveniently cover up the cost of mistakes of poor historical investments and hedging that have destroyed much shareholder value. For example, when Barrick first introduced “Adjusted EBITDA” in 2007, it made positive adjustments of US$1.06 billion for the years 2005-2007, which were settled according to the cash flow statement for US$2.04 billion in cash. The gold hedge close-out culminated with an adjustment of US$5.93 billion in 2009, the settlement of which was at a cash cost of US$5.22 billion in 2009 and US$0.56 billion in 2010. Fortunately, gold hedges got out of favour and are no longer an issue in the latest bull run.
This report has referred, where possible, to the EBITDA numbers calculated by Macrotrends (www.macrotrends.net) the logic being that their numbers will have been derived in a consistent manner. For some companies Macrotrend gives no numbers and Crux Investor had to refer to the company reports. In this group are Polyus, Newcrest, Northern Star and Endeavour Mining. The numbers for Evolution Mining were extracted from Trading Economics (https://tradingeconomics.com).
Figure 3.2_1 gives the EBITDA over time compared to the gold price performance, showing that it rose rapidly from 31% of revenue to fluctuate between 2019 and 2022 around 50% only to fall back to US$25 billion in 2022 and 2023, which was for 2023 equal to 39% of revenue.
It is remarkable that the profitability did not increase very much with the sharp gold price increase, after an early jump. Since 2020 there actually has been a considerable decline, from almost US$30 billion to below US$25 billion. It seems that history has repeated itself and the cost of sales has risen sharply.
Cash Generated by Operations
Figure 3.3_1 shows cash generated by the operations as reported in the annual financial statements and the gold price performance during the same period.
The graph follows Figure 3.2_1 closely except that approximately US$5 billion per annum is spent on items such as taxes, not accounted for in EBITDA. A total of US$117 billion was generated over the period, which amounts to 37% of the revenue over the same period. This is a very decent cash margin. It does not however capture the investments required to keep the company a going concern.
Figure 3.3_2 shows cash absorbed by investments compared to how much cash was generated by the operations.
The graph shows how the companies in general were prudent immediately following the start of the gold price bull run, but this changed after one year, with investments rapidly expanding reaching almost parity with cash generated in 2022. The net cash generated after investments made is shown in Figure 3.3_3, which has purposefully kept the y-axis scale the same as in Figure 3.3_2 to facilitate comparison. The diagram also shows how much funding accrued to shareholders in dividends and share buy-backs net of equity raisings.
The total amount of cash generated over the period was US$38.5 billion, equal to 12% of the revenue over the same period. As the bull market continued, companies became increasingly generous in returning cash. Of the total US$29.5 billion disbursed over the whole period, US$11.0 million was dispensed in 2023, mostly because of Polyus’s contribution of US$6.4 billion. The company financed this by raising debt of US$5.1 billion, something that in the longer run will be unsustainable.
When ignoring Polyus as non-representative, US$4.6 billion was returned to shareholders in 2023. At the market capitalisation of US$223.8 billion on 7 June 2024, this would indicate an average historical dividend yield for the sample group of 2.0%. This is not impressive and shareholders will require dividend growth of at least 3% per annum to achieve an overall 5% return or better. Figure 3.3_3 illustrates that the industry was unsuccessful in generating increasing amounts of cash during the later phase of the gold bull run period.
Finally, Table 3.3_1 compares the financial performance of the largest 15 gold producers during 2018-2023 with that of the ten largest gold producers over the period 2003 – 2012.
From the table, it is evident that lessons were learned and management was much less wasteful during the latest bull run compared to 2003 – 2012. Instead of a negative US$18.78 billion net cash and before financing activities in the early bull run, during 2018 – 2023 operations managed to generate US$38.48 billion. Almost all of the net cash was used to reward minority parties and shareholders. This is a huge improvement and a feather in the cap for the industry.
Value Creation For Shareholders
The above sections are interesting to get insight into overall industry performance. However, for investors, it is somewhat academic. For his reason, Crux Investor has reviewed in Table 3.4_1 how well individual companies in the sample group have performed in terms of:
- Distributing cash back to the shareholders. To standardise the results for the size of company the second column gives the numbers as US$/oz produced over the period;
- Growth achieved. This has been expressed as gold production change between 2018 and 2023; and
- The change in the gold reserve base as an indication of future prospects for the company.
Crux has subjectively highlighted any outperformance in a particular metric with a yellow colour and underperformance with a brown colour.
The best performers in terms of returning cash to shareholders are the four largest producers. For these mature companies, it is hard to increase production and they require large acquisitions to achieve this, or just to maintain production levels. Agnico Eagle achieved its spectacular growth by aggressively acquiring other producers: in 2022 it merged with Kirkland Lake Gold which itself has acquired Detour Gold in 2020. The latest addition to the Agnico Eagle stable were the Canadian assets of Yamana Gold, acquired in 2023.
Other high-growth companies in terms of reserve growth are Northern Star, Endeavour Mining, and Equinox Gold. Northern Star acquired Saracen Holdings in 2021 which consolidated the Kalgoorlie deposits and obtained the Pogo deposit. Endeavour Mining acquired Semafo in 2020 and Teranga Gold in 2021. Equinox appeared from nowhere and saw an enormous increase in production (and reserve base), partially through the merger with Leagold in 2020.
Companies that have been relatively inactive with acquisitions and mergers have found it difficult to replace reserves that have been mined, as is clear from the column showing the reserve change. Even so, the sample group as a whole has done excellently by growing reserves 36.5%. This is however not a reflection of the industry or in-house exploration success, but rather the success with which these larger companies managed to absorb other, generally smaller peers.
The column at the right is another version of the rightmost column in Figure 2.2_1. The results have been standardised by dividing all numbers by US$6,889, the average market capitalisation value per ounce of gold annual production. Numbers that differ considerably from 1.00, the industry average, have been highlighted yellow when at a premium, or brown when at a discount.
There are some surprising results here. The premium awarded to Agnico Eagle is fully warranted given its growth in production and reserves with the company still able to return considerable amounts of cash to its shareholders. However, the premium rating for Alamos Gold is an aberration, as the company’s performance has been stagnant, and the distribution of cash has been well below the industry average.
The companies with discounted values are all performing relatively poorly in terms of returning cash to shareholders, growing production, and expanding the reserve base, except for Endeavour Mining and Equinox Mining. The poor valuation of Endeavour Mining is possibly explained by the high exposure to West Africa. The poor rating of Equinox Mining is probably explained by it only being able to achieve production and reserve growth through much funding. Until the company proves it can from now onwards generate surplus cash, its share price will remain discounted.
Conclusions
- Based on the performance of the largest 15 gold producers the industry is performing a lot better during the current gold price bull run than in the 2003-2012 bull run. Instead of wasting large sums, in excess of cash generated from operations, in a wild dash for production and gold reserve growth, the sample group has achieved 10% production growth and considerable reserve growth, concurrent with generating net cash before financing activities equal to 12% of revenue.
- The greatest improvement in financial performance is early in the bull cycle. There are indications that the industry has found it difficult to sustain high cash margins. However, with the current gold price in excess of US$2,300/oz, which is almost 14% higher than the 2023 average gold price, it is unlikely the margins have deteriorated further.
- Based on the performance of the last six years Agnico Eagle is the star of the class. For distribution of cash to its shareholders the largest four producers are most attractive, but Polyus pay-out rate is unsustainable with the company needing debt financing to cover the large 2023 dividend. Being a Russian company, other considerations will play a role for the large dividend.
- Companies with exposure to Africa are relatively lowly rated, even when they achieve good growth, such as Endeavour Mining.
- Based on comparative ratings for cash return, production and reserve growth, Northern Star looks an attractive opportunity, which is reflected in the share price rating. Conversely, Alamos Gold seems to be heavily overrated.
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