Barrick Gold Corporation (USA) (ABX), Goldcorp Inc. (USA) (GG): What’s The Future Hold?

The rest of the miners find themselves in the same position as Barrick Gold Corporation (USA) (NYSE:ABX), with plenty of room to increase borrowing on their balance sheets. However, with profit margins expected to fall this year across the industry, this could constrict free cash available for interest payments.

Out of the four miners, Newmont Mining Corp (NYSE:NEM) finds itself in the most limited position. With a net debt to equity level of just under 33% and a net debt to EBITDA ratio of 1.1, the company is hardly loaded with debt. However, interest costs are only covered 16x by earnings, indicating that the company is paying a higher than average rate to finance its debt. Furthermore, I believe that it could be difficult for the company to raise additional debt for acquisitions without completely constricting its cash flows.

How much would acquisitions cost?

So, Barrick Gold Corporation (USA) (NYSE:ABX), Kinross, and Goldcorp Inc. (USA) (NYSE:GG) have room their balance sheets to attempt a leveraged buyout, assuming of course that competition commissions around the world allow it. But what price would they have to pay to acquire their competitors and could they afford it?

Here are the enterprise, or take over values of each company.

Figure in millions of USD

It would appear that Kinross Gold Corporation (USA) (NYSE:KGC) is the cheapest miner here and ripe for a takeover by one of its larger competitors. However, Kinross does have one of the highest production costs per oz out of these four miners. Additionally, the company has been running into a lot of production problems, so based on that, I doubt any of the company’s peers would find it an attractive take over target just yet.

Both Newmont and Goldcorp Inc. (USA) (NYSE:GG) have roughly the same enterprise values, although I believe neither of them are suitable takeover targets for larger peer Barrick Gold Corporation (USA) (NYSE:ABX) as, to do so, Barrick would have to roughly triple its net debt — taking debt to equity to 150%!

Having said that, Newmont could be a good acquisition target for Goldcorp. Goldcorp Inc. (USA) (NYSE:GG) has no debt currently and a leveraged acquisition of Newmont would only put the company on a net debt to equity level of 100% — high but sustainable.

Conclusion

Overall, gold miners are under performing and they need to turn themselves around before shareholders abandon them altogether. Increasing shareholder returns or a wave of acquisitions would help the sector, but if gold prices drop further, it could be time to jump ship.

The article Where Next for Gold Miners? originally appeared on Fool.com and is written by Rupert Hargreaves.

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