What does it mean for investors?
According to accounting rules, companies have to periodically test the value of their assets. Most of the gold companies’ assets consist of mines. Mines are valued according to their proven production capacity, as well as possibilities for future exploration. The gold price influences the evaluation of a mine’s reserves.
One other big gold stock that could face a possible write-down is Barrick Gold Corporation (USA) (NYSE:ABX). The company is stuck with its Pascua-Lama project, which is situated in Argentina and Chile. The Chilean side banned the continuation of the work until Barrick Gold Corporation (USA) (NYSE:ABX) deals with the water-management system. The court has recently ordered to freeze the construction of the project that is valued $8.5 billion. However, the exact money spend would be bigger due to additional costs.
At the same time, Barrick Gold Corporation (USA) (NYSE:ABX) has significant debt on its balance sheet, which leads to a high 0.63 debt-to-equity ratio. No wonder the company is already selling its non-core assets. Barrick Gold Corporation (USA) (NYSE:ABX) has recently agreed to sell its energy unit for around $455 million. Barrick Gold Corporation (USA) (NYSE:ABX) needs cash to put more faith into its shareholders because it is likely to make a huge write-down on the Pascua-Lama project.
Write-downs were not a big surprise for market participants. The stocks of both Goldcorp Inc. (USA) (NYSE:GG) and Newmont Mining Corp (NYSE:NEM) did not react to the write-down news. Why? The write-down influences the balance sheet of the company, but it does not influence its cash flows. At current gold prices, the ability to generate cash is the most important factor.
Cash is king
The evaluation of the assets may change over time. The money is needed right now. Goldcorp Inc. (USA) (NYSE:GG) has generated $388 million of cash flow in the quarter. The company was unfortunate with the timing of gold sales.
Half of the gold production was sold in June, when the gold prices were at their lowest levels. This affected the results and has led to an earnings’ miss. The company has reported adjusted earnings of $0.14 per share, while the analysts were expecting earnings of $0.23 per share. Goldcorp Inc. (USA) (NYSE:GG) continued to battle costs. It has reduced projected 2013 capital expenditures by $200 million to $2.6 billion.
Newmont Mining Corp (NYSE:NEM) generated $293 million of cash flow. Capital expenditures were down 29%, in line with the industry trend. Although Newmont Mining Corp (NYSE:NEM) has $6.7 billion of debt on its balance sheet, the schedule is easy. The company has to pay $50 million this year and $585 million in 2014. The next big repayment of $580 million is due in 2017. The cash position looks solid, with $1.25 billion of cash and $3 billion of available revolver credit capacity.
Bottom line
Goldcorp Inc. (USA) (NYSE:GG) trades at an 18.91 forward P/E, at a premium to the two other companies. This reflects the company’s success in financial discipline as well as low debt level. In my opinion, Goldcorp is well positioned to grow when the prices recover.
Newmont Mining Corp (NYSE:NEM) trades at a 12.85 forward P/E. The debt schedule is easy, and I think that the stock is over-punished. Both companies executed well in the second quarter. If you are bullish on gold, both stocks are a must-have in your portfolio.
Barrick Gold Corporation (USA) (NYSE:ABX) is one of the most beaten gold stocks. The uncertainty about Pascua-Lama weighs on the company. The stock trades at a 6.50 forward P/E and is very speculative right now. I would not advise to bet on Barrick unless you have high risk tolerance. It is difficult to say, what kind of Pascua-Lama write-down is already priced into the stock. If it comes worse than expected, the shares might take a dive.
The article Don’t Be Scared of Write-Downs From These Gold Companies originally appeared on Fool.com is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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