Sunday, 29 March 2015

The Real Cost of Gold Mining - Adequacy Ratios

In February Mickey Fulp published analysis with Cipher Research detailing the financial failures of the gold industry and proposing a renewed focus on grade rather than growth which analysts chased companies to chase for the past decade.

Most interesting is the "Adequacy Ratio" which simply compares operating cashflows against all outflows including "capex"
Cipher Research has developed a new, simple, and powerful tool to analyze profitability, the Adequacy Ratio (AR). It is cash inflows (revenues) divided by cash outflows (OP-EX + IMP + debt repayment + dividends paid). Note it does not include equity raises or cash spent on acquisitions. If the ratio is greater than 1.0 a company is healthy; if less than 1.0, unhealthy. Of the seven companies we looked at over 11 years, none had an average ratio greater than 1.0 over the period. Only for one year, in 2011 when gold hit its all-time high, did the average adequacy ratio for the companies as a whole exceed 1.0. To compare for example, Apple has a 1.3 adequacy ratio over the past 5 years.This industry-wide failure means the major gold miners have not generated enough cash flow to meet their obligations despite the amazing 11-year run for gold. We found that companies have been going into debt to pay dividends. For example, Newmont took on an additional $5.8 billion in debt and paid out $5.2 billion in dividends over the period. We know of small-tier junior miners that have paid out dividends with equity raises… that’s unholy and in my opinion, should be illegal.

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