Three Of The World's Top Gold Producers Have Been Burning Cash Since 2001

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Includes: ABX, GG, NEM
by: Simple Digressions

Looking at the financial side of precious metals sector we can very easily notice how bad these businesses have been throughout many years. Let me examine three of the world's top gold producers: Barrick Gold (NYSE:ABX), Goldcorp (NYSE:GG) and Newmont Mining (NYSE:NEM).

In theory, the "healthy" company should be able to generate cash flows over time. It means that in the long run, the "healthy" company generates more cash from its operations than it spends on its investing activities. Periodically such a company can spend more cash than it brings (in such a case it gets the "lacking" cash from its financing activities) but this should be just an episode in the financial history of a "healthy" company.

Meanwhile, the precious metals miners are the examples of something just the opposite. Here is the table summarizing my thesis:

$million

cash flow from operating activities

cash flow from investing activities

cash flow, net

Barrick Gold

24,807

-40,007

-15,200

Goldcorp

11,318

-12,998

-1,680

Newmont Mining

20,841

-20,426

415

Click to enlarge

The table shows the data from 2001 till the third quarter 2013. To make things simple, I have taken the pure numbers from the books, without any inflation adjustments or anything else.

Taking Barrick Gold as an example, these numbers should be read in the following way:

  1. since 2001 till the third quarter 2013 Barrick Gold generated $24.8 billion from its core business
  2. in the same period the company spent $40.0 billion on investment of any kind (mainly the acquisitions of the new mining properties)
  3. it means that Barrick spent more than it generated; this net number is minus $15.2 billion

In the case of Goldcorp the net number is minus $1.7 billion. Only Newmont Mining has been able to generate any positive cash flow in nearly thirteen years! But, looking at the scale of the Newmont's business this is rather a meaningless number.

Now, let me analyze in detail how the economics of these miners look like. First, Barrick Gold.

The table below specifies the structure of cash flows:

$million

Barrick Gold

Operating activities

24,807

Investing activities

-40,007

Capital expenditures

-26,952

Cash flow, net

-15,200

Financing activities

13,762

Proceeds on common share offering

4,053

Long term debt, net

12,504

Dividends

-3,881

Impairment charges

17,036

Click to enlarge

Since 2001 the company has generated $24,807 million from its operations. In the same period it has invested $40,007 million, of which $26,952 has been spent mainly on the mining properties. The net cash outflow has been $15,200 million. This net outflow has been financed mainly through taking debt ($12,504 million). What is interesting, Barrick is a dividend company. Every year it has been paying dividends to its shareholders, totally $3,881 million. These dividends have been financed by the proceeds from common shares offerings. It is a kind of a paradox - the company pays dividends to its shareholders and the cash for that takes from…the same shareholders. Is it a "healthy" business? I do not think so. And last but not least. The impairment charges reported by Barrick stand at $17,036 million. It can be read this way: the company has invested $40 billion and $17 billion (42.5%) should be recognized as bad investment.

Now, let me take Goldcorp.

$million

Operating activities

11,318

Investing activities

-12,998

Capital expenditures

-10,618

Cash flow, net

-1,680

Financing activities

2,774

Proceeds on common share offering

1,620

Long term debt, net

n/a

Dividends

-2,022

Impairment charges

2,804

Click to enlarge

Since 2001 the company has generated $11,318 million from its operations. In the same period it has invested $12,998 million, of which $10,618 has been spent on the mining properties. The net cash outflow is $1,680 million. This net outflow has been financed through the financing activities ($2,774 million), mainly through the new offerings ($1,620 million). The additional cash from the financing activities ($1,154 million) has been paid to Goldcorp's shareholders in the form of dividends. The impairment charges reported by the company stand at $2,804 million, which is 21.6% of the total investment (much less than in the case of Barrick Gold). Summarizing, Goldcorp burns money but to a lesser extent than Barrick Gold.

Finally, Newmont Mining.

$million

Operating activities

20,841

Investing activities

-20,426

Capital expenditures

-18,886

Cash flow, net

415

Financing activities

-5,646

Proceeds on common share offering

3,045

Long term debt, net

3,305

Dividends

-5,646

Impairment charges

4,807

Click to enlarge

In this case the economics are much better than in the preceding cases though they still cannot be defined as "healthy". Since 2001 the company has generated positive cash flow $415 thousand. Looking at the scale of the Newmont's business this is a very small number. But fortunately it is positive. On the other hand the company has paid $5,646 million to its shareholders. Funds for that aim have been acquired through taking debt and offering new shares. This is quite similar to Barrick Gold - shareholders financing themselves. The impairment charges in the amount of $4,807 million make 23.5% of the total investment.

Conclusion

From the investment perspective, three of the world's top gold producers are the value destroyers. Since 2001, two of them (Barrick Gold and Goldcorp) have been burning cash generated by their core businesses. The third one, Newmont Mining, practically has not been able to generate any relevant cash flow. Fortunately for these companies, the present gold bull market has lifted their share prices: Barrick Gold is 10% up, Goldcorp is about 300% up and Newmont Mining is 70% up. Yet, these advances are well below gold price appreciation (around 360%) so the popular thesis on the leverage offered by the miners' shares against gold prices cannot be accepted in the case of these three miners.

Fortunately, there are precious metals businesses that do not burn cash. In anticipation of the next run on gold, every precious metals investor should do the basic math and look at the economics of the business he or she wants to put money into.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.