Cash on Cash, Gold on Gold
Comment of the Day

November 02 2021

Commentary by Eoin Treacy

Cash on Cash, Gold on Gold

Thanks to Iain Little for this edition of his Global Thematic Investors’ Diary focusing on gold miners. Here is a section:

For most of my 40 year career, analysts have mocked poor management in the mining business. The wisdom is that gold mines -perhaps with the exception of royalty or streaming financiers- are low quality, cyclical investments that only work when the cycle is right. Management doesn’t matter. The gold price -and luck with your timing- do. So I was intrigued by this chart. After decades of devouring investors capital for capital-intensive projects and surviving on shareholder bounty, the current generation of gold miners have finally got the message. They have done so when most of their all-in, sustainable costs cluster around USD 1,000 an ounce. Gold trades near USD 1800. Free cash flow yield (FCFY) measures the free cash flow (net profits plus depreciation less annualized capex) as a percentage of a company’s market value. It can be compared to the yield on a bond or a cash deposit. Gold mining, handcuffed by capital constraints after years of shareholder abuse, is now the highest yielding sector on the planet, with a FCFY of 7%, roughly double that of the rest of the market. During the last 2001-2012 bull cycle, when most gold shares multi-bagged, they never really got close to cash positivity. This is money -or maybe gold- that can be paid to investors and it is on the increase. In a yield deprived, inflationary age, is this not El Dorado?

Eoin Treacy's view

It is going to take a long time to shake the reputation miners’ earned for being capital destroyers. The move to positive free cash flow yields is indeed positive and is helping to support the shares of the major miners during what has been a lengthy correction for the gold price.

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