New Year rally in gold miners conceals troubles that run deep

Wed Jan 21, 2015 3:31pm EST
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By Nicole Mordant and Susan Taylor

VANCOUVER/TORONTO Jan 21 (Reuters) - The New Year's rally in gold stocks offers a respite for the beaten-down sector, but it masks deep-seated problems of bloated debt, weak growth prospects and overvalued assets that will emerge when miners post year-end results in coming weeks.

Market heavyweight Goldcorp's recent warning of a multibillion-dollar writedown and Yamana Gold's decision to issue stock to cut debt are signs that four years into a downturn, the gold-mining industry is still not out of the woods.

Miserly free cash generation since bullion peaked in 2011 has made it tough for miners to whittle down debt racked up in a decade-long acquisition and mine-building spree.

"Companies are operating with a very thin margin for error," said Deutsche Bank analyst Jorge Beristain.

A mine mishap or surprise tax hike could force high-debt operators to raise equity, diluting shareholdings.

Even if bullion's recent rally persists - it is up 9 percent this year to $1,290 an ounce - leveraged miners may be tempted to issue shares to shore up balance sheets, said Chris Mancini at Gabelli Gold Fund.

With nearly $21 billion in net debt, the world's four biggest gold miners - Barrick Gold, Newmont Mining , AngloGold Ashanti and Goldcorp - have a median net debt to operating income ratio of 2.2, Thomson Reuters data shows. For the S&P500, the ratio, which measures a company's ability to pay off debt, is 1.65.

Franco-Nevada Corp provides alternative financing for the industry. David Harquail, Franco's chief executive, estimates $27 billion in high-yield debt will need refinancing in coming years, creating opportunities for companies like his.   Continued...