How Long Will the Market Punish Goldcorp for 4Q15 Results?
EV-to-EBITDA multiple
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is an important relative valuation multiple. It’s generally used for capital-intensive industries such as gold mining.
With the help of relative valuation, we can calculate a company’s valuation with respect to its closest peers’ valuations. In this article, we’ll compare Goldcorp’s (GG) forward EV-to-EBITDA multiple with historical averages and its major peers’ multiples.
Higher multiple than peers
As can be seen from the above chart, Goldcorp has consistently traded at a higher multiple than its peers. Currently, Goldcorp has a forward EV-to-EBITDA multiple of 9.8x, which is in line with its five-year historical average. However, it’s still trading at a higher multiple than its peers. Barrick Gold (ABX), Newmont Mining (NEM), and Kinross Gold (KGC) are trading at multiples of 8.1x, 8.1x, and 4.3x, respectively.
Goldcorp’s high EV-to-EBITDA multiple is probably due to its lower leverage and quality assets in safe jurisdictions. Goldcorp’s 2016 EBITDA margin is expected to be around 38%, which is almost the same as Barrick’s at 38% and higher than Newmont’s and Kinross Gold’s at ~30%.
Goldcorp’s future prospects
Goldcorp still has one of the best long-term organic growth production profiles with a good execution track record from management. However, its premium valuation most likely is already factoring in all these positives along with its lower leverage. The upside to Goldcorp stock going forward depends on catalysts such as near-term upside in its production profile. Higher gold prices will definitely be another positive catalyst for the stock. Given a huge pipeline of organic projects, development risk, on the other hand, could lead to a further downside for the stock price.
The SPDR Gold Trust (GLD) mirrors the performance of gold prices. Investors can invest in GLD to get exposure to gold.
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