John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website DollarCollapse.com in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.
We’re entering the age of free cash flow (FCF), in which gold miners start trumpeting the size and growth of this metric in every public utterance. So we’ll need an analytical tool for judging whose FCF — and by implication, stock — is most valuable.
Resourceful Insights’George Billman just posted a quick way to put a miner’s numbers into context: He compares free cash flow to “enterprise value” (Market Cap + Total Debt − Cash), to yield how much free cash an investor is buying per dollar of share price.
Here, he applies this formula to mid-tier gold miners:
The cohort of Intermediate Gold Producers is an interesting set of miners now benefiting from the double leverage of ( 1 ) growth in production ( 2 ) in a rising gold price environment.
The miners in this cohort are at the threshold of size where their acquisition could materially “move the needle” with regard to incremental cash flow and reserves for the major producers like Agnico Eagle, Barrick, Newmont, and other majors.
The strong free cash flow from the Intermediate Gold Producers also enables this cohort of producers to potentially be a ‘predator’, gobbling up miners further down the ‘food chain’, whether producers, developers, or even explorers.
How to Interpret This Chart
The above lines show how much free cash an investor gets per dollar invested. A low number means that future cash flows are relatively certain, and investors are willing to pay a premium to get them. A high number implies that future cash flows are less assured, so investors require more FCF to convince them to invest.
Looking at the extremes:
Alamos Gold — an extremely well-run miner operating in safe jurisdictions, whose future cash flow is therefore relatively certain — trades at a low percentage of Free Cash Flow to Enterprise Value.
B2Gold generates a lot of cash flow, but in Africa, where geopolitical risk makes the future less certain. Because of this, it trades at a high FCF-to-enterprise-value ratio. In other words, shareholders get a lot of cash flow for shouldering the extra risk.
The challenge is identifying the miners about which the market is being too cautious, and undervaluing their cash flow.
None of these stocks are currently in our Portfolio, but they’re held by gold mining ETFs like GDX and GDXJ, which are in our Portfolio.
That miners in this class can be acquirers and/or acquirees makes them both fun to watch and potentially profitable to own. So in the next precious metals correction, I’ll add a few to the Portfolio.
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