Why Gold Miners Stopped Borrowing

On April 10, 2013, a court in Copiapó, a mining town in northern Chile, ordered Barrick Gold, then the world's biggest gold miner, to stop building its flagship mine.

The mine was Pascua-Lama. It sat right on the border between Chile and Argentina, more than 17,000 feet up in the Andes at its highest point.

Indigenous communities downstream had gone to court, saying the work was fouling their water and coating nearby glaciers in dust.

A week later, Barrick's stock hit a 20-year low.

When construction started in 2009, Barrick put the cost at about $3 billion, and by 2012 the estimate had climbed to as much as $8.5 billion.

By the end of June 2013, Barrick had sunk about $5.4 billion into the project. In August, it wrote off $5.1 billion of it, part of $8.7 billion in charges in a single quarter. In October, it stopped construction.

Pascua-Lama never went into production. 

In 2020, a Chilean court upheld an order to close the Chilean side for good.

On Monday, I told you about Jay Cooke and the railroad he couldn't stop lending to. Pascua-Lama was the gold miners' Northern Pacific.

Gold Fell 45%. The Miners Fell 81%.

Barrick wasn't alone.

As gold ran toward its 2011 record, the big miners went shopping. Kinross paid about $7.1 billion for Red Back Mining, mostly for one mine in Mauritania, and within two and a half years it wrote off about $5.6 billion of it.

Barrick paid about C$7.3 billion for Equinox Minerals, a copper miner, and wrote off $3.8 billion of that the next year.

By Bloomberg's count, gold's plunge forced miners to take at least $30 billion of writedowns in 2013 alone.

Gold itself peaked at about $1,920 an ounce in September 2011. By December 2015, it was down to about $1,046, a drop of 45%.

The miners did far worse. The biggest gold miners fund fell 81% from its record close in September 2011 to its low in January 2016.

So if you bought the miners at the 2011 top to get more bang for your buck on gold, by the bottom you'd lost about four of every five dollars, close to twice what gold itself lost.

That fund didn't close above its 2011 record again until September 8, 2025, 14 years to the day.

Long before the bottom, the boards started cleaning house. Barrick replaced its CEO in June 2012, with its chairman saying he was disappointed in the share price. Kinross fired its CEO that August.

By Bloomberg's count, five of Canada's 20 biggest gold miners changed CEOs in 2012.

From $15.4 Billion in Debt to Net Cash

The people who got burned in that bust were the shareholders. When the next cycle came around, they stopped funding big, debt-financed bets on size, and the CEOs who replaced the fired ones learned to put profit and cash first.

You can see it on the balance sheets.

At the end of September 2013, Barrick owed $15.4 billion. At the end of June this year, it had about $5.9 billion in cash against $4.7 billion of debt.

Newmont, now the world's biggest gold miner, had about $3.2 billion more cash than debt at the end of September, and it bought back $5.2 billion of its own stock in the first nine months of this year.

Last week, Newmont reported record adjusted earnings for a third quarter. It spent about $1,454 an ounce, all in, to produce gold it sold for about $4,317 an ounce.

Kinross had about $1.9 billion more cash than debt at the end of June.

That's the exact opposite of what I showed you in Big Tech on Monday. 

There, spending is running ahead of the cash coming in.

Here, the cash is running ahead of the spending, and the difference is going back to shareholders. Barrick returned $2.39 billion to shareholders last year, which it called a company record.

The World Gold Council (the industry's research group) and Metals Focus estimate miners spent about $1,785 an ounce on average in the first quarter.

That's the all-in sustaining cost, everything it takes to dig up an ounce and keep the mine running. The gap between that cost and the gold price hit a record $3,076 an ounce.

Earnings Forecasts Up More Than 4X. Valuations Down 42%.

Sprott, the Toronto money manager that specializes in precious metals, looked at the NYSE Arca Gold Miners Index, which tracks the biggest gold miners.

At the end of 2023, Wall Street's forecast for the index's earnings per share over the next 12 months was about $49.60.

By September 30, it was $219.77. It more than quadrupled.

But the price investors pay has gone the other way.

The usual yardstick is EV/EBITDA. EBITDA is a company's cash profit from operations before interest, taxes and some accounting charges. EV, or enterprise value, is what you'd pay to buy the whole company, debt included.

Divide one by the other and you get how many dollars investors pay for each dollar of yearly cash profit.

In June 2014, with the industry still buried in debt, the miners traded at 9.9 times their expected EBITDA. By the end of September, that was down to 5.7 times.

Investors paid more for these companies when they were drowning in debt than they pay now that many of them have more cash than debt.

Gold Miners Fell 31% From February's Record

Part of the reason investors pay less now is that the last eight months have been ugly.

Gold hit a record of about $5,595 an ounce on January 29.

By last Friday, it was near $4,000, roughly 28% lower. The biggest gold miners fund closed at a record on February 27 and finished last week down about 31% from there.

On October 22, the day AI stocks sold off, it fell almost 6%.

When a sector drops like that, most investors reach for the last time it hurt them, and for gold miners, that's 2011 to 2016.

So the market still treats miners like a leveraged bet on gold, run by people who'll blow the money on the next Pascua-Lama. The balance sheets say otherwise.

Personally, I put the miners on our buy list in April 2025, the day after the tariff crash hit bottom, and we still own them.

And remember Monday's lesson. When lenders get nervous, the first stocks to get hit are the ones that need borrowed money.

Today, a lot of gold miners don't need any.

The Fed announces its next rate decision this afternoon, and Kinross is one of the miners reporting after the close. Whatever comes out of either, those balance sheets are already on the record.

The Two-Number Test

Here's your one move before you buy any gold miner, or add to one you own.

Look up two numbers in its quarterly reports.

1. Cash versus debt. Most miners report "net cash" or "net debt" right in their results. Net cash means the company could pay off every dollar it owes and still have money left.

2. What it's paid you. Check whether its dividend and buybacks have grown over the last two or three years.

If a miner passes both, you're looking at a company that learned from 2013, and if it fails both, you might be buying 2011 all over again.

If it were me, I'd stick to the ones that pass both. A miner sitting on net cash can ride out a drop like this one without having to call the bank.

And size it like a miner, because even the good ones swing hard.

The biggest gold miners fund fell about 31% from its February record through last Friday, in a year when the industry posted record margins. 

We keep every speculative pick at 1% to 2% of the money set aside for those ideas, and that's exactly why.

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