Shares in gold and copper mining giant Newcrest Mining Limited (ASX: NCM) have climbed 18% so far in 2014. But even with signs of optimism returning to the company there is still one very big reason I'm not buying the company today: debt.
Big borrower
When it comes to funding the business Newcrest Mining is a big borrower. Despite strong efforts to pay down debt throughout the 2014 financial year the company still runs on a significant debt pile which stood at $4.076 billion on 30 June 2014.
With great debt comes great responsibility, or more accurately, great liability. Newcrest reported finance costs of $175 million in FY14 which are up from $110 million in FY13, and much of this was fuelled by an increase in interest costs which grew by 28% to $154 million.
Newcrest has ample free cash flow to cover the interest costs, but it remains at big risk if the price of gold falls or if LIBOR interest rates start to rise from the current rate of 0.55%.
Gearing creep
Another important result of the large debt position has been the rapid creep in gearing levels on Newcrest's balance sheet over the last four years as the company undertook massive asset write-downs.
Gearing depicts the percentage of debt which makes up the company and for Newcrest it stood at 33.8% at 30 June 2014. This was a significant increase over the 12.5% in 2012 and the minimal 4% in 2011 as asset values were slashed.
Low debt alternatives
For investors looking to gain exposure to gold through low debt miners there are a couple of alternatives to consider. Northern Star Resources Ltd (ASX: NST) is one. The company is on track to become Australia's second-largest gold producer after a great year, has minimal debt on its balance sheet and declared a profit for the full year FY14.
Evolution Mining Limited (EVOLUTION FPO) (ASX: EVN)) was also profitable in FY14. The company reported gearing of 14% and boasts net tangible assets of more than twice its current share price.
Over the long term gold miners with low leverage and low production costs are the best way to protect your investment against the volatile price of gold and are likely to be the best placed to be able to grow over time.
