Reporting free cash flow systems from Goldcorp

Several rating systems on the market with different parameters adopted by gold companies that will make it easier to make comparisons between companies.

Barrick, the world's biggest gold miner by output and market value (capitalisation), formally introduced the reporting of "free cash flow" into its key statistics as of the release of its fourth quarter, and full year, 2010 results. Now Goldcorp, which boasts the second-biggest market valuation (capitalisation) of any gold-focused stock, has introduced the measure, in its first quarter 2011 numbers.

Far from being a fad, this is one of the most useful moves by gold miners for a long time. Free cash flow cuts through marketing spin, whether from gold or matchstick makers. Its computation is easy; as Barrick puts it, "we deducted capital expenditures from adjusted operating cash flow to arrive at free cash flow". While the ongoing harmonization of accounting around the world under IFRS makes sense (US entities are starting to migrate from GAAP), income statements are arguably less useful than ever.

This may be the irony of a case that's trying to please too many people for much, if not most, of the time. Cash flow, which is sacrosanct, has always been largely immune from manipulation, either by honest and well-intended standard setters, or by bent and twisted company bosses.

AngloGold Ashanti also publishes free cash flow, but does not feature the measure. Another Johannesburg-based global Tier I gold miner, Gold Fields, publishes detailed numbers for what it describes as notional cash expenditure, (NCE). This it defines as operating costs (including general and administration) plus capital expenditure, which includes brownfields exploration.

NCE per ounce, says Gold Fields, "influences how much free cash flow is available in order to pay taxation, interest, greenfields exploration and dividends".

Reportage of free cash flow remains a rarity. Beyond the gold subsector, Alcoa, one of the doyens of global mining, believing since 1888 that it has been "inventing the future", adopted free cash flow reporting from second-quarter 2010. Alcoa says its management believes that free cash flow is a measure "meaningful to investors because management reviews cash flows generated from operations after taking into consideration capital expenditures due to the fact that these expenditures are considered necessary to maintain and expand Alcoa's asset base and are expected to generate future cash flows from operations".

For gold miners, free cash flow has additional significance. For years, many gold miners, and attendant investors and speculators, have obsessed over "cash costs per ounce", a measure heavily promoted by certain gold diggers, and one that has become increasingly misleading. The measure ignores capital expenditure, which is by definition omitted from income statements, but inevitably swallows significant cash sums (both for stay-in-business and new projects). As such, cash costs per ounce can be heavily understated, when seen at the group level.

Second, gold companies that have strayed into producing other metals have often fallen to the temptation of using revenues derived from such metals as a credit to mining costs. Another impressive technique is to report production of "gold equivalent ounces", much along the lines of medieval alchemists, who claimed an ability to convert base metals to gold. Again, cash costs per ounce of gold tend to be understated.

"Free cash flow" cuts through all the nonsense. Barrick explains that: "Free cash flow is a measure that management believes to be a useful indicator of the company's ability to operate without reliance on additional borrowing or usage of existing cash". The measure seems to be more relevant than ever, given the worrying escalation of cost estimates for building new mines.

A low free cash flow number is not by itself a concern; it may be pressed down by a period of heavy capital expenditure which, in theory at least, will translate into enhanced shareholder returns in due course. And like many static numbers that present highly dynamic situations, free cash flows are most useful when seen over a period, preferably years.

Goldcorp
USD m	1Q11	1Q10	2010	2009	2008	2007	2006	2005
Operating cash flow	586.0	282.0	1,787.3	1,270.2	866.0	651.0	763.7	465.8
Capital expenditure	-352.0	-298.0	-1,228.3	-1,348.5	-1,372.0	-871.0	-472.2	-277.5
Free cash flow	234.0	-16.0	559.0	-78.3	-506.0	-220.0	291.5	188.3
Equity raised	11.0	6.0	95.8	79.1	104.0	70.0	527.5	44.0
Cash on hand	1,280.0	497.2	556.2	874.6	262.0	511.0	526.3	562.2
Debt*	-705.0	-732.6	-747.1	-735.7	-5.3	-1,065.0	-925.0
Net cash/(debt)	575.0	-235.4	-190.9	138.9	256.7	-554.0	-398.7	562.2
Dividends	-75.0	-33.0	-154.4	-131.7	-129.0	-127.0	-79.1	-155.0
* Including convertibles

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