APX trading like gold, despite negative free cash flows

Gold prices have surged in the wake of the COVID-19 pandemic as investors look for safer places to park their money.

The jump in gold prices has boosted investors’ willingness to pump billions into the gold mining industry.

Warren Buffet’s Berkshire Hathaway Inc. added to its portfolio a Canadian gold miner, Barrick Gold Corp. In the past, Warren Buffett, the billionaire chairman of Berkshire, cautioned against investing in gold because it’s not productive like a farm or a company.

Now with the jump in gold prices, gold miners are benefiting from surging bullion prices that are boosting profit margins as costs of production have steadied, making them increasingly attractive investments.

Investors interest in gold miners has also caught Apex Mining Company, Inc.’s (APX) shares. APX is also trading like gold.

APX is controlled by the port and gaming tycoon, Enrique K. Razon Jr. through his holding company Prime Metroline Holdings, Inc. which own 40.32% of the shares of APX as of March 31, 2020.

We have to look whether the jump in the gold prices has dramatically improved the finances of APX.

In the year 2017 to 2019, APX had negative free cash flow . It means cash generated from operations was not enough to cover for the capital expenditures. It consistently borrowed money to pay debt and cover the costs of the capital expenditures.

In 1H 2020 where we saw the gold prices jump, still APX’s free cash flow was negative. During the period it borrowed money to cover for the capital expenditures.

The negative free cash flows over the years hampered APX ability to return capital to the shareholders either through dividend or share buy back. From 2017 to 2019 no dividend was declared and no share buy back was initiated.

Cash flow from operations should be able to cover the capital expenditures and leave some for returns to shareholders and pay debts. Gold prices has not risen enough for APX to be able to cover the capital expenditures without borrowing.

Gold prices has to rise more for APX to be able to have a positive free cash flow and since gold sales are priced is US Dollar, the peso also needs to weaken to bolster the revenue of APX in peso. All output of APX is sold to Heraeus Ltd. of Hong Kong and sales are denominated in US Dollar.

For now, the current prices of gold has not put APX into a position where it can return capital to shareholders either in dividend or share buy back. Investors invest in gold mining companies in the belief that the jump in prices will boost profits in those mining companies enabling those companies to return capital to their shareholders increasing shareholder value.

Disclaimer: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent perspective.  Accuretti Systems Inc. does not hold any Apex Mining Co., Inc. shares.

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