A Comparative Study of Capital Structure Determinants in African-Top Gold

Mining Firm (AngloGold Ashanti) and World-Top Gold Mining Firms

Abstract: This paper seeks to compare the determinants of capital structure of one of the top-African gold mining firms
(AngloGold Ashanti) with world-top gold mining firms. Determinants of capital structure would vary in different regions
which could influence the market capitalization of a firm; therefore, a comprehensive understanding of this issue would
be helpful for the decision makers of gold mining industry. For this purpose, regressions are run for these two different
samples. Empirical results show that significant determinants of capital structure have different impacts on the leverage
ratios of AngloGold and world-top gold mining firms except profitability which affects the leverage ratios of both
samples identically. The findings of this paper provide insights for African gold mining managers and policy makers
based on empirical evidences.

Keywords: Determinants of Capital Structure, Leverage Ratio, African Gold Mining Firms, World Gold Mining Firms

1 Introduction
There are 47 countries and over 800 million people in Sub-Saharan Africa, some of the worlds largest remaining
undeveloped mineral deposits are hosted in this area. Mining industry activities play an important role in the economic
grows of the region the activities such as development of resources, ranging from coal to lead to cobalt to gold. Regarding
to natural resources a large number of the nations in SSA still perform poorly on many development indicators, which
leads to increased levels of political and economic uncertainty. Funding and developing mining projects need a powerful
foreign investment because most of SSA countries are involved with dearth of capital. Although the region remains a
medium to high-risk zone for most international banks in any capacity, European banks (the traditional lenders) is lending
and financing the new institution in mining sector recent years (Mulherin, 2012).

1.1 Review of Capital Structure Theories

In the literature of corporate finance, there are various researches which are trying to reach to a stable and scientific
method of understanding the structure of capital. The outcomes of these studies are some theories which are the
fundamentals of research in this field. It should be notified that these theories should be able to be adapted to the realworld applications. In addition, they should be suitable for applying empirical tests in order to test different situations.
Capital structure optimization has become a wonderful field of research, since 1985, when an article has been published
by Modigliani and Miller (M&M) about the irrelevancy of capital structure.
Choosing the optimal mixture of debt and equity which is able to increase the wealth of shareholders is the basic
challenge of each financial manager. There are different supplies which are available for financing including external
financing such as debt or equity and internal financing such as retained earnings or surplus. David Duran (1952) showed
that if a firm increases its leverage ratio, the value of the firm increases and the market prices of shares show the same
behavior. Durands study is followed by one of the well-known studies in this field by Modigliani and Miller (1958).
They show that whether a firm is levered or unlevered does not affect the value of the firm supposing that arbitrage theory
is applied. Another study by M&M also shows that a firm can benefit from tax shield if it uses debt as the financing
source (1963). More precisely, they claim that debt financing gives a useful advantage to the firm in the form of interest
deduction and reduces the taxable income.
As it is known there are some fundamental differences between debt-financing and equity-financing such as tax shield,
costs of financing, risk of financing, maturities and etc. but determining of the optimal capital structure is still the
ultimate goal or researchers and managers. As Morri G and Berretta C (2008) mention, there is still a gap between
theoretical and empirical studies and none of the theories are not yet applied universally. It is not surprising that capital
structure has been an interesting field of research since many years ago because not only all theories are not tested
empirically, but also the empirical tests have resulted in different results (Amarjit Gill, 2009).
Biger, Nguyen, and Hoang (2008) indicate that collateralized assets, income tax, non-debt tax shield, corporate
profitability, firm size, and growth opportunities determine capital structure choices of the firm.
Financially, the capital structure of a firm is a combination of debt and equity which finance the firms investments or
operations (AborJ., 2005).There is not any constant formula to determine the capital structure of a firm. In other words,
financial managers decisions can vary from large proportions of debt and small proportions of equity to large proportions
of equity and small proportions of debt. Additionally, firms may choose either to arrange lease contracts and warrants or
to issue convertible bonds, forward contracts and bond swaps. Therefore, whatever the financial managers decide will
determine the final mixture of the capital structure (Abor J., 2006).

S. M. Hashemi and H. Hosseini. K (2013) studied on determinants of capital Structure in the top-five gold mining
companies. They found that profitability of a firm and tangibility of its assets are significantly affecting the leverage ratio
of top gold mining firms.
In the following section, determinants of capital structure which are believed to be important in the gold mining firms are
discussed briefly.

1.2 Determinants of Capital Structure

Because capital structure influences corporate profitability, it is important to find the important factors that influence
firms choices of leverage. A number of empirical studies have identified firm-level characteristics that affect the capital
structure of firms. Among all firm-specific characteristics are non-debt tax shield, risk, size, tangibility of assets and
growth opportunities.
1.2.1 Non-debt Tax Shield
Depreciation has the advantage of tax deductibility. Non-debt tax shield can affect income taxes mutually with debt tax
shield. However, the presence of non-debt tax shield sometimes leads to mitigation of debt tax shield (Cloyd, 1997). In
addition to depreciation, tax credits are also known as tax-saving means. DeAngelo and Masulis (1980) suggest that tax
deductibility of depreciation and tax credits can mutually cause to mitigate the benefits of debt financing. Hence, the
higher proportion of non-debt tax shields in a firm results in less tendency to use debt. In this study, non-debt tax shield is
defined as the ratio of depreciation and depletion to total assets.
1.2.2 Risk Level of a Firm
According to the related literature, risk profile of a firm is believed to be an important determinant of firms capital
structure (Kale et al., 1991). Generally, firms avoid employing a 100% debt structure because of possible bankruptcy
costs. Therefore, firms decide on their capital structure as a function of their risk profile (Castanias, 1983). Since volatile
earnings could possibly lead to operating risks, firms prefer to reduce their debt level in order to mitigate their exposure to
bankruptcy costs. In addition, an empirical research (Esperanca et al., 2003) reveals that firms risk level is related to debt
level both in long-run and short-run. In this context, risk is defined by the percentage change in earnings before interest
and tax (EBIT) in comparison with the previous year.
1.2.3 Firm Size
The firm size is known as one of the most affecting factors of capital structure decisions. It is believed that as a firm
develops, it can diversify its earnings and reduces the risks involved in the investments (Titman and Wessel, 1988). There
are also some evidences in the literature about the relationship between firm size and its leverage ratio. A study of

Norwegian companies during 1992 to 2005 by Mjos (2007) shows that size of a firm is positively related to its debt ratio.
Another similar study which is done by Frank and Goyal (2007) has investigated US firms during 1950 to 2003 shows
that larger firms have higher debt ratios in comparison with the smaller ones. This study evaluates the size of a firm by
natural logarithm of its total sales or total revenues. On the other hand, a negative relationship could exist between size
and leverage ratio because large firms may have better internal resources and easier access to financial markets and
benefit from better financial conditions on these markets when requesting new issuance of capital (Booth et al., 2001).
1.2.4 Tangibility of Assets
Mining firms, more than other industries, are dependent on their tangible or physical assets. Creditors consider tangible
assets as collaterals which have the least level of risk. Moreover, tangible assets are easier to liquidate in comparison with
intangible ones. Therefore, corporations which have higher amounts of tangible assets are potential to finance their
operations more via debt financing rather than equity financing because the former has lower costs compared to the latter
(Biger, Nguyen and Hoang, 2008).It is indicated in the literature that the type of assets have great impacts on leverage
either positively or negatively (Biger, Nguyen and Hoang, 2008).Similar studies (Frank and Goyal, 2007; Mjos, 2007)
show that as tangible assets of a firm increases, the leverage of that firm increases accordingly. In order to convert the
data for investigation, the ratio of fixed assets to total assets is calculated to be the representative of tangibility of assets.
1.2.5 Growth Opportunities
According to the pecking order theory, there should be a positive relationship between growth opportunities of a firm and
leverage. As firms tend to invest more to grow, they need more debt financing because retained earnings (internal
financing) are limited. Therefore, growth opportunities of a firm affect the leverage ratio of a firm. It is shown that firms
with higher growth opportunities are not willing to increase their debt because they are sure about future investment
opportunities. Therefore, high-growth firms tend to borrow less in order to decrease the transfer of wealth from the
shareholders to the creditors (Mayers, 1977).
1.2.6 Profitability
As profitability can influence the debt ratio of a firm in different ways, the direction of its impact on debt ratio is
conflicting. Based on the trade-off theory, if a firm earns more profits, it should employ higher debt ratios. Higher debt
ratios are associated with more tax savings and lower financial costs of bankruptcy. In addition, profitable firms are more
able to increase debt capacity because of their potential in loan repayment (Guad et al., 2005). However, the opposite
relationship between profitability and debt ratio is the representative of pecking order theory. Based on this theory,
profitable firms tend to benefit from internal funds rather than employing external funds (Myers, 1984).

2 Data and Methodology

2.1 Data
This study collected its data from Thomson Reuters DataStream database. The first sample is consisted of annual figures
for the world-top gold mining firms from 1995 to 2012 extracted from their balance sheets and income statements. As we
investigate 6 world-top large firms, there are 108 observations in the sample. The second sample concerns about the
AngloGold. Quarterly data is extracted from this companys balance sheets and income statements from 1995 to 2012 and
the sample covers 72 observations.
World-top gold mining firms are ranked based on their market capitalization in this study. The following table (Table 1)
shows the world-top gold mining firms versus AngloGold.

Table 1: World-top Gold Mining Firms versus AngloGold

Market Capitalization

Production
Tones

(USD Billion)

(Fiscal Year 2012.)

49.0

210.4

Canada

39.0

67.93

Canada

29.09

141.1

United State

Newcrest Mining
Kinross Gold
Eldorado Gold

26.0
11.5
10.59

58.77
74.2
18.69

Australia
Canada
Canada

AngloGold Ashanti

16.7

111.8

South Africa

Company

Barrick Gold
Goldcorp
Newmont Mining

Headquarters

Source: Freeport-McMoRan 2012 Annual Report (2013)

In order to investigate the relationship between the determinants of capital structure and leverage ratio, a single model is
defined (equation 1):
Leverage = F (Non-Debt Tax Shield, Profitability, Risk, Size, Tangibility, Growth)

(1)

The dependent and independent variables of above equation are defined in the following table (Table 2):

Table 2: Variables Description

Variables
Leverage
Non-debt Tax Shield (NDTS)
Profitability (PROFITABILITY)

Description
Total debt divided by total assets
Depreciation and depletion divided by total assets
Earnings before interest and tax (EBIT) divided by total assets

Risk Level (RISK)

Firm Size (SIZE)
Tangibility of Assets (TANGIBLITY)

Natural Logarithm of Firm Sales

Fixed assets divided by total assets

Growth Opportunities (GROWTH)

3 Empirical Analysis
In this section, the empirical findings of our research regarding the determinants of capital structure are presented.

3.1 Pearsons Correlation Analysis

Pearsons correlation matrix is helpful for recognizing the presence of multi-collinearity among explanatory variables in
order to avoid misleading results. In this study, for both samples Pearsons correlation analysis are done for independent
variables and the results are shown in the Table 5 and Table 6. Through the first sample (world-top gold mining
companies) as it was expected the highest correlation level exists between D (tangibility) and D (NDTS) (0. 4352). This
correlation can be interpreted that higher tangibility of assets occurs in the firms with increase in level of non-debt-taxshield. On the other hand, the lowest correlation coefficient in first sample (world-top gold mining companies) shows the
relationship between D (tangibility) and D (size). Based on this relationship, size of revenue and tangibility of assets are
not associated with each other significantly. In addition investigation on second sample ( AngloGold) shows that, the highest
correlation level is found between D (size) and D (growth); which proofs that large size of revenue occurs in African gold
mining company with increase in level of growth opportunity. In contrast the lowest level of correlation is defined
between D (growth) and D (risk), which says that change in level of growth opportunity does not affect the level of risk in
African gold mining company, significantly. The other results of correlation analysis in both samples are following a
normal behavior.

3.2 The Estimates of OLS Regression Model

As independent variables vary in their stationary levels, different equations are used to formulate the model:

AngloGold
(

)
(

( (

World-top
( (

))
(

))

The outcomes of regression models for AngloGold and world-top firms are shown in the Table 3 and 4, respectively.

Table 3: Estimations of OLS Regression Model for AngloGold

Variable

Coefficient

Std. Error

t-Statistic

Prob.

DNDTS
DPROFITABILITY
DRISK
DSIZE
DTANGIBLITY
GROWTH
C

1.606513
-0.322698
-0.003278
0.007653
-0.131804
-0.004600
0.002835

0.484794
0.073199
0.002310
0.025329
0.127477
0.005761
0.003483

3.313802
-4.408484
-1.419085
0.302135
-1.033940
-0.798510
0.814018

0.0016
0.0000
0.1610
0.7636
0.3053
0.4277
0.4189

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.435465
0.379011
0.025617
0.039375
154.1481
7.713689
0.000004

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.003734
0.032508
-4.392481
-4.162140
-4.301334
1.993608

The OLS regression outcomes for AngloGold show that only non-debt tax shield and profitability are significantly
affecting the leverage ratio of AngloGold; where the coefficient of non-debt tax shield is positive and the coefficient of
profitability is negative. In addition, the R-squared of this regression shows that more than 43% of changes in leverage
ratio can be explained by these 6 independent variables.

The positive effect of non-debt tax shield intensifies the importance of tax shield for AngloGold in contrast to its worldtop competitors (shown in Table 4). This behavior of world-top firms is consistent with the findings of DeAngelo and
Masulis (1980) that tax deductibility of depreciation and tax credits can mutually cause to mitigate the benefits of debt
financing.
On the other hand, the effect of profitability on the leverage ratio is not only similar to the world-top firms, but also it is
consistent with the pecking order theory. Based on this theory, profitable firms tend to benefit from internal funds rather
than employing external funds (Myers, 1984).

Table 4: Estimations of OLS Regression Model for World-Top Gold Mining Firms
Variable

Coefficient

Std. Error

t-Statistic

Prob.

DGROWTH
DNDTS
DPROFITABILITY
DRISK
DTANGIBLITY
DDSIZE
C

0.022361
0.049086
-0.081679
0.000196
0.017355
-0.103444
0.000343

0.010831
0.111700
0.032497
8.74E-05
0.009886
0.029901
0.010681

2.064528
0.439443
-2.513469
2.240853
1.755551
-3.459491
0.032138

0.0419
0.6614
0.0138
0.0275
0.0826
0.0008
0.9744

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.224163
0.171860
0.102934
0.942987
85.68835
4.285809
0.000769

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.000646
0.113111
-1.639341
-1.452357
-1.563759
2.537527

The OLS regression outcomes for World-Top gold mining firms show that growth, profitability, risk, tangibility and size
are statistically significant. The growth opportunities and tangibility of assets of these firms have positive impacts, while
the size of the firms, their risk level and their profitability negatively affect the leverage ratio. However, the coefficient of
risk is almost zero, so its impact is not considerable. In addition, as R-squared shows, more than 22% of changes in
leverage ratios of these firms are explained by the independent variables.
As world-top gold mining firms may have a better access to financing resources, an increase in size of these firms affects
the leverage ratio negatively. Moreover, the positive impact of growth opportunities and tangibility of assets on the
leverage ratio demonstrates the presence of a positive signal for creditors.

Table 5: Correlation Matrix Results for Anglogold

GROWTH
D(NDTS)
D(PROFITABILITY)
D(RISK)
D(SIZE)
D(TANGIBLITY)

GROWTH
1.000000
-0.075355
0.001162
0.156596
0.404042
0.007516

D(GROWTH)
D(NDTS)
D(PROFITABILITY)
D(RISK)
D(SIZE)
D(TANGIBLITY)

D(GROWTH)
1.000000
-0.199791
0.206564
-0.406828
0.154432
-0.067823

D(NDTS)

D(PROFITABILITY)

D(RISK)

D(SIZE)

D(TANGIBLITY)

1.000000
0.107846
-0.337579
0.114517
-0.189385

1.000000
-0.265636
0.058657
0.235069

1.000000
0.301332
-0.537610

1.000000
-0.124662

1.000000

D(D(SIZE))

D(TANGIBLITY)

1.000000
0.004329

1.000000

Table 6: Correlation Matrix Results for World-Top Gold Mining Firms

D(NDTS)
D(PROFITABILITY)
D(RISK)
1.000000
-0.284182
-0.022940
0.096918
0.435292

1.000000
0.077626
0.103024
0.063054

1.000000
0.149529
0.005091

4 Conclusions

The significant determinants of capital structure in case of AngloGold are consisted of profitability and non-debt tax
shield, while profitability, size, tangibility of assets and growth opportunities are the significant determinants of capital
structure in the world-top gold mining firms. Therefore, as the first main finding, only profitability has the same impact
on the leverage ratios of both samples. The negative relationship between profitability and leverage ratio is mentioned in
the studies of Titman S, Wessels R. (1988), Rajan RG, Zingales L. (1995), Biger N et al. (2008).
On the other hand, the second main finding of this study shows that other significant determinants of capital structure are
different in each sample. This issue may be related to the firm such as creditworthiness of company and management
priority or to some other reasons such as accessibility of funding resources, geopolitical circumstances.

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