Commodities | Jun 28 2019
The first part of this story was originally published as part of Weekly Insights on Friday, 28 June 2019, under the title "Gold Stocks: Winners & Losers". See Rudi's Views on the website.
This follow up contains additional information from stockbroking analysts releasing research updates after the first story had been written.
As the price of gold has broken out on further central bank policy easing, stockbroking analysts are assessing what has already been priced in, and which gold stocks still offer great opportunity.
Which Gold Stocks?
By Rudi Filapek-Vandyck
Share prices of AUD gold producers in Australia have been flying high as investors woke up to the fact bond yields are once again retreating into negative territory (inflation-adjusted) and central bankers are getting ready to become more dovish, having already abandoned their hawkish bias earlier this year.
As per always, a rejuvenated gold price -both priced in USD and AUD- has pulled the eternal gold bulls out of the shadows of financial markets. One gold bull last week predicted $20 for Northern Star ((NST)) shares should not be considered impossible, and neither is $100 per share for Newcrest Mining ((NCM)).
What is seldom highlighted is that same gold sector locally is home to some serious capital destruction for investors who picked the wrong stocks in the year past.
Which is why Bell Potter's sector update last week was such a refreshing exercise. The analysts felt compelled to highlight the spectacular wipe-outs (their terminology) that have equally characterised the gold sector domestically, including significant share price falls for:
Analysts at Credit Suisse express the view that, while gold priced in AUD has surged to record highs this month, the rally in gold producers' equities has nevertheless generated stretched valuations all-around.
The analysts have tried to assess what is being implied by the various share prices and come up with the following conclusions:
-Shares in medium-large companies including Newcrest Mining, Evolution Mining ((EVN)) and Northern Star are implicitly pricing gold at US$1750/oz
-Shares in mid-cap producers OceanaGold ((OGC)), Regis Resources and St Barbara are still equivalent to gold priced at US$1277-US$1339/oz
With the price of bullion surging above US$1400/oz, the immediate conclusion to draw is that larger cap quality names are trading at a premium, both to gold and to the rest of the sector, while many other, smaller-cap producers are still incorporating a discount towards gold.
No surprise thus, Credit Suisse finds Newcrest Mining is the most expensively priced stock in the sector, especially since a large chunk of its annual production is actually copper. The analysts still like Evolution Mining as an overall quality portfolio diversifier.
Most liked is Alacer Gold, because it's cheap and represents "best value".
Over at Morgan Stanley, gold stocks have completely fallen out of favour. Morgan Stanley's commodities analysts used a general sector update to downgrade Newcrest Mining to Underweight, and to announce that none of Australian gold producers under coverage are left carrying a rating other than Underweight.
The reason is, on Morgan Stanley's calculations, share prices for Newcrest, Regis Resources, Evolution Mining and Northern Star are all reflecting a gold price above US$2000/oz, and this makes them overly expensive.
And then there is Canaccord Genuity where mining and metals analysts are ostentatiously more enthusiastic, both in North America as Downunder. Canaccord's view is that gold priced in USD and in AUD can surge higher, supported by the house view the Australian dollar has de-coupled from bullion and is destined for more weakness.
Similar to peers elsewhere, Canaccord Genuity has upgraded gold bullion forecasts. In USD, the average price out to 2025 has been lifted by 5% to US$1508/oz. In AUD, the average forecast has lifted by 6% to $2154/oz.
The revisions had a positive impact on valuations for mid-cap producers under coverage of some 17%, while small-cap brothers enjoyed a boost of 20%.
Two rating changes have followed: OceanaGold has been upgraded to Buy from Hold with a revised price target of $5, but Saracen Mineral Holdings ((SAR)) received a downgrade to Sell from Hold with a revised price target of $2.65.
Other Buy-rated Australian domiciled gold producers include Northern Star (target $12), Resolute Mining (target $1.90), Perseus Mining (target $1), Westgold Resources ((WGX)) (target $2.80) and Dacian Gold, on Speculative Buy, with a target of $1.20 (down from $2.25).
Top Picks as nominated by the commodities desk at Canaccord Genuity are:
Northern Star among mid-cap producers; Perseus Mining and Westgold Resources among the smaller caps; and Bellevue Gold ((BGL)) among developers.
However, if one does not share the view of a weaker Australian dollar for the years ahead, the outlook for local gold producers starts looking a whole lot different.
This, essentially, is the proposition put forward by analysts at Citi.
Citi has equally upped bullion price forecasts to an average of US$1466/oz for 2020, with gold anticipated to reach US$1700/oz in 2023, but alongside this new forecast sits the expectation of a gradually strengthening Australian dollar against the greenback.
Citi analysts are not trying to be contrarian just for the sake of it. On FNArena's observation the world is trying to assess what lower bond yields and a Federal Reserve returning to stimulus actually means for the USD medium and longer term.
At this point, we can but report that opinions across various experts are sharply divided. Except that in the short term, the USD should weaken, which is what we are experiencing right now.
If Citi's view of AUD/USD appreciating to 77c by 2023 proves correct (implying the USD is embarking on a drawn out cycle of weakness) then gold priced in AUD looks unlikely to continue to reach for new record highs in the years ahead, as suggested by, for example, Canaccord Genuity.
Citi too has downgraded Newcrest Mining, to Neutral, with the biggest impact in terms of earnings boost felt by Dacian Gold, as that's how this whole thing works out for high-cost producers.
The only pure gold producers that are left with a Buy rating at Citi are now Perseus Mining (revised target ($0.75) and Resolute Mining (target $2.05) but both carry the additional "High Risk" tag.
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