Gold Stocks Ready To Shine Again

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The global economy still faces a tough time and while gold prices have eased back, gold producers continue to be profitable. Are gold stocks oversold?

-Softening gold stocks affected by sentiment
-Opportunities emerging if sell-off overdone
-Recovery in production should drive cash flow
 

By Eva Brocklehurst

Are gold stocks oversold? Morgans believes so, as the problems and lack of confidence stemming from the pandemic have not been simply swept away by the progress being made on covid-19 vaccines.

At the current gold price most companies are still earning close to $1000/oz, the broker asserts, compared to their all-in sustaining costs (AISC). Morgans considers the current slide in gold stocks is driven by sentiment rather than underlying fundamentals.

As a result, the broker expects a shift away from gold stocks to persist in the short term. Then, when second quarter production and earnings are reported from January the strength of cash flow should be a reminder of the margins being obtained.

Yet the global economy faces a tough time, and while vaccine trials are promising there are difficulties still ahead. Moreover, stimulus measures from the central banking fraternity need to be watched as a counter point.

Hence, Morgans believes there will be good opportunities emerging in gold stocks as markets take on board/offload risk. Goldman Sachs has reiterated a 12-month gold target of US$2300/oz, and agrees the equity sell-off has been overdone relative to the value implied by spot gold.

Gold is now fair value, in Macquarie's opinion, attributed to a combination of momentum selling and liquidation by exchange traded funds. The broker is more confident regarding higher long-term yields and lower gold prices through 2021, although this is neutralised by US dollar weakness and risk events such as the US Federal Reserve's meeting on December 16 and the Senate run-off in Georgia on January 5.

JPMorgan suspects it could be as good as it gets for gold and reflects the latest forward curve in gold price forecasts, reducing US dollar gold prices for FY21 and FY22 by -9% and -8%, respectively, and raising the AUD/USD rate by 3%.

The broker acknowledges the US Fed meeting is important as it holds potential for an extension of the maturity of Treasury purchases, and a slow US economy could cause Treasury yields to drift down and support gold prices. Better economic outcomes throughout the second half of 2021 should cause these to retrace.

The broker envisages a bumpy outlook for 2021 in terms of global GDP, amid a sharp move down as pandemic problems continue before these fade as the year progresses.

JPMorgan strategists suspect 2021 may be the strongest year for growth with the fewest geopolitical shocks in a decade. In turn this would support positive returns across cyclical commodities. The broker holds a long-term gold price forecast of US$1600/oz and an Australian dollar at US74c.

Stocks To Watch

JP Morgan notes over the year to date only Saracen Mineral Holdings ((SAR)) and Evolution Mining ((EVN)) have outperformed gold, retaining Neutral and Underperform ratings, respectively. The broker's valuations reflect the combination of quality, leverage, margin, mine life and copper revenue associated with the individual stocks.

Newcrest Mining ((NCM)) is the least affected by the gold price revisions while OceanaGold ((OGC)) and St Barbara ((SBM)) are the most. Overweight ratings are held for Newcrest Mining, Gold Road Resources ((GOR)), St Barbara and OceanaGold with Neutral ratings on Northern Star Resources ((NST)) and Regis Resources ((RRL)).

Goldman Sachs considers Evolution Mining, for which it has a Sell rating, is trading above fair value at spot gold prices. The broker generally assesses existing production and reserve growth are the main opportunities for value, despite a large disparity in relative valuations between large and small-mid gold producers.

As the September quarter produced generally softer production and higher costs across the sector a supportive gold price masked the impact on cash generation. A recovery in production is expected in coming quarters for some gold stocks such as St Barbara and OceanaGold that should drive strong free cash flow.

Nevertheless the broker considers the free cash flow yield in the sector "somewhat underwhelming". Goldman Sachs retains Buy ratings for St Barbara, Resolute Mining ((RSG)) and OceanaGold.

Morgans notes Ramelius Resources ((RMS)) has been a consistent performer and frequently over achieved against guidance. The company has growth potential and should produce strong cash flow even on weaker gold prices.

Red 5 ((RED)) is considered attractively priced for its large, long-life King of the Hills project in Western Australia with cash flow from the Darlot mining centre. Regis Resources missed guidance in the first quarter and the share price slumped but fundamentals remain strong, Morgans asserts, and progress on McPhillamys offers growth. The broker has Add ratings for all three stocks.

Macquarie has initiated coverage of Ramelius Resources with a Neutral rating. Ramelius owns the Mount Magnet and Edna May gold mines in Western Australia. The company also operates satellite mines that provide additional feed to the process plants. The broker expects production of 277,000 ounces of gold in FY21 at an all-in sustainable cost of $1268/oz.

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