Glistering gold, always the safe haven in difficult times, is now very much in focus. Brokers are re-evaluating gold price forecasts and assessing the resilience of gold stocks.
Gold equities have decoupled from the outlook for earnings, with UBS noting a sharp fall in the S&P/ASX gold index of -35% in late February, despite the Australian dollar gold price lifting to a record high. Gold equities, in the broker’s opinion, are pricing in a gold price of US$1500/oz or below, which compares with spot gold price of US$1600/oz.
As Credit Suisse points out, massive economic stimulus in response to the coronavirus crisis will ultimately be inflationary, which should be positive for gold.
Moreover, the sector is well capitalised, with low levels of debt and modest gearing. Volatility is still likely, in the broker’s view, as positions are closed in order to support liquidity, but beyond this the outlook is robust.
JPMorgan agrees, now the liquidity-driven selling has dried up and physical markets have tightened. This is not to say that there will be no impact on production and earnings from the coronavirus crisis.
However, as Credit Suisse notes, perversely, supply restrictions locally on gold may further support the price. Gold is expected to be between US$1540-1600/oz over 2020. The broker further expects a 2021 gold price average of US$1600/oz, with 2022 at US$1550/oz, and a long-term gold price of US$1400/oz. JPMorgan’s forecast for the long-term gold price stays at US$1500/oz.
Financial Strength
Australian gold companies are financially strong after an extended period of elevated gold prices, enabled broad de-leveraging. UBS notes most of the stocks under coverage are either net cash or projected to become so in the next 12 months. Other factors, including the depreciation of the Australian dollar and low oil prices.
The ability to continue operating and producing is now in focus and JPMorgan points out some operations are more exposed than others. At present, Australian mines are classified as an essential service, meaning fly-in, fly-out operations are excluded from border closures, albeit subject to change.
All gold businesses are reducing some aspects of production, travel and non-essential expenditure. If restrictions continue then planned maintenance and construction projects could be delayed.
JPMorgan assesses the main mines affected under its Australasian gold stock coverage include Waihi and Macraes in New Zealand (OceanaGold) and Fruita del Norte in Ecuador (Newcrest).
The broker notes declining grades and short reserve lives mean Newcrest Mining ((NCM)) and Evolution Mining ((EVN)) are struggling to maintain current production levels. In contrast, Saracen Mineral Holdings ((SAR)) and Northern Star Resources ((NST)) offer strong production growth.
St Barbara’s ((SBM)) growth, UBS notes, is expected to come from Gwalia and Moose River amid assumptions the Simberi sulphide going ahead.
The broker prefers Saracen and Evolution, which have high margins and diverse assets. Saracen has transformed in scale and growth opportunities with the acquisition of a stake in the Kalgoorlie Super Pit. Northern Star also has a stake in the Super Pit and the broker expects both companies will add value through more aggressive exploration. Both companies were net cash as of December 31, 2020.
Incremental underground production at Duketon should benefit Regis Resources ((RRL)), which was also net cash. Credit Suisse upgrades Regis Resources to Outperform from Neutral.
Of the major gold miners the broker considers Evolution Mining the most leveraged to the gold price from an earnings perspective, while amongst the smaller stocks Perseus Mining ((PRU)), upgraded to Neutral, and OceanaGold ((OGC)), downgraded to Neutral, exhibit the highest earnings leverage
Alacer Gold ((AQG)) also has high leverage, given the company has no hedging and full exposure to spot prices. The stock has underperformed peers in the year to date but is rapidly paying down debt and UBS projects it to be net cash by the end of June.
Credit Suisse prefers Evolution (Outperform) and Northern Star, the latter being upgraded to Neutral from Underperform. The former has a well diversified portfolio and superior free cash, while the latter has an attractive medium-term earnings growth profile. Newcrest is expected to lag, as the production outlook is more inferior and there is a higher copper exposure.
Liquidity
One significant issue is liquidity. One of the gold stocks that is suffering is OceanaGold, given problems with the blockade in the Philippines. Credit Suisse assesses the stock has the weakest capital position and is most at risk from extended mine suspensions. With Didipio and New Zealand operations suspended, this leaves Haile as its sole cash generating asset.
JPMorgan notes OceanaGold keeps re-setting 2020 lower. Growth assumes a re-start to Didipio from 2021 and the Waihi/Martha ramp up is likely delayed until early 2022. The resolution of Didipio would provide a US$50m benefit to cash flow from concentrates stockpiled at the site, UBS points out. The broker expects the debt position will be maintained during 2020 as Didipio and Waihi will be shut down for most of the year.
While the company’s debt position may be larger than peers, UBS calculates it is still less than 1x forecast operating earnings (EBITDA) in 2020. The broker retains a Buy rating on the stock, and given the disruption, this means that the 2020 outlook is not indicative of the underlying asset value. The share price is now significantly lagging peers and the lift in the gold price.
On the other hand, UBS retains a Sell rating for Newcrest as the stock is trading at a 10% premium to revised valuation and pricing in a US$1600/oz long-term gold price. Production and earnings are also set to peak in FY20 because of great declines at Cadia. Moreover, issues at Lihir may be ongoing as this is a large but difficult ore body to mine.
