Gold continues to glisten in a setting comprised of low interest rates and depressed global economies, attracting several brokers to take a closer look at the sector amid a more constructive long-term outlook for the price of the yellow metal.
Earnings momentum is likely to be the driver of share performance and, when the gold price is rising, Citi ascertains the valuation of individual stocks matters less, allowing the share price to be driven by the gold price.
Global gold risk appetite has improved but Australian risk appetite continues to lag. Hence the broker considers there is further upside for Australian gold names, and attributes the lag in Australian gold stocks to some of the operating issues amongst ASX names.
Macquarie cautions that, while there is support from declining US interest rates, the long end of the yield curve, with which gold is most closely correlated, has been tracking sideways.
On another measure, gold has marginally outperformed, when considering its negative correlation to developed market equities, and this creates a risk of short-term corrections. Yet, despite the bullish commentary on gold, the broker notes investor positioning does not appear to be stretched.
Shaw and Partners suggests the valuation metrics and performance of gold stocks will stay high for as long as the underlying price trend is favourable. Hence, Buy ratings are retained for all gold names under coverage.
The broker also assumes no further hedging contracts or sales are entered into and the current books roll off in line with the delivery profile.
Gold Stocks
Shaw and Partners has initiated coverage of Geopacific Resources ((GPR)), a small gold company developing the Woodlark Island project in PNG. This is a simple open cut operation that is expected to produce 100,000 ounces of gold per annum over a 13-year mine life and does not face some the usual problems associated with operating in PNG.
The broker has a Buy rating and $1.37 target for Geopacific Resources, noting there is significant exploration upside on the island.
Macquarie has resumed coverage of bellwether Newcrest Mining ((NCM)), with a Neutral rating and $28 target, and Dacian Gold ((DCN)) with an Outperform rating and $0.45 target.
Citi retains a Buy rating for Newcrest Mining and also prefers Resolute Mining ((RSG)) , while upgrading Perseus Mining ((PRU)) to Buy/High Risk. In the mid-cap stocks the broker prefers Saracen Mineral Holdings ((SAR)).
Citi retains a Neutral rating on Evolution Mining ((EVN)), despite it being the most expensive in the group in terms of multiples. While this stock offers less leverage to the gold price, the strong cash flow is appealing and earnings momentum supportive.
New Gold Highs?
Shaw and Partners warns investors not to fixate about the distribution yield in one or two years time. While share prices track the movements in free cash flow & dividends, robust cash flow and yields, alone, will not support the price if the underlying commodity is weakening
Citi also points to a disconnect between inflows from investors and the physical demand for gold. Gold equities are not made of gold, the broker quips, and cannot escape a bear market.
In this situation, equities may serve as a liquidity hedge for raising cash, and profit-taking could be inspired by another equity market sell-off. Furthermore, the trajectory of gold prices is rarely even, especially during a deep recession, and the broker is cautious about calling a new high for the gold price.
Nevertheless, Citi expects gold to breach US$2000/oz in 2021, noting the previous long-term high (2011) was US$1921/oz. Shaw and Partners expects this peak price will be taken out and gold will hit US$2000/oz in late 2022.
That said, the Australian dollar gold price is likely to be close to its highs, and the local gold price does affect local currency earnings and share price performance. In 2009-13 the gold price cycle in terms of both the US and Australian dollars peaked at the same time, the broker points out, but the Australian dollar was trading at US$1.04 back then, as opposed to around US$0.65.
