Plenty of upside left in gold stocks’ shining year

The sky-scraping performance of Australian gold mining stocks this year has led to the inevitable questions of when to expect a correction, but analysts say there’s potential still to be realised.
Nanjing Night Net

Of the biggest names in the index, Evolution Mining has risen 86 per cent this year to date, Newcrest Mining 83 per cent, Regis Resources 74 per cent and Northern Star Resources 69 per cent.

Analysts at Morgan Stanley say globally, total shareholder returns for 2016 so far for precious metal shares have hit 169 per cent, sending valuations at or above historical highs.

“While lifting gold prices have driven upgrades to consensus earnings, we maintain more than 50 per cent of the equity performance is explained by multiple re-ratings,” the investment bank said in a client note, adding the market is paying a 32 per cent premium compared with history.

Gold miners stand out for their strong balance sheets and, according to Morgan Stanley, 10 of 27 companies are sitting on net cash, with an average net debt to EBITDA [earnings before interest, tax, depreciation and amortisation] ratio of 0.3-times.

They say this rally is different to previous cycles. This year’s rally stands out among the last six rallies over the past 40 years. In just eight months gold equities have surged 111 per cent, while the previous comparable rally took 20 months to achieve the same result.

The analysts expect gold prices to remain supported by uncertainty surrounding the duration and impact from the Brexit process, and its effect on the European Union, which they say will likely result in further quantitative easing from the European Central Bank.

Combined with a “languishing” rate hike cycle from the US Federal Reserve, which has continually delayed raising rates in light of mixed economic data, and doubts over China’s economy persist, particularly its rising debt, is resulting in investors looking to preserve capital, leading them to the ultimate safe haven asset.

Morgan Stanley’s global picks include AngloGold, Centamin Goldcorp and Zhaojin.

In Australia, the future is bright for local producers, Macquarie Wealth Management says. According to analysts for the investment bank, there’s never been a better time to build a gold mine, with the price of gold at post-financial crisis highs in US dollar terms, and record highs in Australian dollar terms.

“With the completion of the major resource projects in the country’s northwest, skills abound and contract rates for services have come back to earth,” the analysts said in a note.

Of the local developers, Macquarie prefers Gold Road Resources and Dacian Gold. Both have an outperform rating and feature competitive costs, better or comparable mine lives and exploration potential. Most enticingly, these stocks are trading at a more attractive level than their peers.

“In our view, on a risk adjusted basis, both stocks are overly discounted and we see considerable upside as they progress along the path to production.”

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