Rocks and Stocks: Going for Gold

About the author:

Author name:

By Chris Brown

Job title:

Senior Analyst

Date posted:

23 September 2015, 2:10 PM

Sectors Covered:

Junior (Emerging) Resources

Gold is back in vogue. The yellow metal rallied after the US Fed left rates on hold with dovish tones on interest rates supporting a move into safe haven assets last week.

Gold is a natural hedge against economic uncertainty and inflation and with the US Central Bank tone about weakness in the world economy and global risks, it comes as no surprise that investors have been flocking to gold equities.

The sector has performed well during September, and we argue there is still value upside in the larger producers which trade on cheap PE's. We also note that after a strong run in the top end of the sector, attention is now turning to some of the mid-cap and smaller plays.

A divided set of opinions = a good environment for gold

Before the US Fed met on interest rates last week we noted a large divide in opinions on what effect an interest rate outcome would have on gold. Clearly the market has mixed views in what is largely uncharted territory. As a result we expect gold will remain well supported leading into the next Fed interest rate meeting in October 2015.

The bigger miners are closing in on our price targets

Domestic Australian gold producers have performed strongly since early August with a surge leading into the Fed result.

Australian denominated gold prices have improved by around 6% however the largest gold producers in our coverage universe including Evolution Mining (EVN) (PT $1.40ps, 20% upside), (Regis Resources) RRL (PT $1.83ps,+16% upside), Newcrest Mining (NCM) (PT $14.30ps, 21% upside) and Northern Star (NST) (not covered) have all performed well and as such are now within 10- 20% of our price targets.

Longer term the sector still offers appealing upside, particularly from domestic AUD exposed operators noted above.

The bigger miners like RRL trade at an FY16 PE of 9x and offer a dividend yield of 5% and EVN trades at a cheap FY16 PE of less than 7x at today's prices.

The next tier of gold players is starting to gain traction

We've noted that attention has turned to smaller producers and advanced explorers who have gained buying support.

Saracen Mineral Holdings (SAR) remains on track to reach 300kozpa by 2018 and is our preferred pick outside of the "Big 4" producers.

Dacian Gold (DCN) is our key pick of the advanced non-producers and aims to release its scoping study for the Mt Morgans project shortly.

We also like the look of Troy Resources (TRY, Not covered) who aims to commence production at its high grade 100,000ozpa Karouni project in Guyana this month with All-in costs of around US$630/oz.

M&A is far from over, expect more deals

The Denver Gold show is on this week, one of the largest gold conferences in the world. Presentations from the bigger miners such as Barrick suggests the top end producers are making changes to increase free cashflow and strengthen their balance sheets and they're doing this by divesting assets.

We expect similar strategies for the other large miners so the pipeline of divestment assets available for sale is likely to continue and will feed into the strategy of many mid-tier miners looking for mature bolt on assets similar to what NST, EVN and SAR have acquired over the last few years.

More information

View more detailed analysis on the Resources sector, or contact your nearest Morgans office for more information.

Disclaimer(s): The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.