Rocks and Stocks: Still value to be found in gold

About the author:

Dorab Postmaster
Author name:
By Dorab Postmaster
Job title:
Analyst
Date posted:
06 August 2019, 5:00 PM
Sectors Covered:
Resources

  • The Australian dollar gold price has breached A$1,900/oz, A$2,000/oz, A$2100/oz (a record high). 
  • Geopolitical uncertainty, made worse by ongoing US-China trade fears, has shepherded investors into gold and the US dollar (global reserve currency) as a safe haven. 
  • A strong gold price and weak A$ exchange rate equates to record high A$ gold prices. This positions A$ gold producers extremely favourably. 
  • While the sector has surged, we still see pockets of value on offer in some gold miners.

Our pick in gold

Many gold stocks rallied strongly due to the favourable commodity price (especially the larger producers including Evolution Mining (EVN), Newcrest Mining (NCM) and Northern Star Resources (NST) and look to be trading at elevated levels. As the larger producers become fully valued, investors begin to look at smaller producers that may be getting less attention such as emerging mid-tier producers like Ramelius Resources (RMS). We like RMS given its:

  1. increasing reserve life through acquisitions and organic growth,
  2. scaling up production by an estimated 10% in FY20,
  3. growing corporate appeal as an M&A target, and
  4. balance sheet strength with +A$100m of cash and zero debt. 

Apples and oranges

Even though gold prices are at record levels, not all gold companies are benefitting from this environment, the recent troubles experienced by some junior developers is testament to that.

Gold produced at different mines may end up looking the same but each orebody the gold comes from is different and each company mining the gold is different, and that is why it is important to understand where the companies sit relative to each other. 

How we rate gold stocks

There are many metrics that can be used to compare companies, some of the most telling and relevant metrics include: 1) reserve life, 2) EV per reserve ounce, 3) EV per annual production ounce, 4) all-in sustaining costs (AISC), 5) margin (achieved price less AISC), and 6) cash build to revenue (we define underlying cash build as the change in cash balance between period after deducting any new equity/debt and adding back dividends or cash acquisitions). We view cash build to revenue as a particularly interesting indicator given the consistent look through to underlying FCF generation it provides regardless of a company's operating scale. 

Our view

With the trade talks ongoing and the RBA expected to cut rates further, the current conditions that have caused the elevated A$ gold price look to be around for a while yet. Gold is already one of our most preferred commodity exposures, but it has been promoted up the ranks as a favourite given its attraction as a safe haven.

Our positive view on gold has been 'supersized' by the current strength in the Australian dollar gold price, which broke through an all-time record high of A$2,100/oz. While gold stocks have already posted strong performances, we see opportunities in junior and emerging companies that are now getting the attention of the market.

More information

Morgans clients can access further detailed analysis on the Resources sector via our research section of the client website. If you would like more information, please contact your adviser or nearest Morgans office.

Disclaimer: 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.

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