Macquarie Securities’ commodities team issued a note last week saying it had raised its gold price outlook and that this had triggered earnings upgrades for the gold stocks it covers. It has re-rated a number of gold producers ‘outperform’.
Macquarie says that the gold price may dip early next year but it expects it to climb to a peak of US$1650 an ounce towards the end of next year. This suggests the gold price still has an increase of about 11 per cent to go, given the current spot price of around US$1490, before it reaches its peak.
It has upgraded Northern Star Resources, Evolution Mining, Saracen Mining, Regis Resources, St Barbara, Alacer Gold, Gold Road Resources and Perseus Mining to ‘outperform’.
These companies join several that Macquarie had already rated ‘outperform’: Oceana Gold, Resolute Mining, Aurelia Metals, Bellevue Gold and West African Resources.
It rates Newcrest Mining, Australia biggest gold producer, ‘neutral’.
As to the appropriate investment strategy, Macquarie says: “Newcrest and Evolution Mining offer a ‘low risk’ margin maximisation approach. Both companies are wedded to the bottom of the cost curve at the expense of growth, with production either flat (Evolution) or declining (Newcrest).
“On the other hand, Northern Star Resources and Saracen Mineral Holdings have production growth locked in. Their ounces are higher cost but the leverage is, in our view, worth it. On top of that, both have significant potential to deliver new discoveries.
“We are excited by Western Australia’s exploration potential. In our view the region is on the cusp of a new wave of deeper, but no less impressive, discoveries.
“In short, while we understand the attraction of Newcrest and Evolution on ‘vanilla’ earnings, we believe this ignores the declining earnings trend of both companies compared with upside presented by Northern Star and Saracen.
“We still see upside in the African names, with Resolute Mining the standout, and we also believe explorers of meaningful intent also show value, which is highlighted by Bellevue Gold as a key pick.”
Macquarie’s outlook on the gold price is based on consensus view that interest rates will be “lower for longer”. With little to be gained from investing in cash and fixed income, the opportunity cost of holding gold has become much less of an issue.
It is so confident of its long-term view on gold that it has upgraded earnings for all of the gold stocks it covers out to 2024/25 financial year.
Even investors looking for equity income can play the gold theme, according to dund manager Plato Investment Management. It has several gold stocks in its listed investment company Plato Income Maximiser.
Plato senior portfolio manager Peter Gardner says that three years ago Plato was underweight resources.
“Now we have a big position in the sector. We like gold,” he says.
Gardner says the key to Plato’s approach is that it looks for total return and not just high yield. “We want growth plus income,” he says.
“Gold miners have done very well. You would not associate an income fund with gold stocks but with our total return outlook, it fits in.”
The fund’s gold stock holdings include Regis Resources, St Barbara, Northern Star and Evolution Mining.
Plato Income Maximiser produced a return of 16.3 per cent over the 12 months to the end of July, and distributed a yield of 12.2 per cent (including franking).
The S&P/ASX 200 return over the same period was 15.2 per cent, with a yield of 6 per cent.