Gold equities have re-rated to historical peaks or above. Without diminishing the possibility of more upside if risk aversion continues, we estimate that equities are discounting a gold price that is >20% above spot through perpetuity. Anglogold, Centamin, GoldCorp, Zhaojin are relative global picks
Equity re-rating has driven valuations to levels that are at or above historical peaks. Total shareholder returns for precious metals equities have so far exceeded 169% YTD. This has propelled valuations to levels that are at or above historical peaks for most equities under our coverage universe. While lifting gold prices have driven upgrades to consensus earnings, we maintain more than 50% of the equity performance is explained by multiple re-ratings. Our analysis suggests that the market is paying a 32% premium to what it has historically paid for reserves and resources across our global precious metals coverage.
An average 24% upside to spot gold is currently priced in. Without diminishing the upside to equities if risk aversion continues, shares are discounting a gold price that is, on average, 24% above spot through perpetuity if we use our base case costs of capital. Alternatively, the implied gold price declines to US$1,437/oz if we use a normalized 5% WACC - still 6% higher than current spot prices.
Balance sheets, operating risks remain low in absolute terms. Gold producers maintain robust balance sheets with 10 out of 27 companies holding net cash; the average ND/EBITDA among our globally covered stocks stands at 0.3x. This gives optionality to better manage sector cyclicality and seize reinvestment opportunities as they arise, without exposing shareholders to disproportionate risks. Companies have shown prudence and discipline so far, in our view. Additionally, cost improvements and overall price deflation over the last 12-18 months reduced all-in cash costs (AISC) whereby gold prices would need to fall by ~35%, on average, before companies burn cash.
This rally is (somewhat) different from historical precedents. We identify 6 rallies in gold equities with >60% performance over the last 40+ years including the current one, but excluding the super cycle. The current rally stands out. It has occurred over a relatively short time frame, with gold equities up 111% in just 8 months, compared to 20 months in one previous instance with a comparable level of performance, and 18-24 months for 2 rallies with over 200% absolute performance.
Relative picks: We favour AngloGold, Centamin, Goldcorp, and Zhaojin among our global coverage. Fresnillo and Randgold Resources are least preferred.
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