Commodities: Inflation fears push gold higher

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
16 November 2021, 8:00 AM
Sectors Covered:
Mining

  • Gold stock prices have lifted as inflation fears globally lifted the USD gold price, while a flat AUD means gold has moved back above A$2,500/oz recently.
  • M&A continues to play out in the sector with NST, EVN, NCM and RMS all recently announcing purchases or divestments, while a number of smaller names have also been busy.
  • While interest in the sector has returned, concerns around rising costs means investors remain cautious.
  • We look at several standard valuation metrics across the sector, with each metric having strengths and weaknesses and all requiring context to be best understood and interpreted.

Gold price and sentiment

While the gold price in both USD and AUD terms has been rising on the return of global inflation concerns, concerns about rising costs of production in the sector (especially WA) remain front and centre of investors’ minds.

WA labour challenges may worsen in the short term with a vaccine mandate due to take effect on 1 December, and borders forecast to remain closed until February.

Cost pressures remain

Cost of production was yet again a key topic of discussion on analyst calls during Q1 reporting. For WA, border closure have created labour shortages across the mining sector, while all eyes are on the 1 December implementation date for the resources sector vaccination mandate.

AISC and AIC cost reporting metrics both rose this quarter for our producers, although the gold price received also lifted qoq.

Ranking the miners

No two gold miners are the same. Scale of production, jurisdiction and number of operations all factor into the market valuation. Larger miners provide relatively ‘safer’ optionality to the gold price with production spread across several operations.

Small producers may offer more leverage to the gold price, or upside from discovery or production growth, but at relatively higher risk. As such, no metric generates a ranking that fully captures valuations.

We rank and review our ASX listed gold miners on a number of metrics and consider if relative valuations are fair.

Key observations

RED has enjoyed a rising share price as construction continues at King of the Hill, while the sale of Siana in the Philippines has bolstered RED’s cash position and removed overheads.

RMS remains our key pick under formal coverage for investors looking for exposure to the gold price.

For those only interested in the large cap majors, NCM’s strategic plan for the next 10 years shows steady gold production while costs are pushed down towards US$500/oz – but comes with a major capital price tag.

Figure 1: Gold price and All Ord Gold Index  

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans Financial, Company

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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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