Gold Sector: Gold outperforms the commodity pack
About the author:
- Author name:
- By Sharad Bhat
- Job title:
- Date posted:
- 16 May 2023, 7:00 AM
- Sectors Covered:
- Junior Resources
- Gold prices (AUD) were up ~11.6% during the March quarter driven by central bank buying and uncertain macro conditions.
- Australian gold equities (All Ordinaries Gold index) outperformed the broader market (All Ords index) by ~15.4% over the same period.
- Path to normal remains rocky with the gold price appearing “stronger for longer” driven by central bank buying, stress on the banking/financial sector, and rising rates to quell inflationary pressures.
- Regis Resources (ASX:RRL) is our top pick based on our coverage.
Gold price and sentiment
The gold price significantly increased in both USD and AUD terms (~8.1% and ~16.6% respectively) in the March quarter, on the back of a somber economic outlook, combined with rising interest rates, and geopolitical events.
We see gold remaining strong in the medium term, driven largely by central bank demand and uncertainty, as investors flock back into the safe haven.
Gold miners March quarter performance
The March quarter was sluggish for Australian gold miners, driven by production challenges, weather events, and inflationary pressures, which resulted in below consensus production and guidance revision – as miners fell short of capitalising on record gold prices.
Amongst the large-cap gold miners, NCM is a stand-out with higher margins than peers.
Mid-tier gold miners performed well delivering strong operational cashflows and healthy margins. CMM, GOR, and ALK (again) delivered stand-out AISC margins vs mid-cap peers.
Red 5 (RED) and Calidus (CAI) transitioned from developers to producers, delivering AISC margins of $293/oz, and $416/oz, respectively. We expect margins to increase as operations iron out teething operational/commissioning challenges.
Within Africa miners, Perseus (PRU) and West African Resources (WAF) delivered industry-leading AISC margins. Both companies have sound balance sheets and quality portfolios, highlighting the continued trend of gold production at attractive margins for African producers.
We witnessed multiple take-over deals YTD – NCM-Newmont, RMS-BRB, and SBM-GMD-SLR. We anticipate further M&A and consolidation in the mid-tier gold producer landscape driven by higher gold prices.
Within our current formal coverage, Regis Resources (RRL) remains our preferred producer for its attractive valuation, low-risk profile (assets in WA/NSW), sustained capital spending, and organic growth project.
Additionally, consolidation in the large cap domain will benefit RRL, in our view.
Changes to commodity forecasts
Gold price is driven by uncertainty. Given the inflation rates, geopolitical events, and stress in the banking sector, we have meaningfully re-baselined our short-term gold forecast in-line with consensus estimates.
We view this uncertainty to prevail in the tactical space with gold prices remaining elevated.
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