Analysts divided on outlook for gold stocks but united on downside for white-hot FMG

Profit-takers dictated activity in the red-hot gold sector this week as the first warning bell was rung about “stretched” share prices, even as the underlying metal built on its record run and reached out towards the magic mark of $US2000 an ounce.
31st July 2020
Tim Treadgold

Profit-takers dictated activity in the red-hot gold sector this week as the first warning bell was rung about “stretched” share prices, even as the underlying metal built on its record run and reached out towards the magic mark of $US2000 an ounce.

Macquarie Bank, the biggest gold bull in the Australian financial sector, warned that gold had entered “overshoot” territory after its 16.5% rise in seven weeks, from $US1680/oz on June 5 to its latest price of $US1958/oz, which is down slightly on the record $US1981/oz reached on Tuesday.

Another measure of gold’s remarkable performance, which has been aided by a fall in the value of the U.S. dollar, is that last July gold was selling for $US1406/oz meaning that the latest price represent an increase of 39.2% in 12-months.

Enjoyable as the ride has been for gold bugs, there are some analysts who reckon the best of the boom is coming to an end and it’s time to take some of the profit.

“Having broken above its 2011 U.S. dollar high on Monday, gold fell just short of $US2000/oz on Tuesday, briefly touching $US1981/oz,” Macquarie said. “At such elevated levels we believe gold is in overshoot territory and likely to trade with increased volatility.”

Macquarie is not forecasting a significant correction in the gold price because the bullish price drivers are still intact, including ultra-low (and in some cases negative) interest rates and ongoing weakness in the U.S. dollar.

There is also an argument that gold is still well short of its “real” record price which the World Gold Council reckons is $US2800/oz after allowing for the effect of 40-years of inflation on the 1980 peak price of $US760/oz.

But, what Macquarie has done is warn investors that the easy uplift in this gold cycle has been achieved and from now on it gets harder to go much higher.

And while Macquarie didn’t add this warning, there will soon questions asked about the quality of some gold assets, especially undeveloped resources, mines operating on thin profit margins and new floats which lack substance or skilled management (or both).

Macquarie backed up its warning with a long list of what it considers over-priced stocks, topped by Newcrest, which the bank reckons is heading for a 22% fall from $35.96 to $28, and St Barbara, which is tipped to fall by 19.3% from $3.47 to $2.80.

Not everyone agrees with Macquarie, as can be seen in a deep dive into investment recommendations for one of the gold sector’s leaders, Regis Resources, with price tips ranging from an outright sell by Goldman Sachs, which reckons Regis is heading for a fall of 29% from its latest price $5.77 to $4.10, whereas UBS reckons Regis will rise by 12.7% to $6.50.

Beauty, as they say, is in the eye of the beholder!

But if the big guns at banks such as Goldman Sachs and UBS are a country mile apart in their views of a well-run gold miner, it might be asked what hope for the man in the street?

It’s the gap in professional assessments as well as the fact that gold has run hard for 12-months that adds to the risks attached to the metal and the companies that mine it.

The uncertainty factor can also be seen in the price movements of several sector leaders such as Northern Star, which rose sharply as gold set its all-time high before easing back to be roughly where it started the week at $15.51, and Evolution which repeated that trick with a rise from $5.82 to a mid-week high of $6.19 before retreating to $5.94.

Gold explorers and project developers did better than the producers with moves that included:

  • Musgrave Minerals adding 3c to 69c after reporting bonanza grade assays as high as 884.7 grams of gold a tonne over 3m from a depth of just 5m from drilling at its Starlight project in WA.

 

  • Alto Metals reported a 36m-thick zone of shallow gold mineralisation assaying in a range of 2.3g/t to 4.1g/t at its Lord Nelson project near Sandstone in WA. On the market, the stock added 2.5c to 9.1c.

 

  • Aeris Resources rose a modest 0.1c to 4.3c but attracted a buy tip from Bell Potter which sees a target price of 8.7c thanks to the addition of the Cracow gold project in Queensland to existing copper assets.

 

  • Breaker Resources added 2c to 28c after announcing a $23 million capital raising to fund expansion of the resource at its Lake Roe project in WA, and

 

  • Oklo with a capital raising of $10 million for work on its Dandoko gold project in Mali became the latest gold stock to take advantage of investor’s appetite for gold exposure, though issuing the extra shares rubbed 2c off the company’s price which slipped to 32c.

The over-stretched argument being applied to gold could also be applied to iron ore which has also enjoyed a stellar run thanks to the iron ore price staying higher for longer because Chinese demand has been being stronger for longer.

Fortescue Mining, the leading pure-play producer, pleased its shareholders yesterday with a strong full-year production result which has set the scene for an equally impressive profit and dividend announcement next month.

But, as with the gold sector, it is getting harder to justify a stratospheric share price against a background of slowing global growth and an accelerating rate of Covid-19 infections in the U.S. and several other countries.

Every major bank and broking house is tipping a Fortescue fall, led by Citi which sees $11.70 as its price target, down 33% on latest sales which are an all-time high of $17.48.

Another example of the share prices of iron ore miners becoming disconnected from professional analysis is Mineral Resources, which rose by 9% this week to $26.54, an all-time high, which is 30% up on the $18.80 price target of J.P. Morgan.

Uranium also had a warning bell rung when Cameco, a big Canadian producer of the nuclear fuel, said it planned to restart its mothballed Cigar Lake mine in Saskatchewan in September, an announcement that rubbed $C1.50 off Cameco’s share price which fell to $C10.52 because of concern about the uranium glut growing again and also hit local uranium hopefuls such as Vimy, which lost 0.8c to 3.3c.

Lithium was led by Pilbara Minerals, which added 3c to 37c after announcing a new and lower-cost debt facility. Other lithium stocks were modestly firmer with Galaxy and Orocobre adding 1c each to $1.09 and $3.10, respectively.

Galena Mining added 2c to 26c after taking advantage of the low interest rates available on debt by securing a $US110 million facility for the development of its Abra base metals project in WA.

Other news and market moving events included:

  • Lynas Corporation added 9c to $2.25 after securing U.S. Government support for the construction of a rare earth processing plant in Texas as part of a joint Australian/U.S. push to cut reliance on Chinese supplies of the exotic material.

 

  • Hastings Technology Metals joined in what looks like a rare earth revival with a rise of 2c to 14c after announcing a 13% reduction in the estimated capital cost of its Yangibana project in WA.

 

  • Peel Mining rose by 2c to 24c after announcing that it had paid $17.1 million to achieve full ownership of the Mallee Bull copper project in NSW after buying out its partner, CBH Resources.

 

  • Capricorn Metals raised $25.5 million to accelerate work on its Jaguar nickel project in Brazil. On the market the stock slipped 2c to $2.01, and

 

  • New Century Resources added 2c to 22c after announcing it might have to invest $US200 million to secure ownership of the big Goro nickel project in New Caledonia

 

Image: Fortescue Metals Group Gallery

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