Barry Fitzgerald: Trap for investors in record Aussie gold price
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The Aussie dollar gold price of more than $2000 an oz (at the time of writing at least) means ASX-listed producers of the yellow stuff have never had it so good.
But there is a potential trap for investors from getting caught up in the euphoria of $2000-plus gold by chasing the big name gold producers higher, and higher still.
That’s because in the rush to gain exposure to the bumper price for gold, investors could be paying too much for the leading producers.
It is an issue that Credit Suisse has done some work on after identifying that the record local gold price had “stretched’’ gold equity valuations.
“We have conducted an exercise to assess what gold price in perpetuity is being priced in to current gold equities assuming unchanged operating estimates and spot foreign exchange and by-product commodity prices,’’ Credit Suisse said.
“Our modelling indicates that of our medium-large cap names Newcrest, Evolution and Northern Star are pricing in gold of $US1750/oz ($2505).’’ That’s a thumping big premium to current prices.
Credit Suisse said its mid-cap operators OceanaGold, Regis and St Barbara are pricing gold at $US1277-$US1339/oz, 4-9 per cent below spot gold, while its smaller cap names Alacer and Perseus are pricing in $US1296-$US1322/oz, 5-7 per cent below spot.
Reduce all that down and the conclusion is that there is better value to be had for investors by playing around in the mid-cap and small-cap space. But it is not as simple as that.
“We suspect the premium associated with our larger cap names is ‘quality’ related, as they are benefiting from increased capital inflows from generalists seeking gold exposure and deploying capital into larger cap, higher liquid, gold equities with perceived lower operating risk,’’ Credit Suisse said.
“If the gold price continues to advance we expect the equity in these three companies will continue to outperform a broader portfolio of gold equities.’’
Credit Suisse didn’t say so but it is assumed that if gold prices begin to fall as they might well do, the large cap gold stocks will also offer the best protection.
And when the discussion is around the gold price, it is the US dollar gold price that is all-important.
It more than anything else drives sentiment in the gold equities space, with the current local record price more a talking point than anything else.
It’s why with stretched valuations aside, Credit Suisse continues to like Evolution on its overall portfolio quality, diversification and mine life.
Newcrest is the “most expensive’’ gold company in Credit Suisse’s coverage on current spot prices for gold and copper, with the latter produced in significant amounts at the company’s Cadia operation in New South Wales.
Despite copper having more fans to the upside than just about any other metal, the price has been under pressure and has been lagging gold’s glittering performance in both US and Australian dollar terms.
Credit Suisse sees best value in the ASX and Toronto listed Alacer which it said has a “clear opportunity to continue to re-rate higher versus its peers’’ following first commercial production from its new sulphide gold plant at its Copler operation in Turkey.
From all of that it can be seen that bumper gold prices have not meant much just yet for junior gold producers and explorers.
But it is clear a sustained period of $2000 gold would put the necessarily higher risk small operations on a stronger financial footing, as well as foster greater investor support for equity raisings by junior explorers.
Watch out though if the US dollar gold retreats in a hurry from its current levels, which might well be the case.
Credit Suisse for one has gold averaging $US1286 in (calendar) 2019 and $US1300 in 2020. At the time of writing gold was $US1408, reducing the metal to a still none too shabby 30-day gain of 9 per cent.