With markets spooked, uncertainty locked in, interest rates effectively zero and the Fed keeping the US economy afloat by whatever means necessary, there is much to support a buoyant gold price for the foreseeable future. Based on the current US monetary base, Edison analysis suggests the gold price should be near US$1,900/oz. And there is potential for this to rise to in excess of S$3,000/oz.
Capital markets have not caught up with this outlook. So, when taking the full range of scenarios into account, many gold equities appear to be decidedly undervalued.
Report author Charles Gibson says:
‘A Golden Future: The Outlook for Gold and Gold Equities, is an opportunity for investors and mining companies to understand what’s driving global equity valuations and how different coronavirus crisis scenarios will likely affect macroeconomic conditions and consequently the gold market.
‘Gold, with its safe haven and monetary status, has been an obvious beneficiary of the current uncertain environment and that seems unlikely to change for as long as the coronavirus remains a largely unknown quantity.”
INTEREST RATES ECHO 1979
While the total US monetary base has expanded 58% in eight months, real interest rates remain solidly negative.
That may change. However, there is potential for some material volatility, including the possibility that the consumer price index (CPI) could go negative or very much more positive in short order.
In this respect, there may be a historical precedent in that there was similar volatility in both inflation and interest rates between September 1979 and October 1980 in gold’s first great bull run in the period of fiat money.
Then, a large part of the reason for the volatility in inflation was the oil price and Middle Eastern politics. Today, it is a potent combination of money printing, bond buying, national lockdowns and economic crisis. Nevertheless, it is worth observing that in the previous case, gold did not top out until real interest rates were over 4% for a sustainable period of time.
EQUITIES ALMOST NEVER CHEAPER THAN METAL
To date, moves in the gold price have resulted in a rapid (and geared) response from large-cap producing gold equities, which is in sharp contrast to the performance of smaller-cap exploration juniors, the share prices of which are much more dependent on financing conditions in global financial markets than the unique characteristics of the projects they are trying to finance.
History would suggest the share prices of the juniors will catch up with those of their larger brethren over 2.5–5.5 years.
However, since 2002 the prices of gold mining and mining equities in general have almost never been cheaper relative to the price of gold than at the current time.
THE BRIGHT SPOT ON THE HORIZON
If the coronavirus crisis proves protracted and the Fed’s balance sheet stabilises or continues to increase, we would expect the gold price to rise to at least US$1,892/oz.
The share prices of existing producers will take immediate advantage of this situation. In theory, companies with higher levels of financial and operational gearing should benefit the most in percentage terms, while the share prices of junior exploration companies will outperform slowly over the longer term.
With the rest of the global economy in the doldrums, however, this scenario will also create the opportunity for existing producers to provide financing to the junior sector and potentially usher in an era of wholesale consolidation within the industry.
Gold: Doves in the ascendant
Charles Gibson outlines the changes to his gold price forecasts for the next decade and beyond, in light of new evidence. Published: August 2019
Gold stars and black holes
In keeping with recent tradition, Edison conducted, augmented and added to three major analyses. The first is to derive in-situ values for 19 metals and minerals. The second is a study of EV/NPV ratios for junior explorers at PEA, PFS and BFS stages of development. The third is a series of multiple regression analyses used to corroborate our in-situ valuations and derive specific empirical equations to predict the valuations of junior mining exploration companies with respect to five factors, namely project location, IRR, NPV, discount rate and stage of development. Published: January 2019
For further details and to access our research on our gold mining clients
Agnico Eagle operates eight mines in Canada, Finland and Mexico and is among the top 15 largest gold mining companies in the world. It seeks to build a high-quality business that generates superior long-term returns for shareholders and contributes to the communities in which it operates.
Alkane Resources is an Australian production and development company. It previously produced 70,000oz pa of gold from the open-pit operations at Tomingley gold mine, but is transitioning to underground operations and expects to produce c 32,000oz pa of gold.
Auriant Mining is a Swedish junior gold mining company focused on Russia. It has two producing mines (Tardan and Solcocon), one advanced exploration property (Kara-Beldyr) and one early stage exploration property (Uzhunzhul).
Endeavour Mining is an intermediate gold producer, with four mines in Côte d’Ivoire (Agbaou and Ity) and Burkina Faso (Houndé and Karma) and one major development project in Mali (Kalana), all in the highly prospective West African Birimian greenstone belt.
KEFI Minerals is an exploration and development company focused on gold and copper deposits in the highly prospective Arabian-Nubian Shield – principally the Tulu Kapi project in Ethiopia and, to a lesser extent, the Jibal Qutman project in Saudi Arabia.
Newmont has interests in 14 mines in North America, South America, Australia and West Africa, including eight world-class assets (three within the Nevada Gold Mines jv plus Pueblo Viejo, Penasquito, Ahafo, Boddington and Tanami) and two emerging world-class assets (Merian and Yanacocha).
Pan African Resources has three major producing precious metals assets in South Africa: Barberton (target output 95koz Au pa), Barberton Tailings Retreatment Project (20koz) and Elikhulu (55koz), now incorporating Evander Tailings Retreatment Project (10koz).
Wheaton Precious Metals is the pre-eminent ostensibly precious metals streaming company, with 29 high-quality precious metals streaming and early deposit agreements relating to assets in Mexico, Peru, Canada, Brazil, Chile, Argentina, Sweden, Greece, Portugal and the US.
About the team
The Mining and Metals team was formed at the genesis of Edison 17 years ago. Now headed by Global Head of Resources, Ian McLelland, current clients include Newmont, Agnico Eagle Mines and Endeavour Mining. Our mission is to raise awareness of our clients’ stocks, enlighten relevant investors as to the real equity stories behind the headlines, introduce new buyers and improve existing shareholder relations. We also produce regular reports on the trends behind the commodities that help determine stock valuations.