Cit Equity Research issued a report today suggesting that the bottom was in for gold mining stocks, and also took the opportunity to change their sector recommendation from Neutral to Bullish. Citi’s team of analysts, led by Heath R. Jansen, argue that not only have fundamentals improved significantly over the last few quarters in most gold miners, but that investor sentiment on the sector has finally hit rock bottom and has nowhere to go but up.

Five stages of grief

Jansen and colleagues draw an analogy between the travails of the gold miners over the last couple of years and the well-known five stages of grief, arguing that the gold mining sector has finally reached acceptance and is ready to move forward. “The mining sector has moved through five stages of grief, namely Denial, Anger, Bargaining, Depression and we now think we are in Acceptance that the sector has moved into a new norm.”

Improving fundamentals for the sector

The Citi report also highlights that the macroeconomic climate is steadily improving and that most gold miners have made good strides in reducing overhead and improving margins. “Improvements in European and US growth are supportive for commodities and weakening commodity currencies are providing a fillip for the miners. Against this backdrop the mining companies are cutting costs, improving balance sheets and aligning with shareholders, which are resulting in an inflection point in the secular trend of EVA creation. We forecast the sector to deliver a CAGR in earnings of around 7% and importantly free cash flow yield is expected to grow at a CAGR of 23.9% until the end of the decade, and broadly dividend yields are now supportive for the sector against the market.”

Gold Miners Top Picks

Large, diversified gold miners likely to outperform

Jansen et al also argue that improving fundamentals related to operational efficiencies means that large, diversified gold mining stocks are likely to outperform over the next 12 months. The report specifically mentions Rio Tinto plc (LON:RIO), BHP Billiton plc (NYSE:BHP) (LON:BLT) and Glencore Xstrata PLC (LON:GLEN) as the top plays in the gold mining sector in 2014. On the sell side, the authors of the report single out Anglo American plc (OTCMKTS:AAUKY) (LON:AAL) as their “least favoured large cap miner.”

FTSE 350 Gold Miners