With Gold trading at close to $1,100, a five year low -its anyone’s guess as to what is next. But that does not mean gold miners should not worry.
A July 22nd report from Goldman Sachs Equity Research suggests that gold prices are likely to slip closer to $1050 as the sector remains technically and cyclically depressed. Related to this and on a sobering note, GS analyst Andrew Quail and team point out that only 40% of the gold mining firms in their coverage universe have a positive FCF in 2016 at $1000 an ounce.
Quail et al.highlight their Buy-rated names Gold Corp, Barrock Gold, Silver Wheaton (royalty co.) and Detour Gold (junior) will remain FCF positive with gold prices at $1000 an ounce, while the Sell-rated Kinross Gold and IAMGOLD (junior) will swing to negative cash flow owing to their company-wide high-costs.
Gold miners ETF GDX down 15% this week
Of note, the GDX saw its biggest two-day consecutive fall in 2.5 years, dropping by close to 15%. The GS analysts suggest that the 4% decrease in gold prices was the main catalyst for the bottom dropping out, but clearly there were technical factors and investor repositioning that leveraged the sharp move down. They also note that GDX is currently hitting all-time lows, but keep in mind that the Bloomberg Commodities Index hit a 13-year low on Tuesday, plumbing levels even below the 2008 global financial crisis and the Euro area crisis of 2012.
The Goldman team says that gold prices are probably going to continue to grind down for at least another couple of quarters. Quail and colleagues note: “Although the speed and magnitude of the sell-off has surprised us, the trajectory has not. Our 12-month gold price target of $1,050/oz remains unchanged. We continue to believe gold prices will remain under pressure in 2H15 on the back of a strengthening USD and a likely Fed rate hike. We continue to believe commodity prices should remain under pressure with the emergence of broad-based cost deflation throughout the sector.”
Goldman Sachs reiterates Buy rating on Barrick Gold
The GS report highlights that an investment in Buy-rated Barrick Gold is a “tradeoff between gaining exposure to one of the best gold asset portfolio vs. one of the most levered balance sheet makes ABX the most debated names in our coverage.”
They argue that ABX, the largest global gold producer, clearly has one of the premier portfolios of operating assets worldwide. The firm’s high level of debt is the main criticism of ABX, and is a “major overhang” on the stock price in their opinion.
Quail and colleagues claim this overhang is overblown as the firm has the cash on hand to pay off all the debt with a chunk of change left over. “We acknowledge ABX has the highest leverage among its senior peers at 2.4x with Net Debt/EBITDA but given the company only has about $1.8bn of debt maturing over the next four years and a cash balance of $2.3bn, ABX has sufficient liquidity to cover these repayments (Exhibit 3).”
Finally, the report also points out that ABX’s “shrink to profitability strategy” is coming along well with asset sales of $850 million already finalized, and the looming sale of Zaldivar. These asset sales could total up yo close to $3 billion, beefing up Barrick’s balanced sheet and improving the firm’s financial flexibility.
