Gold's grim outlook

A LEADING precious metals forecaster expects the gold bear market to last for several years, while analysts are flagging write-downs and project deferrals, as gold dipped below $US1200 an ounce overnight.
Gold's grim outlook Gold's grim outlook Gold's grim outlook Gold's grim outlook Gold's grim outlook

Thomson Reuters GFMS research director William Tankard said the extreme gold price volatility since April had led to downward revisions of price forecasts.

"Although many of the core positive arguments for a strong gold price remain in place, the list of negative factors for gold has grown in recent months, not least growing investor disillusionment, and this sets the scene for what could develop into a multi-year bear market for gold, an occurrence that earlier this year we had only forecast to emerge in 2014," he said.

"That said, from what now represents a heavily oversold position in late June we stand neutral to cautiously positive on the price in the second half of the year, with risks to the upside based around a possible re-ignition of the dormant Eurozone sovereign debt crisis, renewed uncertainty in the United States over the debt ceiling debate, a slow-down in the equity market and indeed a delay of the tapering to the Fed's [US Federal Reserve's] quantitative easing measures."

GFMS flags gold to average more than $1400/oz this year and to trade between $1100 and $1400/oz next year.

Meanwhile, RBC Capital Markets has taken a closer look at Australian producers in the wake of the recent price drop and associated equity sell-off.

Companies such as Newcrest Mining, Alacer Gold and OceanaGold already have completed reviews to cut costs and RBC has flagged further similar announcements to come, as well as write-downs.

Saracen Mineral Holdings suspended its Carosue Dam expansion, while developer Gryphon Minerals delayed first production from its Banfora project in Africa.

Troy Resources yesterday announced cost-cutting measures while this morning Resolute Mining deferred its Syama expansion and Kingsgate Consolidated flagged a write-down of its Challenger mine.

Project deferrals

RBC has taken a look at the growth projects of gold companies and flagged the ones that could be at risk.

"In the tough prevailing climate, we believe it is increasingly likely that less compelling growth projects are deferred to enhance near-term free cash flow," the analyst said.

The list comprises Perseus Mining's Sissingue project in Ivory Coast, Medusa Mining's Bananghilig project in the Philippines, St Barbara's Simberi sulphide expansion in Papua New Guinea, Northern Star Resources' Ashburton project in WA and Kingsgate's Esperanza and Bowdens projects.

"If growth projects ‘at risk' are deferred, the best value stocks are St Barbara and Medusa, followed by Evolution and Silver Lake," RBC said.

Costs and free cashflow

On the cost front, Regis Resources was the top pick, however, RBC said Alacer was a standout without its Australian operations, which are on the market.

RBC said once growth capex and cash tax was included, free cashflow generation among ASX-listed producers was relatively modest at best.

"Medusa emerges from this analysis as one of the more interesting stories with a rare combination of both production growth and above-average cash margins, even though our forecasts are materially more conservative than the company's, given MML's relatively poor recent track record of meeting guidance," RBC said.

Analysts said the focus would shift to near-term free cashflow generation. However, analysis shows that at a $1000/oz gold price, ASX-listed producers are free cashflow negative, aside from Regis and Alacer, minus its Australian mines.

Following Newcrest's lead, RBC also is expecting lower dividends for gold equities.

RBC said Medusa had the best potential dividend yield, providing it deferred Bananghilig.

Write-downs

"We believe any gold company which has undertaken a company acquisition in the last 2-3 years, may struggle to avoid a write-down in the upcoming FY13 earnings season in August, given the sharp pullback in the gold price," the analyst said.

Although RBC acknowledged write-downs could be difficult to estimate, analysts see a risk of material write-downs for St Barbara on its Allied Gold buy, Silver Lake Resources on its Integra Mining acquisition, Alacer on its Australian operations and Kingsgate on Challenger, though the company already flagged a $300 million impairment this morning.

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