ASX-listed gold miners are poised to catch up with the surging price of bullion

ASX-listed gold miners have lagged the lift in the gold price but that may not last long, say top brokers.

Share prices in Australia’s listed gold sector should start to accelerate in line with the surging price of bullion.

History suggests the lagging share prices in Australia’s listed gold sector, relative to the physical gold price, is set to outperform over the medium term, says a ­selection of top stockbrokers.

According to Wilsons, an attractive opportunity beckons to invest in the sector at a time when valuations are trading at a historical discount, aggregate company guidance has been lowered to ­realistic levels, and consensus earnings momentum is poised to turn positive, in line with the rising gold price.

Even after a recent surge, Wilsons maintains a positive outlook for the gold price – currently trading at about $US2378 an ounce.

Global broker Citi agrees on the positive outlook, noting an eventual Federal Reserve interest rate cutting cycle and lower long-term yields could provide a 25 per cent kicker towards $US3000 over the next six to 18 months.

Gold prices have surged recently despite a material increase for real/nominal yields, a rallying US dollar and more hawkish Federal Reserve pricing in short-term interest rate markets.

These rate markets are now implying fewer than two interest rate cuts this year, against the March average of three cuts, and early-2024 expectations for six to seven cuts, yet gold has rallied to all-time highs.

On balance, this suggests ongoing Federal Reserve pricing is likely to be more bullish for precious metals markets.

A decoupling from US rates and the US dollar indicates to the analysts support via robust physical consumption (Indian and ­Chinese imports), geopolitical hedging and central bank buying.

While gold mine production should be a record in 2024-25, Citi suggests this supply may struggle to grow in 2027-28 based on the current project pipeline.

Consistent with this broker’s zero to three-month and six to 12-month price targets (updated at the start of April to $US2400 and $US3000 an ounce, respectively) the 2024 and 2025 gold price forecasts are raised by about 6.8 per cent and 40 per cent, respectively to $US2350 and $US2875.

Meanwhile, the team at Wilsons suggests the major advantage of owning goldmining companies during gold bull markets is operational leverage, which can lead to significantly higher returns than merely owning gold.

Mining companies largely have fixed cost bases, and as the gold price increases (with no impact upon operating costs), earnings receive a proportionally larger boost as margins expand.

Favourites in focus

So which ASX gold stocks are in the frame? Wilsons’ preferred gold exposure is Evolution Mining (EVN), which also has ­material exposure to copper.

In effect, higher copper prices translate to stronger gold margins for Evolution as copper sales are ultimately credited as a reduction to its gold unit costs. The miner’s production is 95 per cent unhedged, aiding strong earnings growth in the event of a gold rally.

Being the lowest-cost gold miner on the ASX underpins highly attractive margins at the current gold price and provides a degree of cash flow and balance sheet protection against a weaker gold price, the broker says.

Wilsons looked closely at three gold miners on the ASX – Evolution, Northern Star and Newmont. Each of the stocks offer high-grade assets, low costs, good cash flow and balance sheet strength. The brokers also noted key market signals such as P/E and dividend yield. The P/E ratios ranged between 6.4 at Northern Star to 10.8 at Evolution – and the dividend yield at all three companies was about 3 per cent.

According to Wilsons, on the current environment of capex/cost blowouts, Evolution’s falling capital intensity is particularly ­attractive and stands in contrast to Northern Star and Newmont.

The gold price in US dollars this year is up about 15 per cent – it has put on strength since the Federal Reserve began raising rates in March 2022. With the prosect of lower rates in the near future, gold prices could now move higher still.

Looking across the market, Wilsons suggest: “The ASX-listed gold miners have lagged this year’s rally in the physical gold price, which is out of step with the sector’s long-run tendency to outperform the gold price during gold bull markets.”

As Wilsons analysts David Cassidy and Greg Burke put it: “Notwithstanding the headwinds to production (for some miners) and costs (industry wide), the major gold miners are generally poised to deliver strong earnings growth over the medium term, as the benefit of leverage to a higher gold price will outweigh the impact of cost inflation. This is not yet adequately reflected in consensus earnings expectations.

“With the gold price around $US2350, consensus earnings estimates will almost certainly have to be revised higher by analysts in the coming months, which should provide consensus earnings momentum that will be supportive of the sector’s performance.”

Mark Woodruff writes for the market research service FNArena