Waiting for the central bank cavalry
We remain bullish on gold. The escalating European debt crisis, the upcoming
replay of the U.S. debt ceiling debacle and the pending “fiscal cliff” in the U.S leaves
us firmly bullish on gold. That being said, and as we have seen over the past few
years, increased global risks have lead to a “flight-to-the-dollar” at the expense of
equities, commodities, and gold. The U.S. dollar index is trading at its highest level
since the summer of 2010 and the US 10-year treasury yield yesterday hit a 60-year
low of 1.61%. In our view, the market is signaling deflationary pressures ahead. A
strong dollar could persist in the near term but, ultimately, we believe that central
banks are likely to respond at some point with additional monetary stimulus –
particularly if the Eurozone continues to deteriorate.
Based on our expectation that near-term dollar strength could continue, we are
lowering our gold price forecast to $1,648/oz in 2012 (from $1,700/oz) and
$1,750/oz in 2013 (from $1,800/oz). We have raised our 2014 gold price to $1,700
(from $1,600/oz). We have also reduced our spot-based LT gold price to $1,500/oz
(from $1,600/oz) to take an arguably more conservative stance in our valuations.
Exhibit 1. TD Securities Precious Metals Forecast
(US$/oz) 2011A 2012E 2013E 2014E LT
Gold $1,572 $1,648 ↓ $1,750 ↓ $1,700 ↑ $1,500 ↓
Previous $1,700 $1,800 $1,600 $1,600
Silver $35.30 $30.67 ↓ $34.00 ↓ $28.00 ↓ $25.00 ↓
Previous $35.00 $36.00 $30.00 $30.00
Source: TD Securities estimates
Gold equity valuations remain low by historical standards – We believe that gold
equities are likely to underperform gold in a strong dollar environment; however, we
note that gold equity valuations are already low by historical standards and are not far
from levels seen during the GFC. In our view, potential monetary stimulus would be
positive for gold and, given where gold equity valuations are, we could see gold
equities outperform. We estimate that the large-cap producers are trading at 0.82x
NAV (at spot gold), well below the historical average of 1.11x and just above the
trough 0.78x NAV seen during the GFC. As we show in Exhibit 2, the average
P/NAV multiple increased to 1.37x by January 2009 from 0.78x in October 2008.
Similarly on a P/CF basis, the large caps are trading at 7.2x compared with the
historical average of 13.7x and the GFC trough of 6.2x.
Target price and recommendations – We have lowered our estimates and target
prices to reflect our lower gold and silver price forecasts. In addition, we have moved
to higher discount rates for several projects due to geopolitical risk and/or for projects
at an earlier stage of development with technical risk. In general we are now using a
7-10% discount for development projects that are early-stage or have elevated
technical or geopolitical risk. Our recommendations are largely unchanged. Among
producers, our top picks are Eldorado, Goldcorp, Franco-Nevada, Yamana,
B2Gold and Alamos. Within the junior gold companies, we like Extorre,
Continental and Rubicon.
Gold & Precious Minerals
Greg Barnes
Steven Green, CFA
Daniel Earle
Carey MacRury, CFA, (Associate)
Scott Parsons, CFA
Shey Ylonen, CFA (Associate)
Niall Glynn (Associate)
All figures in C$, unless otherwise specified.