Carnage in Gold Mining Stocks Not Over - Jefferies; (ABX) (GG) (KGC) (NEM) Downgraded
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Price: $13.54 --0%
Rating Summary:
5 Buy, 17 Hold, 2 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 13 | Down: 11 | New: 14
Rating Summary:
5 Buy, 17 Hold, 2 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 13 | Down: 11 | New: 14
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While some are making bold calls to buy Gold and Gold Mining stocks amid the swoon, analysts at Jefferies see further carnage ahead.
"We've been negative on gold mining equities in general for a long time. And, despite declines ranging from 30% to 56% this year, we believe there is further downside to go," Jefferies analysts led by Peter Ward said.
The firm is downgrading ratings on all the gold miners by one notch. And, they are lowering their gold price forecast to $1,250 from $1,500.
Jefferies downgraded Barrick Gold (NYSE: ABX) from Buy to Hold with a price target of $14.00.
Jefferies downgraded Goldcorp Inc. (NYSE: GG) from Hold to Underperform with a price target of $19.
Jefferies downgraded Kinross Gold Corporation (NYSE: KGC) from Hold to Underperform with a price target of $3.75.
Newmont Mining Corporation (NYSE: NEM) from Hold to Underperform with a price target of $18.
In its downgrade, the firm notes Gold mining is a very challenging business that they believe warrants a low equity multiple – not a high one.
"Given the dramatic decline in share prices, some may perceive gold equities as inexpensive. We strongly disagree. In our opinion, gold equities have rarely been more expensive when we incorporate current gold prices. Despite a quintupling of the commodity price from 2003 to 2011, the gold mining majors generated little to no free cash flow. On our estimates, the majors are likely to generate negative free cash flow over the next several years. That said, the gold price will need to decline even further before existing mines cut production. And, we doubt that modest production cuts will do much to support the gold price in the medium term. Gold has a far larger and more liquid above ground stockpile than most other mined commodities. Therefore, the cost of production is not as relevant in determining the commodity price as it might be in say copper."
With gold down 37% from its high in 2011, Ward said "the myth that gold is a low risk "store of value" has been exposed for what it is to the latest generation of investors." The firm now fears as dissatisfied investors exit the market, selling could beget selling and send the gold price well below the cost of production.
In summary, the firm said while they'd like to believe the carnage in the group is over, they don't.
"With short reserve lives, rising costs, rising political risks and a stagnant commodity price, we believe an argument could be made that gold equities should trade at valuation discounts to other resource equities. Instead, they continue to garner valuation premiums. In our opinion, that continues to make the risk/reward for the North American gold group unattractive. At a minimum, we remain confident there are better values within global metals and mining."
Related ETFs: Market Vectors Gold Miners ETF (NYSE: GDX), Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), SPDR Gold Shares (NYSE: GLD).
For an analyst ratings summary and ratings history on Barrick Gold click here. For more ratings news on Barrick Gold click here.
Shares of Barrick Gold closed at $15.25 yesterday.
"We've been negative on gold mining equities in general for a long time. And, despite declines ranging from 30% to 56% this year, we believe there is further downside to go," Jefferies analysts led by Peter Ward said.
The firm is downgrading ratings on all the gold miners by one notch. And, they are lowering their gold price forecast to $1,250 from $1,500.
Jefferies downgraded Barrick Gold (NYSE: ABX) from Buy to Hold with a price target of $14.00.
Jefferies downgraded Goldcorp Inc. (NYSE: GG) from Hold to Underperform with a price target of $19.
Jefferies downgraded Kinross Gold Corporation (NYSE: KGC) from Hold to Underperform with a price target of $3.75.
Newmont Mining Corporation (NYSE: NEM) from Hold to Underperform with a price target of $18.
In its downgrade, the firm notes Gold mining is a very challenging business that they believe warrants a low equity multiple – not a high one.
"Given the dramatic decline in share prices, some may perceive gold equities as inexpensive. We strongly disagree. In our opinion, gold equities have rarely been more expensive when we incorporate current gold prices. Despite a quintupling of the commodity price from 2003 to 2011, the gold mining majors generated little to no free cash flow. On our estimates, the majors are likely to generate negative free cash flow over the next several years. That said, the gold price will need to decline even further before existing mines cut production. And, we doubt that modest production cuts will do much to support the gold price in the medium term. Gold has a far larger and more liquid above ground stockpile than most other mined commodities. Therefore, the cost of production is not as relevant in determining the commodity price as it might be in say copper."
With gold down 37% from its high in 2011, Ward said "the myth that gold is a low risk "store of value" has been exposed for what it is to the latest generation of investors." The firm now fears as dissatisfied investors exit the market, selling could beget selling and send the gold price well below the cost of production.
In summary, the firm said while they'd like to believe the carnage in the group is over, they don't.
"With short reserve lives, rising costs, rising political risks and a stagnant commodity price, we believe an argument could be made that gold equities should trade at valuation discounts to other resource equities. Instead, they continue to garner valuation premiums. In our opinion, that continues to make the risk/reward for the North American gold group unattractive. At a minimum, we remain confident there are better values within global metals and mining."
Related ETFs: Market Vectors Gold Miners ETF (NYSE: GDX), Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), SPDR Gold Shares (NYSE: GLD).
For an analyst ratings summary and ratings history on Barrick Gold click here. For more ratings news on Barrick Gold click here.
Shares of Barrick Gold closed at $15.25 yesterday.
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