Goldman Sachs Lifts 2017 Gold Forecast to $1,150; Newmont Mining (NEM) Raised to 'Buy', Franco-Nevada Cut to 'Sell'

Goldman Sachs increased its gold price forecast by an average of 10-15% over the next three years. The bank's gold price deck moved to $1,202 for 2016 ($1,097 prior), $1,150 for 2017 ($1,000 prior), and $1,150 for 2018 ($1,050 prior).

With higher prices, analysts now believe miners are well positioned to generate superior market returns.

Discussing impact for miners, analyst Andrew Quail said, "We expect gold miners’ EBITDA margins to rise over 4% on average over the next 12 months, driven by rising gold price. Mining consumables deflation is widespread, and FX and energy tailwinds continue to positively impact miners’ bottom lines. Since 2012, gold miners have successfully lowered their cash costs by 30% on average to adapt to the lower gold price environment. For many companies this was a survival tactic, while for others it was necessary to unwind the bloated cost bases built over the last upward gold cycle. Now, it's a different story."

"Ultimately, we still prefer miners with volume growth, low costs, strong balance sheets and low geopolitical risk exposure that generate superior FCF and EBITDA growth. For valuation purposes, we move to EV/EBITDA from adjusted FCF (CFO-sustaining capex), as going forward we believe that it will be more difficult to differentiate between sustaining and expansionary capex, a fundamental driver behind our methodology. We note that this will also enhance our ability to compare equities across different commodities," added the analsyt.

The updated view prompted Goldman Sachs raise its rating on Newmont Mining (NYSE: NEM) to Buy from Neutral with a price target of $36.

Commenting on the change, Quail said, "With organic growth from Merian (c.15% of EBITDA) now less than 6 months away and a possible asset sale in Indonesia on the horizon, we believe NEM is well positioned to outperform on our revised price deck. In our view, NEM has the financial flexibility (ND/EBITDA set to dip below 1.0x by year end) to undertake some its highly prospective organic growth projects over the next 12 months."

Goldman Sachs also lifted its rating on Kinross Gold (NYSE: KGC) to Neutral, downgraded Franco-Nevada (NYSE: FNV) to Sell, and cuts its rating on Goldcorp (NYSE: GG) to Neutral.

Discussing Franco-Nevada's sell rating, the analyst said, "To be clear, this is a relative call. In a more favorable gold price environment, we believe the royalty streaming business model could potentially underperform the operators given the lower operating leverage they inherently possess. FNV is also trading 65% above its long-term average on EV/EBITDA, and at a 70% premium to its royalty streamer peer group (SLW, RGLD). "

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