The big spike in upgrades marks a significant turnaround in market views about the outlook for gold in a world wherein one third of global government bonds are yielding negatively, and with central banks expected to pull down cash rates further towards zero.
The higher price outlooks for bullion reflect positively on Australian gold miners. Stocks that had looked egregiously overbought only a few weeks ago, suddenly looked “attractive” again post pull back and with analysts revising their forward-looking numbers.
In between, the tsunami in upgrades for mostly small cap gold producers, we find the occasional upgrade for Goodman Group, Ramsay Health Care (twice), and Mirvac Group (twice).
On the negative side, two downgrades out of the five shifted to Sell, with Sims Metal Management and Vicinity Centres the unlucky receivers.
A ginormous increase for Myer means the week’s top 10 table for positive revisions to earnings estimates does not have a gold producer on top, while nickel exposures Western Areas and Independence Group make sure the first gold producer, Evolution Mining, is only found on spot number four.
The short-term outlook for equities remains dominated by macro factors, including bond yields correcting from over-exuberance and security risks for global energy supplies, while out-of-season corporate results releases are continuing.
Apart from selective mining segments, such as gold and nickel, the underlying trend for earnings estimates in Australia remains negative.
In the good books
ALACER GOLD CORP (AQG) was upgraded to Outperform from Underperform by Macquarie B/H/S: 3/0/0
Macquarie’s commodity strategists have updated gold price forecasts. The revised forecasts envisage a correction early in FY20 and a peak in late FY20 of US$1650/oz. Long-term assumptions are upgraded 11% to US$1400/oz. The new price deck drives material upgrades to earnings estimates for all gold stocks under coverage. Rating is upgraded to Outperform from Underperform. Target is raised to $7 from $6.
EVOLUTION MINING LIMITED (EVN) was upgraded to Outperform from Underperform by Macquarie and to Neutral from Sell by Citi B/H/S: 1/4/2
Following updated gold price forecasts by Macquarie’s commodity strategists (see Alacer Gold upgrade above), the broker retains a preference for the greater leverage in growth but understands the attraction of the superior margins being offered by Evolution Mining. Rating is upgraded to Outperform from Underperform and the target raised to $5.40 from $4.20.
Commodities analysts at Citi this week revised their price forecasts for gold bullion, now predicting US$2000/oz in the medium term should be regarded as a genuine possibility. In response, analysts in Australia have upgraded their views on domestic gold companies. Evolution Mining is hereby upgraded to Neutral from Sell. Target price lifts to $4.70 from $4.20.
GOODMAN GROUP (GMG) was upgraded to Buy from Neutral by UBS B/H/S: 3/1/1
UBS believes there are enough structural developments to overcome global economic uncertainty. Going forward, the company’s portfolio strategy should mean a high level of sustainable performance fees. In FY19 Goodman Group generated $600m in development profits, expected to drive performance fees later on. UBS estimates development gains will generate roughly one third of performance fees over the medium to long term. The broker upgrades to Buy from Neutral, maintaining a steady target of $15.60.
GOLD ROAD RESOURCES LIMITED (GOR) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/0/0
Target is raised to $1.60 from $1.40 following updated gold price forecasts by Macquarie’s commodity strategists (see Alacer Gold upgrade above).
MIRVAC GROUP (MGR) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 2/1/1
Credit Suisse reiterates a positive view on the quality of the company’s office portfolio, expecting that operating income growth will be healthy and derived from rent reviews and the rolling out/completion of the commercial development pipeline. The sustainability of distribution growth is also well supported by recurring revenue streams and a low pay-out ratio. Rating is upgraded to Neutral from Underperform. Target is steady at $3.04.
NEWCREST MINING LIMITED (NCM) was upgraded to Neutral from Sell by Citi and to Neutral from Underperform by Macquarie B/H/S: 0/3/3
Newcrest Mining was upgraded to Neutral from Sell by Citi after the broker’s commodities analysts revised their price forecasts for gold bullion (see Evolution Mining upgrade above). Target price increases to $36.90 from $31.05.
While upgrading to Neutral from Underperform, Newcrest is Macquarie’s least preferred gold stock because of declining production. Target is raised to $35 from $24.
NORTHERN STAR RESOURCES LTD (NST) was upgraded to Buy from Neutral by Citi, to Outperform from Underperform by Macquarie and to Neutral from Sell by UBS B/H/S: 2/1/2
Northern Star was upgraded to Buy from Neutral by Citi after the broker’s commodities analysts revised their price forecasts for gold bullion (see Evolution Mining upgrade above).. Target price lifts to $13.30 from $11.50.
Macquarie flags Northern Star as an “unashamed growth story”. Rating is upgraded to Outperform from Underperform. Target is raised to $14.20 from $10.00.
Northern Star has the most near-term production and earnings momentum of the gold stocks under coverage, UBS assesses. Production is expected to grow to 884,000 ounces in FY20 and towards an aspirational target of over 1m ounces per annum. The main component in the turnaround will be Pogo. Pogo has declared a maiden reserve of 1.5mt and 7.5g/t. UBS upgrades to Neutral from Sell and raises the target to $11.50 from $10.00.
OCEANAGOLD CORPORATION (OGC) was upgraded to Buy from Neutral by UBS and to Buy from Neutral by Citi B/H/S: 4/1/0
The business is highly leveraged to the gold price, yet the shares have not rallied with the sector because of recent operating and regulatory issues. UBS notes the share price has declined -29% in 2019 to date. A cessation of mining at Didipio in the Philippines remains the biggest headache for the company, although lower-grade stockpiles are still being processed. UBS does not believe the share price is factoring in much value for Didipio but upgrades to Buy from Neutral as the stock is considered fair value based on the value of the NZ and US assets. Target is reduced to $4.00 from $4.40.
OceanaGold was upgraded to Buy from Neutral by Citi after the broker’s commodities analysts revised their price forecasts for gold bullion (see Evolution Mining upgrade above). Target price climbs to $4.85 from $4.45.
PERSEUS MINING LIMITED (PRU) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/2/0
Rating is upgraded to Outperform from Neutral following updated gold price forecasts by Macquarie’s commodity strategists (see Alacer Gold upgrade above). Target is raised to $0.90 from $0.80.
RAMSAY HEALTH CARE LIMITED (RHC) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/6/0
Since the beginning of August, the stock has underperformed the healthcare sector by -11% and the broader market by -9%, Credit Suisse observes. While maintaining a negative stance on the Australian private hospital industry and assessing margins & returns to be diluted by recent offshore acquisitions, the broker suggests the current price reflects this and there is no longer a catalyst for a de-rating. Rating is upgraded to Neutral from Underperform. Target is steady at $65.
REGIS RESOURCES LIMITED (RRL) was upgraded to Neutral from Sell by Citi, to Buy from Sell by UBS and to Outperform from Underperform by Macquarie B/H/S: 2/1/2
Regis Resources was upgraded to Neutral from Sell by Citi after the broker’s commodities analysts revised their price forecasts for gold bullion (see Evolution Mining upgrade above). Target price increases to $5 from $4.70.
UBS upgrades to Buy from Sell, taking a new valuation approach and given the -5% decline in the share price over 2019. The company has not shared in the rally from the 20% increase in the Australian dollar gold price. The business generates cash and has relatively low operating risk. While economics at Duketon are becoming more challenging and there is risk of a delay at McPhillamys, UBS believes this is more than fully captured in the share price. Target is raised $5.30 from $4.85.
Macquarie upgrades to Outperform from Underperform following updated gold price forecasts by Macquarie’s commodity strategists (see Alacer Gold upgrade above). Target is raised to $5.60 from $5.10.
SARACEN MINERAL HOLDINGS LIMITED (SAR) was upgraded to Outperform from Underperform by Macquarie and to Neutral from Sell by Citi B/H/S: 1/1/0
Macquarie retains a preference for the greater leverage in growth and upgrades Saracen Mineral to Outperform from Underperform. Target is raised to $4.30 from $3.30.
Saracen Mineral was upgraded to Neutral from Sell by Citi after the broker’s commodities analysts revised their price forecasts for gold bullion (see Evolution Mining upgrade above). Target price has gained 10c to $3.65.
ST BARBARA LIMITED (SBM) was upgraded to Neutral from Sell by Citi and to Outperform from Underperform by Macquarie B/H/S: 1/1/1
St Barbara was upgraded to Neutral from Sell by Citi after the broker’s commodities analysts revised their price forecasts for gold bullion (see Evolution Mining upgrade above). Target price remains unchanged at $3.00 despite increased forecasts.
Rating is upgraded to Outperform from Underperform following updated gold price forecasts by Macquarie’s commodity strategists (see Alacer Gold upgrade above). Target is raised to $3.50 from $3.00.
In the not-so-good books
BLUESCOPE STEEL LIMITED (BSL) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 3/3/0
The recent strong performance from BlueScope Steel has been contrary to a deterioration in steel spreads, trade concerns and scrap pricing/demand. As a result, Ord Minnett, noting the full valuation and falling price momentum, downgrades to Hold from Accumulate. Target is steady at $14.
SIMS METAL MANAGEMENT LIMITED (SGM) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 2/2/1
The recent strong performance from Sims Metal has been contrary to a deterioration in steel spreads, trade concerns and scrap pricing/demand. As a result, and amid heightened macroeconomic risks, Ord Minnett downgrades to Lighten from Hold, reducing the target to $10.50 from $11.00. The broker believes the recent appreciation in the share price is unjustified. Non-ferrous automobile shred, called twitch, is now priced at multi-year lows of US$0.39/lb.
Earnings forecast
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
