Canaccord sees ongoing gold market support; releases preferred gold exposures
Gold and gold equities are likely to continue to enjoy a supportive environment, according to Canaccord Genuity (TSX:CF, LSE:CF) Precious Metals September quarter Preview and Commodity Price update.
The gold price continues to break all-time highs, gaining 13% in the September quarter to reach ~US$2,685/ounce in late September. Similarly, gold priced in Australian dollars has hit a new all-time high of A$3,936/ounce.
Quantitative easing to support gold
Canaccord says the price action was supported by a range of drivers, including increasing ETF inflows, rate cuts, a rising US debt stack and escalation of geopolitical conflicts.
There are differing views on the US rate outlook but bond market participants are pricing roughly six cuts for a 150 basis point reduction over the next 12 months.
Yet it's not just a US story as central banks including the ECB, Bank of Canada and Swiss National Bank have each begun quantitative easing.
Notably, gold and gold equities have consistently outperformed during quantitative easing cycles.
Further, supporting the gold price is the sharp increase in US debt levels, which now stand at US$35 trillion — up ~US$4 trillion over the past year.
The Congressional Budget Office recently raised its forecast for the US deficit to $2 trillion for 2024, or around 7% of GDP, with deficits expected to average 6.3% of GDP over the next decade.
Record prices don't mean record free cash flow
Canaccord cautions that there’s no guarantee that record high gold prices will translate to record cash flow, noting factors such as mill shutdowns, second-half production weightings and elevated capex will impact free cash flow for a number of producers, yet it says the September quarter results could still catch some by surprise.
In fact, Canaccord expects that less than 50% of the 19 gold producers it covers will produce meaningful free cash flow in the current quarter.
Compounding the outlook is the tendency for working capital normalisation in the September quarter, following reporting of full-year numbers at the end of June.
Perseus - strong free cash flow tipped
One company that Canaccord expects to produce strong free cash flow results in the current quarter is Perseus Mining Ltd (ASX:PRU, TSX:PRU, OTC:PMNXF), which “Continues to be in a production sweet spot ahead of capex spend on Nyanzaga”.
Perseus is currently focused on the development of the Nyanzaga Gold Project in Tanzania, which it plans to bring into production by Q1 2027.
It also continues to successfully operate its three existing West African mines, Yaouré, Sissingué and Edikan, which in FY24 produced 509,977 ounces of gold at a weighted average AISC of US$1,053 per ounce.
Canaccord has a ‘Buy’ recommendation and $4.15 target price on PRU — a 15% lift from its previous $3.60 target.
Predictive Discovery - speculative buy
Another of Canaccord’s preferred exposures across the producer and development space is precious metals explorer Predictive Discovery Ltd (ASX:PDI, OTC:PDIYF), of which Perseus Mining is a 19.9% shareholder.
In August, Perseus increased its interest in African gold and West Africa by making a strategic equity interest in PDI, which is focused on developing the Tier-1 Bankan Gold Project in Guinea with an ore reserve of 3.05 million ounces.
The Bankan Gold Project is the largest gold discovery in West Africa in a decade and has a growing resource base of more than 5 million ounces of gold.
Predictive’s strategy is to bring Bankan into production as well as discover and develop other potential deposits within its significant 356-square-kilometre licences in the Siguiri Basin, Guinea.
Canaccord has a ‘Speculative Buy’ recommendation on PDI and a $0.50 share price target, a 12% increase on its previous target of $0.45 per share.
What’s ahead for gold?
Canaccord increased its long-term US$ gold price by 9% to US$2,963/ounce and near-term estimates by an average of 10% (CY24-29) — in line with the current forward curve.
Easing cycles are broadly favourable for gold, with the last three easing cycles — the tech bubble, GFC and 2019/pre-COVID easing — providing material tailwinds for gold that resulted in average increases of 40% and up to 73% in the GFC, in the 12 months following the last rate cut.
The broker’s long-term foreign exchange rate remains unchanged, increasing A$ gold price estimates in line with US$ gold to A$4,232/ounce. Its long-term foreign exchange rate forecast remains unchanged, thereby increasing its A$ gold estimates in line with US$ gold to A$4,232/ounce.
For silver, Canaccord has lifted its long-term price by 5% to US$35.28/ounce.
The broker says company valuations remain relatively undemanding, particularly in the context of all-time high gold prices and expects “gold and gold equities will continue to outperform through 2024”.
As a group, they are trading at price/net asset values 0.65x, down from a historical average of 0.84x, and an average implied gold price of US$2,271/ounce, implying a 14% discount to spot.
Source: https://www.proactiveinvestors.com.au/