Gold and Precious
Metals
When the going gets tough
Despite the pullback in gold equities, we see risk of
further de-rating triggered by reserve downgrades
and weak cash flows. Randgold (OW) looks well
positioned to continue to outperform in the current
environment, while ABG (EW) faces heightened
risks and has limited scope to raise returns.
Randgold well positioned to outperform in current
environment: RRS operates high-quality assets that
are still capable of generating substantial cash flows
(albeit diminished) in the current gold price environment.
We expect total all-in cash costs to be c.US$875/oz in
2013. The company conservatively maintains a solid
balance sheet and could sustain a net cash position
while fully funding its growth capex through 2014. We
expect an FCF yield of 7% in 2015 at current spot prices
and anticipate minimal changes to mine plans given the
conservative measurement of reserves at $1,000/oz.
ABG faces heightened downside risks: We expect
all-in cash costs to be c.$1,245/oz in 2013, which would
pose significant risks to cash generation if current prices
persist. Cash flow would not be sufficient to maintain
dividend payments at 2012 levels, capital spending
requirements (despite being optimized) would reverse
the company’s broad net cash position as early as this
year. Furthermore, ABG uses a $1,500/oz gold price to
measure reserves, so faces a higher likelihood of
reserve downgrade and life-of-mine reduction. That said,
ABG has the highest gearing to the gold price (we
estimate a 1% change = 1% improvement in FCF yield).
Valuation: modest upside for RRS, not enough
safety margin for ABG: RRS trades on 16x 2014e spot
P/E (vs. 3-year average of 17.5x) and an EV/Reserve
value (i.e. EV/(reserve ounces x spot gold price) of $0.3,
the lowest in the last 5 years. This compares to ABG,
which is trading on a 2014e spot P/E of >30x, which
does not reflect the higher risks of potential reserve and
life-of-mine downgrades. We remain EW on ABG, but
cut our PT to £1.0 (6% downside). We stay OW
Randgold, retaining it as our long-held relative gold pick.
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Metals
When the going gets tough
Despite the pullback in gold equities, we see risk of
further de-rating triggered by reserve downgrades
and weak cash flows. Randgold (OW) looks well
positioned to continue to outperform in the current
environment, while ABG (EW) faces heightened
risks and has limited scope to raise returns.
Randgold well positioned to outperform in current
environment: RRS operates high-quality assets that
are still capable of generating substantial cash flows
(albeit diminished) in the current gold price environment.
We expect total all-in cash costs to be c.US$875/oz in
2013. The company conservatively maintains a solid
balance sheet and could sustain a net cash position
while fully funding its growth capex through 2014. We
expect an FCF yield of 7% in 2015 at current spot prices
and anticipate minimal changes to mine plans given the
conservative measurement of reserves at $1,000/oz.
ABG faces heightened downside risks: We expect
all-in cash costs to be c.$1,245/oz in 2013, which would
pose significant risks to cash generation if current prices
persist. Cash flow would not be sufficient to maintain
dividend payments at 2012 levels, capital spending
requirements (despite being optimized) would reverse
the company’s broad net cash position as early as this
year. Furthermore, ABG uses a $1,500/oz gold price to
measure reserves, so faces a higher likelihood of
reserve downgrade and life-of-mine reduction. That said,
ABG has the highest gearing to the gold price (we
estimate a 1% change = 1% improvement in FCF yield).
Valuation: modest upside for RRS, not enough
safety margin for ABG: RRS trades on 16x 2014e spot
P/E (vs. 3-year average of 17.5x) and an EV/Reserve
value (i.e. EV/(reserve ounces x spot gold price) of $0.3,
the lowest in the last 5 years. This compares to ABG,
which is trading on a 2014e spot P/E of >30x, which
does not reflect the higher risks of potential reserve and
life-of-mine downgrades. We remain EW on ABG, but
cut our PT to £1.0 (6% downside). We stay OW
Randgold, retaining it as our long-held relative gold pick.
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