Gold Sector: Time to take a breather (take profits) Investec Securities In a gold sector report earlier this year (Leverage like leverage used to be, 25 June 2012) we lifted all of our gold company recommendations to Buy, on the basis that the gold bullion price would increase and gold equities would outperform.

Gold equities have indeed performed well, appreciating by an average 28% since then.

Whilst we are raising our estimates and price targets, given the sector’s outperformance, we now recommend that investors take profits at current levels, on the basis of buying again at lower levels. ¢ Raising our Gold Price Assumption: We recently increased our forward gold price assumptions as part of our quarterly commodity price review.

While our revised prices include some significant increases relative to prior assumptions, they reflect mainly a delay in the rate at which our gold price assumptions recede to the long-term price, rather than aggressive pricing above the spot price (currently c.US$1,750/oz).

In addition, we have increased our long-term price by 8% to US$1,350/oz, reflecting what we believe is the average inducement price for new operations, when considering the all-in costs of production. ¢ Company estimates upgraded: Our increased gold prices have a significant impact on earnings, particularly in years 2013 and 2014, which saw the largest lift in price assumptions.

FY13E EBITDA for the large UK-listed African producers RRS, ABG and CEY has increased by an average 22%.

The highest-cost (and therefore most leveraged) ABG benefited the most with EBITDA up 27%, while the lower-cost RRS saw the least benefit, albeit still up 19%.

Our estimated FY14E EBITDA has increased by an average 31%, with all three producers seeing similar increases. ¢ Recent outperformance means ratings cut: Whilst we have revised upwards our earnings estimates and valuations on the basis of the higher gold price assumptions, given the outperformance of the sector, the upside to our new targets is quite modest.

As a result, we are reducing our recommendations for RRS and CEY to Hold (we had already reduced ABG to a Hold in an earlier research note). ¢ Long Term fans of gold – but see short term profit taking: We believe that the macroeconomic environment remains supportive of gold and we remain positive on gold in the medium term.

In the short term, however, we have passed through what is historically the strongest period of gold price appreciation.

Having benefited from the recent share price increases we recommend that investors take profits at current levels, on the basis of buying in again at lower levels.

¢ Valuation basis: Our target prices are an equal blend of NPV (run at a flat US$1,600/oz gold price) and average one-year forward earnings multiples (PER and EV/EBITDA).

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