🕐04.12.13 - 09:27 Uhr

INVESTEC: RUNNING OUT OF REASONS TO HOLD GOLD



[Description: http://investecsecurities.force.com/servlet/servlet.FileDownload?file=015G0000001c61yIAA] Running out of reasons to hold gold In an earlier sector note (Higher bullion price now needed to support the gold equities run, 10 September), we suggested that gold equities had rallied too far in response to the increase in the bullion price from its June lows.

Bullion has since fallen 10% and, while the equities have responded, their decline has generally been less pronounced.

This leaves them reliant on a gold recovery, a scenario looking increasingly less likely near term. * The gold price continues to face headwinds, most notable being the likely Fed tapering as the US economic outlook improves.

Consumer demand has helped offset the impact of ETF outflows but this too is at risk, as the Indian government continues to clamp down on physical gold imports as it attempts to reduce its trade deficit.

Meanwhile China is picking up the slack and the gold market is rapidly becoming increasingly reliant on it to support the price.

Our concern is that this may not be enough, especially against the Indian curbs. * The recent volatility in the gold price has resulted in a broad range in broker gold price forecasts, with Bloomberg data indicating that the forward high-low range of estimates now exceeds $500/oz.

The consensus average is, however, a modest variation on the current bullion trading range.

Investec is currently at the higher end of the broker consensus range, $60-100/oz above average. * The target prices for the larger African gold producers under our coverage, and therefore the investment recommendations, are based on an equal blend of NPV’s and three year forward earnings multiples.

Given recent share price movements, all else remaining the same, we have increased our recommendation on Randgold to a Buy. * Clearly, our target prices are dependent on our gold price assumptions, which currently incorporate a flat, US$1,400/oz gold price from the 2H14E.

This note includes a sensitivity analysis on our company target prices (TP) to various gold price assumptions (run flat, forever).

Centamin and Randgold display similar degrees of leverage, with their TP’s increasing approximately 15% for every $100/oz increase in the gold price (from our base case of $1,400/oz).

Due to its higher operating cost base, African Barrick’s leverage is significantly higher, with the TP increasing at near double the rate of the others, i.e., at approximately 38% for every $100/oz increase. * At current share price levels, we would need to assume a flat gold price of around US$1,450/oz for African Barrick to become a Buy.

Alternatively, at the current spot gold price of c.$1,250/oz, none of the above companies would be a Buy.

Our ongoing recommendations are therefore also reliant on a gold price recovery.
To access the full note please click here Analyst: Hunter Hillcoat +44 (0)20 7597 5182
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