The Australian gold sector has performed spectacularly this year.

The Australian gold sector has performed spectacularly this year. Photo: Jim Rice

The Australian gold sector has performed spectacularly in 2015, far in excess of the gold price, and the bull run may have further to go.

Companies including Newcrest, Northern Star and Evolution Mining have made big gains this year and, in the short term at least, could go even further.

This year, the price of gold has dropped slightly, from $US1187 an ounce to $US1177. However, the Australian gold miners index has risen nearly 50 per cent, from 2047.4 to 2992.1, with nearly all of those gains occurring since August.

Newcrest is one example of strong recent gains. In mid-September it was still trading at only $11, the same price it was at in January. It’s now at $14.97. 

Northern Star is another performer for 2015, rising from $1.49 to $3.04. Evolution Mining is another, rising from 60¢ to $1.52. 

The gold price has risen in the past month from around $US1100 to its current level of $US1177 with the realisation that the US Federal Reserve might delay its hiking cycle, and this has helped the sector.

Boost for the sector 

“The whole gold sector has come back into fashion because the rate lift-off timing has been delayed,” said Deutsche Bank analyst Brett McKay.

“If you look at US gold equities, they’ve all risen quite strongly as well and most of our performance has been on the back of that performance. It tends to follow the lead of the US dollar gold sector.”

But Mr McKay said the reason Australian gold stocks had outperformed the gold price over the past year was their cash performance.

“It also comes down to the amount of cash they’re generating at the moment. There aren’t many companies that are generating as much cash as the Australian dollar gold sector at the moment. They’ve come into favour because of the amount of free cash that they’ve generated.”

“The guys that have got good balance sheets have got big cash piles and Northern Star is a good example. You’re getting the opportunity to participate in higher dividends. That’s the appeal really. It’s all about cash and cashflow at the moment rather than valuation.”

All about cash and cashflow

Chris Conway, head of research at the  Australian Stock Report, said the short-term direction for gold was up. “Amid US dollar weakness and signs of tame global inflation, weakening the case for a Fed rate hike, further gains are expected as the market continues to price in a Fed rate hike by mid-next-year at the earliest.”

Consequently, the group put a buy recommendation on Evolution Mining. “Evolution’s pre-released September quarter report showed higher production and lower costs than previously forecast,” said Mr Conway. “Financial year 2016 guidance should easily be beaten and management will review in January. Strong cash flow is allowing Evolution to rapidly repay debt and the stock offers excellent leverage to the Australian dollar gold price.” 

Deutsche Bank, however, was less bullish on the future of the gold price. Last week it increased its Evolution Mining price target to $1.40 a share, from $1.30, but downgraded the gold miner to “hold” on valuation.

Deutsche rated all Australian gold companies a hold or buy except Newcrest. “We’ve had a sell on Newcrest for years. It’s always looked pretty stretched from a valuation point of view,” said Mr McKay.

In particular, Newcrest’s troubled Lihir project in Papua New Guinea “remains very challenged and probably will do for years to come”, he said. 

Mr McKay said it was inevitable that the sector would quieten off a little bit.

“You look at the valuations and the way these things are run, I think it’s time for a breather myself.

“We have the gold price weakening from here by roughly $US100.” 

Deutsche rated Independence, OceanaGold, Orocobre, Sandfire, Syrah and Western Areas a buy; Alacer, Evolution, OZ Minerals, Regis Resources, and St Barbara were rated a hold.

Mr McKay tipped a long-term cooling-off of the gold price to $US1100 per ounce in June 2016, $US1050 per ounce in June 2017 and $US1045 in June 2018.