“We continue to remind investors that the current gold price still allows for healthy margins and free cash flow for almost all the producers in our coverage. On top of that, balance sheets have never looked better and H2/21 is expected to be stronger than H1 production-wise,” said Fahad Tariq, precious metals analyst at the bank. “We think even if gold stays flat or declines slightly from current levels, gold equities still look attractive on valuation. With still strong margins and higher production in H2, we expect more announcements of higher dividends and increased pace of buybacks.”
The comments come as the mining sector prepares for its second-quarter earnings season.
Not only does the price of gold provide plenty of support for mining equities, but Tariq noted that the sector is relatively undervalued. He said that the industry is currently trading at about 1.3x its price to net asset value (P/NAV). Historically, the sector trades at about 1.8x P/NAV.
“The current average implied gold price in valuations, based on our models, is ~$1,540/oz, a clear discount to spot. From a broader metals perspective, we see more near-term upside and re-rating potential for gold producers than copper producers,” he said.
Tariq said that his firm’s top picks in the mining sector are: Agnico Eagle, Barrick, Endeavour Mining, Kinross, Newmont, and Yamana Gold.
Despite Credit Suisse’s positive outlook, the mining industry struggles to attract investor attention and capital. The VanEck Vectors Gold Miners ETF (NYSEARCA: GDX), which tracks the world’s top gold producers, is currently trading at $34.85, down 7% from the start of the year, relatively in line with the drop seen in the gold price.
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