Battle of the Brokers: Gold is in favour, but are you team Evolution or Northern Star?

Reporting season is on the horizon, with ASX gold miners in focus
Newmont is the obvious exposure for gold investors, but analysts have diverging opinions on the best of the rest
While Goldman likes Evolution, RBC prefers Northern Star

At US$2029/oz, gold prices may have taken a slight hit to start 2024.

But they remain so close to historic highs — the US$2078/oz briefly touched at the end of 2023 — the prospect of interest rate cuts from the US Fed later this year will have miners licking their lips that good times are here to stay.

Yet gold is, historically, a low margin business and returns are highly dependent on the quality of the orebody, exploration success, age of the operation, processing requirements, scale and the extent to which the producer is hedged at lower or higher prices than the current spot market.

And strangely enough, these metrics are valued differently by different analysts.

What is clear is that there is one, pure exposure at the top of the market if you want an equity that is leveraged pretty directly to the price of gold — the world’s biggest gold producer Newmont (ASX:NEM) which put daylight between it and its competitors by acquiring Australia’s biggest gold producer Newcrest in 2023 in the largest corporate deal in Australian mining history.

Below that are two big choices. High volume pure-as pure play goldie Northern Star Resources (ASX:NST) is the first. At a $15 billion market cap, the miner plans to produce 2Mozpa by 2026 and is the first to consolidate Kalgoorlie’s famous Golden Mile under one owner.

Then there is Evolution Mining (ASX:EVN). Similarly an upstart of the mid-2010s gold revival, $7.5b Evolution is smaller in stature with a production profile below 800,000ozpa. But it offers growing copper exposure as a natural hedge against weakness in gold, with its shares in the Ernest Henry and now Northparkes copper-gold ops also helping to offset its production costs.

Team NST or EVN

With production reports on the horizon, the big investment banks and brokers have reached out to their clients with their key picks on the Aussie gold space.

Both Goldman Sachs and RBC are positive on the gold price. GS sees prices rising to US$2182/oz by the fourth quarter with RBC expecting bullion to pay US$2075/oz at the same time.

But both have different ideas on how to play the theme.

Goldman is team Evolution.

“Of the larger cap names EVN (Buy) remains our preference to NST (Neutral) on near-term FCF, where while NST briefly traded at a discount on P/NAV, recent performance/EVN’s acquisition/raise see EVN with a higher TSR,” analysts led by Hugo Nicolaci said.

They see EVN having stronger near term free cash flow on commodity assumptions (Goldman is big on copper), with GS also 10% above consensus on the sustaining capex at Northern Star’s operations.

On the other hand, RBC has an underperform rating on Evolution and buy on Northern Star. While RBC has increased its price target to $3 a share on higher copper prices, it sees big risks at the Red Lake mine in Canada where Evolution has been struggling to engineer a turnaround for a number of years.

“We find potential risk that Red Lake tonnage does not meet market expectations. An updated Ernest Henry Resource could be released,” analyst Alex Barkley said.

“Also we remove the Red Lake expansion to 1.8Mtpa (current 1.1Mtpa) from our forecasts, with our site value falling 26cps to 48cps. We see potential for an asset write-down at the February HY or August FY result.”

At the same time, they expect a stronger performance for Northern Star in the December quarter than September term.

“Production and AISC should be sequentially better than a mill shut affected Q1,” Barkley said.

“In Q2, we do not expect major issues at any sites. This should see the diversified group produce one of the more assured Q2 results among our gold coverage.

“Versus consensus, we do expect Q2 AISC could come in slightly high.”

Lessons for investors

But investors may best be careful to not react too strongly to individual quarterly results as they emerge over the next couple of weeks.

The lessons of a series of guidance disappointments which prompted selldowns last year was that they came ahead of big rallies for major gold producers.

“Top DecQ performers in our coverage were RRL (+44%), SLR (+39%) and NST (+26%). All were sold off following FY24 guidance, but all had decent Q1s. This highlights the importance of avoiding negative guidance shocks, and also the opportunities available thereafter,” RBC’s Barkley said.

“The market has been quick to capitalise on downward guidance revisions – even if a company has a strong operating record and better earnings quality – as is the case for NST and SLR.”

Analysts typically look to valuation measures like EV/EBITDA ratios and proportion of net asset value to guide their calls.

Outside of the major players, RBC remains supportive of De Grey Mining (ASX:DEG), owner of the $1.3 billion Hemi project in WA’s Pilbara, new producer Bellevue Gold (ASX:BGL), Silver Lake Resources (ASX:SLR) and Regis Resources (ASX:RRL), holding outperforms on the lot.

Along with Evolution it rates Gold Road (ASX:GOR), which could disappoint with CY2024 guidance at its Gruyere gold JV in WA after the site just scraped the lower end of its 320,000-350,000oz guidance last year at 321,978oz, as an ‘underperform’.

“Over 4Q23, A$ gold has increased ~5% but our coverage increased ~20%. Combined with cost increases, this has lifted valuations closer to fair. Our coverage P/NAV is 0.97x and earnings multiples are closer to recent averages,” Barkley said.

“However, we still find pockets of value with positive catalysts. For Q2 FY24 results: NST should be relatively safe, SLR has pre-reported strongly, and any DEG update is likely to be positive. RRL and BGL have operating/project risks; but both skew to the positive. The biggest downside risk is GOR’s CY24 guidance.”

Goldman’s picks

On the other hand Goldman continues to rate GOR a buy, along with De Grey.

But it’s neutral on NST and Capricorn Metals (ASX:CMM) and lowered its rating on the resurgent RRL to neutral in last week’s update.

“With RRL’s low priced gold hedges now closed, we see more limited near-term catalysts for the stock, with double-digit FCF yields now more priced in on a P/NAV basis, and downgrade RRL to Neutral,” Nicolaci and Co. said.

“Since we added RRL to our Buy list on 3 July 2023, RRL’s share price has risen ~13% vs. the ASX 200’s up ~3%, gold peers up ~8%, and US$/A$ gold prices up c. 7%/6% over the same period.”

As always costs will be a focus for gold miners in the December quarter. GS says mining costs for open pit and underground have softened in the past 12 months, though costs were up overall in the September quarter because underground volumes were rising.

However, processing costs have lifted in the order of $25/t in the past 12 months, they said.

“Sector average gold grades have picked up with new mines, though feed grades have softened with lower grade stockpile drawdowns,” they said.