Gold miners have been an unhappy hunting ground for investors over the past three years, but with concerns over the high values of stock markets globally, UBS suggests the sector’s appeal is growing.
The Swiss broker believes that if the turbulence increases, gold's role as a portfolio diversifier/tail risk hedge has potential to become increasingly relevant.
More to the point, after the three years of retrenchment and cost-cutting the miners themselves are in a better position to take advantage, it says.
“Assuming the gold industry does not revert to pursuing growth over returns, maintains strong cost discipline and the gold price increases, we believe the sector could be in a strong position to offer what, arguably, it should have offered during the 2000s – expanding margins, increasing FCF [cashflow] and genuine leverage to gold price upside.”
The broker concedes that if gold price does not pick up from the current price of around US$1,100, share prices in the sector are unlikely to recover much.
But for those of a gloomy disposition who believe the gloomsters predicting a cataclysm ahead for the global economy, there is plenty of upside potential adds UBS.
At present, mining share valuations point to a price around 10% above the current spot price, but a $200/oz increase in gold from $1,100-1,300/oz increases the net present value of European gold miners by 80% and underlying earnings by 40%.
UBS explains that during the gold upturn of the 2000s, the primary focus for most gold miners was growth, with increasing unit costs, negative cash flow and higher debts.
It caused a significant erosion of value and underperformance of gold equities against the gold price.
Now, after the recent heavy cost-cutting and significant benefits from currency and oil price weakness, the majority of the listed global gold universe can now generate cash at the current price of US$1,100.
Of course, the price may go lower still and a number of commentators expect that, but the uncertain start to financial 2016 has also seen some more bullish predictions for the gold price.
Of the companies themselves, UBS picks Africa specialists Randgold (LON:RRS) and Acacia (LON:ACA).
Randgold offers the highest-quality/lowest-cost European gold exposure, but its positive operating momentum (volume and unit costs) in recent years is waning.
Acacia disappointed in 2015 but can deliver higher production and lower unit costs over the next 12 months nad has re-rating potential.
Elsewhere, Fresnillo (LON:FRES) needs a silver price revival, while Polymetal (LON:POLY) has Russian political risk.