The price of gold remains restrained in the new year, although analysts generally agree that the setup for the yellow metal is positive. RBC Capital Markets analysts noted that policy is very accommodative, but any signs of economic growth could change it.
Positive Outlook For gold In 2021
Analyst Josh Wolfson and his team noted that the prospect of more stimulus under Joe Biden's administration is a tailwind for gold. It also yielded negative real rates globally. They expect interest rates to remain at zero until 2023, assuming a protracted recovery and low inflation.
However, the RBC team also said inflation expectations have climbed with the potential for additional traction appearing in the first half of the year. They also point out that nominal yields have lagged. Further, Wolfson and his team said the Federal Open Market Committee could eventually skew rates tighter than the baseline. They added that U.S. net speculative positions are heavily short.
Robust Setup For Gold Equities Too
Higher gold prices have resulted in record free cash flow and deleveraging among gold miners, however the RBC team said decision-making remains conservative among miners. Companies are also being responsible about their capital investment, and RBC feels that long-term production is sustainable.
One key theme for gold miners is the return of capital. Wolfson and his team said dividend yields are running 1.7%, which is sustainable down to a price of $1,350 an ounce for gold. They also said the valuations of miners do not reflect higher gold prices being sustained.
The RBC team looked at two gold stocks, in particular. They see Royal Gold (NYSE: RGLD) as an attractive, low-risk business insulated from inflation trends and direct operating risk. Wolfson and his team added that the company has a high EBITDA margin of 80% and high free cash flow conversion at about 90%. Royal Gold also has low dilution.
The RBC analysts forecast 13% growth for the company, driven by its Cortez and Penasquito, Koemacau development and the COVID rebound. They believe Royal Gold's output is sustainable until at least 2025. Wolfson and his team also said the company is well-positioned financially with $140 million in net cash, $1.14 billion in liquidity, and cash growth net of dividends of $350 million to $400 million at spot prices.
They have an Outperform rating and $150 price target on Royal Gold, and they describe its valuation as "highly attractive." The key risks are the competitive transaction landscape, potential changes in the U.S. tax law, and execution at Khoemacau.
The RBC team also likes Kinross Gold (NYSE: KGC). They said the company is a first-quartile cash flow generator that benefits from gold prices, the capital expenditures cycle, and margin improvement. Wolfson and his team also said Kinross Gold's risk profile has improved after the Mauritania fiscal update and its deleveraging cycle.
The company has a track record of favorable capital allocation and a history of achieving guidance. The RBC team has an Outperform rating and $12 price target on Kinross Gold, which they say is a discounted valuation. Risks improve above-average political risk exposure and project execution at Tasiast, Gilmore, and La Coipa.
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