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Financial discipline is the key message at Denver Gold Forum - analysts

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(Kitco News) - As gold prices trade above $1,500 an ounce, gold miners are seeing some of their best margins in nearly three years and as many companies celebrate at this year’s Denver Gold Forum, some analysts are warning them not to get too carried away.

Last week the Bank of Montreal (BMO) increased its forecast for gold and silver and in a follow-up report said that the higher gold prices have lent to an average 100% improvement in 2020 year-end earnings for the precious metals equities under the bank’s coverage.

Andrew Kaip, precious metals analyst at BMO Nesbitt Burns, who authored the report, said that higher gold prices have boosted cash flow estimates by 21%; at the same time, net present value (NPV) estimates have risen on average 13%.

“Given our view that gold and silver are likely to trade for a sustained period above our long-run equilibrium, we believe the risk is to the upside for gold equities,” he said in the report. “No matter what way we look at it (P/NPV, P/CF or implied gold price analysis) we see further upside.”

However, the mining sector’s previous bad behavior in the 2011 gold rally is still weighing on investor sentiment, the bank warned.

“There is an overwhelming view amongst investors that if gold and silver prices stay or rise above current levels, the precious metals miners will go back to their bad practices and squander margins,” Kaip said.

“That said, we are of the view that precious metal miners have addressed a number of these criticisms – today precious metal miners are in a more sound financial position, debt levels are low and continue to decline,” he added.

Heading into the Denver Gold Forum, Kaip said that companies need to present a united message of discipline to investors.

The message of fiscal discipline is also being promoted among a prominent group of mining investors. Last week, The Shareholders Gold Council, the brainchild of famed investors John Paulson, the founder of Paulson & Co. released a report that said that if gold producers could reduce their governance and administration (G&A) budgets, it could potential unlock $13 billion in shareholder value.

“The inescapable conclusion of our analysis is that gold producers are significantly mismanaged from a G&A perspective and that management teams and boards need to immediately explore ways to reduce excessive spending levels,” the SGC said in the report.

“The senior group of gold producers spend nearly 2.0x as more than other comparable other non-gold producing miners while the single-asset producers spend 2.4x more and the multi-asset producers spend 3.0x more than non-gold miners,” the report added. “There is no justification for why gold miners spend more than non-gold miners from a G&A perspective.”

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