Look for quick rebound in gold and miners once COVID-19 crisis passes - CIBC
(Kitco News) - A continued uptrend in gold prices and healthy balance sheets will help mining companies weather the economic storm created by the spreading coronavirus, according to market analysts.
In a report Wednesday, mining analysts at CIBC said that signs of stability are starting to show in equity markets and now could be a good time to buy underpriced mining companies that were beat up as investors sold everything.
The analysts said that the mining sector looks attractive as gold and silver prices are expected to push higher due the unprecedented action by global central banks. Monday, the Federal Reserve launched an open-ended quantitative easing program. This past week gold has seen a strong rebound as prices tested resistance just below $1,700 an ounce Wednesday. While prices are off their highs they are still holding recently modest gains; April gold futures last traded at $1,637.20 an ounce, down 1.72% on the day.
“The current environment in 2020, with near-zero interest rates, market uncertainty and ongoing liquidity injections, provides a bullish set-up for gold and silver,” the analysts said. “As the dust settles, we would expect the rebound to be rather swift.”
The analysts noted that the relative value in the mining sector is compelling. They said that mining companies are currently trading at historically attractive multiples of around 0.90x P/NAV; before the coronavirus impacted the global economy, the valuation of gold stocks was around 1.2x P/NAV, they added.
The optimism comes as mining companies discard their production guidance as they are forced to shut down operations to comply with government lock-down orders. However, CIBC said that companies are in a good position to deal with the production shutdowns.
“Most of the companies in our coverage universe would likely be able to navigate a reduction to production levels with no significant strain on their balance sheets at current and lower gold commodity prices,” the analysts said.
Because of strong balance sheets, CIBC said that mining companies could withstand a 10% drop in gold prices coupled with a 10% drop in production for the second and third quarter. Looking at specific miners, the Canadian Bank likes Barrick Gold (NYSE: GOLD), Newmont Corp (NYSE: NEM), Wheaton Precious Metals (NYSE: WPM, TSX: WPM) and Franco-Nevada Corp (NYSE: FNV, TSX: FNV).
“We believe large, diversified, high-quality producers with strong balance sheets will continue to outperform,” the analysts said.