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BMO ups gold, silver forecasts, does not expect 'bad behaviors of the past' from producers

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(Kitco News) - Loose monetary policy around the world bodes well for precious metals, said BMO Capital Markets Friday in updating its gold and silver forecasts. However, analysts also said they look for gold companies to increase free cash flow and not return to the “bad behaviors of the past.”

BMO said it was hiking its previous 2020 gold forecast by 5% to an average of $1,732 an ounce for the full year. Analysts said they upped their 2021 to 2024 price expectations by 4% to 8% and also hiked their “long-run forecast” by 17% to $1,400 an ounce from $1,200 previously.

“Often, what is bad for the world is good for gold,” BMO said.

In this case, the global COVID-19 pandemic has meant massive liquidity was pumped into the global economy to counter the economic damage, analysts explained. Government bond yields tumbled and real interest rates are negative in many areas.

“We see this environment as highly supportive of gold prices, even without factoring in the potentially more fragile geopolitical risk environment which often results from economic downturns,” BMO said.

Further, global exchange-traded-fund holdings of gold are on pace for their largest annual inflow ever in 2020, the bank said.

In the case of silver, BMO said it upped its 2020 forecast by 2% to a full-year average of $17.60 an ounce, with the outlooks for 2021 to 2024 increased by 2% to 6%. The bank’s “long-run” price view was increased by 6% to $18.25 from $17.25 previously.

BMO analysts said they do not take changes in the long-term outlooks lightly and the bank’s price assumption had been static since 2015. In fact, BMO said, producers themselves have tended to maintain price assumptions lower than actual prices as they show discipline. These revised forecasts have an impact on BMO’s outlooks for various producers, including target prices of their stocks.

“After raising our long-term pricing estimates, our target prices rise by around 20%, with more levered (either through higher costs or through higher debt loads) companies faring best,” BMO said. “Our NPV [net present value] estimates increase for over 30% for the group. As a general rule, companies with higher base-metals exposure tend to fare worse than their peers, but the trend is still positive.”

In particular, after its price revisions, BMO said it was upgrading Kirkland Lake Gold to “outperform” from “market perform,” while downgrading Osisko Royalties to “market perform” from “outperform.”

Meanwhile, analysts said they do not expect a repeat of the past bull market in gold, when many investors were critical of some of the actions taken by gold producers. When gold was soaring a decade ago, mining companies were criticized for taking on too much debt and racing to see who could produce the most ounces, such as acquisitions, rather than focusing on profitability and returns to shareholders.

“We are not anticipating that an elevated gold price will drive a return to the bad behaviors of the past, or at least not to a widespread extent,” BMO said. “Growth for growth’s sake has been shunned by investors and management teams alike. Costs are expected to remain relatively stable as low fuel prices and a strong U.S. dollar aid in maintaining cost bases.”

With rising prices, the bank expects a “definite upward trend” in free cash flow for gold-mining companies, even the smaller ones.

“With so many gold producers generating free cash flow, it seems likely that the market may start to look to these companies as good businesses, rather than just leveraged ways to invest in gold,” BMO said. “This can only bode well for asset allocation to the space.”

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