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Credit Suisse: P/NAV suggests room for more upside in gold-mining stocks

Credit Suisse sees more room for upside in gold-mining stocks based on the ratio of stock prices to net asset value (P/NAV), as well as an expectation that gold prices will rise some more.


Valuation multiples are still below where they were in the last bull cycle for the gold market, Credit Suisse said.


“This trend is more pronounced for mid-cap/intermediate gold stocks, as large-cap/senior gold stocks have re-rated more quickly with generalist inflow,” the bank said.


For companies that Credit Suisse covers in North America, the average P/NAV is currently around 1.80 times, compared to around 2.25 during the previous peak. Average P/NAV for intermediate gold producers, with annual gold production below 1 million ounces, is currently around 1.19 times, compared to around 2.34 during the previous peak. Average P/NAV for senior gold producers, who exceed 1 million ounces a year, is currently around 2.11, compared to 2.31 during the previous peak, Credit Suisse reported.


The bank said it studied P/NAV since it is considered the standard valuation multiple for the gold sector. NAV estimates can vary due to the assumptions used, such as gold price, mine life, capital expenditures and more, so Credit Suisse said it went with “historical consensus” NAV in its research.


Credit Suisse said “there is a runway for gold to reach all-time highs” due to the “unprecedented” macroeconomic backdrop, which includes accommodative monetary policy with unlimited quantitative easing from the U.S. Federal Reserve, low bond yields, potential for a weaker U.S. dollar and eventual inflationary pressures. As of 9:49 a.m. EDT, spot gold was at $1,724.50 an ounce, still a ways below the peak above $1,900 an ounce back in September 2011.


“As this expectation for higher gold crystallizes in the near term, we expect gold equities to continue to re-rate higher and potentially return to average multiples seen in 2011/12,” Credit Suisse said.


Analysts noted that there is increased investor focus on free cash flow (FCF) and returning capital to shareholders.


“Therefore, there is potential for stocks to trade higher not only on a P/NAV re-rating, but also on a P/CF, P/FCF, and/or FCF yield re-rating,” Credit Suisse said.


With a backdrop of higher gold prices, companies tended to be profitable in the first quarter, especially since many had cut costs and debt after the downturn in gold prices that began in 2011. For the January-March time period, companies tended to show improved cash flow from a year ago, and many are paying dividends.


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