Gold stocks will continue to outperform, says Goldman Sachs

Goldman Sachs downgraded Gold Fields and Fresnillo as it took a look at gold producers, but kept its positive stance on AngloGold and Centamin, saying fully-covered dividends and sound balance sheets were a rarity in the mining sector.

It cut South Africa’s Gold Fields to ‘sell’ from ‘neutral’ saying the valuation was stretched following the recent rally in the shares.

It said that with South Deep potentially continuing to underperform and Australian mines nearing the end of life, Gold Fields is likely to need either significant capex to sustain the Australian mines or an acquisition – both of which could depress investor returns.

It cut London-listed Fresnillo to ‘sell’ from ‘buy’ to reflect the disappointing grade at the Fresnillo mine and the stock’s significant premium to both peers and its historical average.

“The Fresnillo mine continues to underperform on grade due to vein narrowing faster, natural decline in grade, and delay in infrastructure installation. Although the company is taking measures to counter the decline we see risks skewed to the downside.”

The bank kept its ‘buy’ rating on AngloGold and Centamin, although it removed the latter from its Conviction List after the recent rally.

It said the market under-appreciates Centamin’s low cost position and its ability to generate cash and potentially ramp up investor returns.

“Although we see limited imminent catalysts for the stock, we believe it still has another leg to move up as the market underappreciates its capacity to generate FCF from its low-cost asset, Sukari, and thus increase shareholder returns.”

Goldman was bullish on the sector in general. It noted gold has been one of the best performing commodities year-to-date in a risk-off market and given tightening financial conditions in the US, which have led market participants to scale back their rate hike expectations.

GS said gold stocks have already been through the pain of capex/cost cuts and balance sheet restructuring, whereas for industrials, the process is just beginning.

“We believe gold equities (even after the recent stretch of outperformance) should continue to outperform.”

At 0955 GMT, Centamin shares were down 1.6% to 84.55p while Fresnillo was down 4.1% to 911.29p.