Acacia, Polymetal hit by JPM downgrade

Early in March, Tanzania banned exports of gold/copper concentrate, a move that hit shares in Acacia, which generated around 30% of its revenues last year from the concentrate.

Although JPM acknowledged that Acacia remains one of the cheapest UK gold exposures, with near-term earnings multiples trading at more than a 50% discount to peers, it said the recent concentrate export ban highlights the risk of being exposed to a single jurisdiction.

As such, the bank reckons there are headwinds to the positive re-rating thesis until the market can re-gain comfort with Tanzanian risk and/or ACA can geographically diversify.

JPM noted that discussions continue with authorities to seek a resolution to the ban.

"At this stage, we make no changes to our base case forecasts although flag that under a scenario where the ban is immediately overturned the financial impact would be minimal, although a 'bear case' scenario could reduce pro-forma 2017/18 production around 35%/54% and around 35%+ to consensus EBITDA."

Within the UK gold sector, JPM retained a preference for Randgold Resources, which it rates at 'overweight'.

Its least preferred is Polymetal, however, which it downgraded to 'underweight' from 'neutral'.

JMP, which lifted the price target on the stock to 980p from 680p, said the shares have outperformed the Philadelphia Gold Index by more than 30% since June 2015 as Rouble-denominated gold prices rose more than 50% over the period.

"However, we now view Polymetal’s 9x EV/EBITDA as expensive and inadequately discounting the impact of Rouble strengthening and the risk of improving Russian economic conditions."

At 1550 BST, Acacia shares were down 2.3% to 445.90p while Polymetal was 5.5% weaker at 982.50p.