CIBC World Markets has increased its 2009 gold price prediction from $900/oz to $950/oz and introduced a 2010 gold price of $1,050/oz.
In a recent report, CIBC metals analysts Barry Cooper, Brian Quast, and Cosmos Chin said, ‘We further expect pure gold plays will outperform gold/base metal mixed plays in the current environment especially since the latter has not suffered full adjustments to the lower pricing regime for copper and zinc.
Top picks in the sector include pure gold companies Kinross, Centerra, and Eldorado, according to the analysts, who find valuations and growth prospects attractive for Goldcorp and Yamana. CIBC noted that Franco-Nevada held special status as the best royalty play, but downgraded Royal Gold to sector underperformer, citing price appreciation and valuation.
The analysts asserted that gold equities are 40% undervalued relative to trading levels in the first six months of 2008.The events of 2008 should have pushed gold to higher levels than $1,000/oz in our opinion, the analysts said, citing the collapse of Fannie Mae and Freddie Mac, multiple bank failures, $50 billion in swindles, the collapse of the Big 3 automakers, and the downfall of the housing market. Instead, they noted, gold performed as what every insurance policy does; it maintained the owner's wealth and certainly outperformed all other commodities during the crisis.
CIBC anticipates that gold production will continue to decline as mines have moved into a very mature state from which there is little hope for a turnaround or new discovery. The evolution of discovery has gone from reserve growth to reserve replacement and has now entered into the realm of deserve drop-off. Nowhere is this more evident than amongst the largest producers that account for some 25% of world production. Ironically these same companies are the very ones that can best afford to build mines but they are not accelerating projects to fill a production void that is fast approaching.
Suggesting that recession hollow will last two years, the analysts forecast that gold will also show strength for those two years. It is our contention that regardless of the economic conditions, it is the uncertainty factor that drives gold's appeal, they said. That uncertainty factor we believe is at an all-time high and unlikely to dissipate in 2009.
Meanwhile, CIBC assured investors that the threat of central bank gold selling is less of a concern in the current environment. To those that are worried about 400 tonnes of IMF gold sales, we say bring ‘em on. They are more likely to be absorbed as they were 30 years ago in today's market.
However, they added, While the selling of gold reserves seems to have been capped and is under control, the buying of gold reserves has so far eluded the thought process of central bankers. We believe this vacuum of ideas could come to an end as countries consider the hazards of holding only U.S. Treasury bills or other financial assets that have taken a totally new level of risk.
2009 GOLD EQUITY DRIVERS
CIBC's analysis found several catalysts that should help gold equities perform better this year than they have in the past including:
• Not many alternatives
Noting that other equity opportunities seem plagued with either individual financial issues or poor earnings potential, the analysts suggested that it is likely that insurance in the form of gold holdings will play a bigger role going forward than it has in the past, be that bullion itself or the equities.• Small-cap rebound in the works?
While the small-cap companies have been decimated in 2008 not only on a relative basis but also historically, the analysts suggest that should money inflow accelerate as we expect, it is local that this group should offer the great returns. The timing of such an event however is the key unknown factor.• Pure plays to outperform producers enhanced by base metals
We think there is both a current opportunity afforded pure gold plays on a relative valuation perspective as well as going forward we expect that pure plays will outperform producers with base metals contributions.• Costs down
The analysts estimated that the world cash cost curve has already corrected by $70/oz to $400/oz. However, they advise that the full effect of this change is not expected to be seen until the first quarter of this year and we also believe is not factored into the share prices of gold equities-look for a rollover of the world cost curve in Q4 gaining momentum into 2009 results.• Reserves flat-good for gold less so for equities
CIBC's expectations for year-end 2008 reserve changes are modest. While not good for gold companies, limiting future supply should underpin gold prices, the analysts noted. In part we expect the declining reserve picture is a combination of mature mines and unsuccessful exploration.‘Some of the differences will be made up by smaller discoveries and incremental ore found around existing operations but for the most part we believe that the world has crossed the threshold of lower total reserves for gold, they forecast.• M&A to accelerate out of necessity
Noting that 2008 lacked the usual frothiness of corporation action, the analysts, nevertheless, forecast that mining M&A activity will return in the second half of the year as the pressures for reserves and development projects becomes more acute. By then we think that CEOs will have established some confidence in the gold market although broader markets (particularly for debt financing) may stay elusive for a while.• Weightings for sector will force buying
The analysts advised that generalists can no longer ignore the gold group and will need to hold close to market weightings for fear of being caught offside from strong relative movements. This should create further buying interest amongst the gold sector as it is out contention that on average generalists are underweight the sector.In part we think the process has already started and that is why there has been general outperformance from the senior producers compared to smaller names. We also believe that traditional valuations will play a role in generalist's decisions and for the most part bigger companies trade a lower cash flow multiples. The reason for this is that larger companies have a greater problem showing growth either in production or reserves.