UBS bullish again on gold, gold miners

Zurich-Switzerland (Mar 31)  UBS is back as gold bull, particularly on the equities side. In a note to clients UBS analyst Julian Garran makes the case that the U.S. Federal Reserve will be forced to continue easing thus boosting international liquidity in US dollars and, by consequence, demand and speculation in gold.

UBS said the key issues for gold are that with a strong US dollar “excess returns in the US are under pressure” and that dropping energy prices are putting the squeeze on corporate cash flows.

Meantime UBS said that as wage pressures rise, “weak productivity means that cashflows could be squeezed further”.

It said that both undermine credit conditions and “threaten the longevity of the cycle” and, further, that “the prospect of deteriorating liquidity magnifies the threat”.

So UBS concludes: “That in turn is limiting the Fed’s ability to tighten policy and may induce it to ease in the future. We think the Fed has started to recognise that pressure with its dovish backtracking at the March meeting last week.”

That’s good for gold prices, UBS said.

More than gold, however, UBS favours the gold mining equities and made four picks: Randgold, Acacia, Goldcorp and Agnico Eagle.

It shone the most praise on Randgold, which it calls “one of the best-managed stocks in the global gold sector”. It likes free cash flow potential here and what the miner might do with it.

While UBS acknowledges Randgold’s rather stellar production growth in the last four years is slowing, it sees the London-based miner building strong cash flows, on the back of cost cutting, and boosting its cash position.

That, UBS said, could benefit shareholders in two ways: “We expect this capital to be deployed in value-accretive growth projects currently in Randgold’s extensive exploration portfolio, potential M&A (if deals meet Randgold’s strict investment criteria) or returned to shareholders through higher dividends.”

In the other three mining equities it highlighted Goldcorp’s production profile – estimated to grow by 42% in five years; Acacia’s turnaround with new management and its key, long life Bulyanhulu mine; and Agnico Eagle’s low-cost growth in existing projects.

Source: Mineweb