Scotia Capital lowers 2013 gold price estimate to $1,400/oz

Scotia Capital suggests Goldcorp, Yamana Gold and Eldorado Gold can best withstand low gold prices, noting that Randgold and Franco-Nevada have no debt.

Reflecting the year-to-date average, and assuming a relatively flat second half of this year, Scotiabank analysts Monday revised short-term precious metals prices.

Despite the revisions, Scotia Capital analysts Tanya Jakusconek, Joanne van Ballegooie, and James Bender initiated only one rating change as Agnico-Eagle Mines was lowered from Sector Outperform to Sector Perform.

“We are adjusting our gold price background for 2013 given year-to-date actual pricing ($1,515/oz). Short term, the gold price faces headwinds with the strengthening of the U.S. dollar…and more positive sentiment toward the global economic outlook,” said the analysts. “This has resulted in gold’s role as a ‘safe haven’ changing somewhat, and outflows have been evident both in the gold ETFs and Comex positions. We believe this sentiment will continue into 2014.”

“We believe we are in a period similar to the 1970s when the gold price is expected to pause and the next move upward will be driven by inflationary expectations,” they suggest.

“With the recent decline in the gold price, mine output is forecast to slow down and decline longer term. This is due to lower grades being mined coupled with the deferral of the projects,” the analysts said.

Gold Price Assumptions

“Our 2013 gold price assumption is adjusted to $1,400/oz from $1,550/oz. We have also decreased our 2014 to 2016 estimates; to $1,300/oz (from $1,700/oz), $1,400/oz in 2015 (from $1,700/oz) and $1,500/oz in 2016 (from $1,600/oz). Our long-term gold price is unchanged at $1,300/oz, which reflects normalized all-in costs in the industry,” said Scotia Capital.

Silver Price Assumptions

“The silver price change assumes a 62:5:1 ratio for silver to gold for the period 2H/13-2015, 60:1 in 2016 and 65:1 in 2017 and long-term. Our estimate for 2013 is now – $23.50/oz (assuming $20.50/oz in 2H-13) from $27.00/oz. For 2014 our silver price is $21.00/oz (from $31.00/oz), $22.00/oz in 2015 (from $31.00/oz), $25.00 in 2016 (from $30.00/oz). Our long-term price has been adjusted slightly to $20.00/oz from $21.00/oz.”

Platinum/Palladium Price Assumptions

“Our platinum estimate for 2013 changes to $1,475/oz (from $1,650/oz) and our 2014 estimate is $1,550/oz (from $1,650/oz). 2015 to 2016 and beyond are unchanged at $1,500/oz and $1,400/oz respectively.”

“For palladium, our 2013 estimate is $714/oz (from $725/oz), 2014 and 2015 changes to $725/oz (from $750/oz). Estimates are unchanged for 2016 and 2017 and beyond; $700/oz and $650/oz respectively.”

Meanwhile, with the assumption for a gold price remaining at the $1,300/oz for the next 18 months, the Scotia Capital analysts are focusing on companies that can adapt quickly with cost cutting and mine plan adjustments and have operated before at low gold prices. “Important will be balance sheet strength and we believe companies with higher-grade assets will also be rewarded,” the analysts advised. “FCF, although very important will be difficult at the lower gold prices. We also believe that companies that borrow to pay a dividend will not be rewarded.”

Scotia Capital recommended Goldcorp, Yamana Gold and Eldorado Gold as companies with strong balance sheets and at low risk of covenant stress at lower gold prices, including $1,000/oz. The analysts also noted that Randgold would fare best among international gold mining companies in the low price environment, while Franco-Nevada is preferred among royalty companies.

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