Our Long-Term $1,100 Gold Price Forecast Unchanged

We don't expect recent gold price movements to have a massive impact on our gold miner fair value estimates

Elizabeth Collins, CFA 17 April, 2013 | 6:13PM
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With gold prices in a seeming free fall over the past few trading days, we want to remind our clients that our gold miner valuations have incorporated a long-term gold price assumption of $1,100 (in real terms) since April 2011. We base our long-term forecast on a look at the marginal cost of production. Our gold price view also incorporates our belief that central bank buying of gold can't continue interminably. For a summary of our arguments, please see our April 20, 2011 article, "We See Gold Going Lower in the Long Term" and our Feb. 22, 2012 article, "4 Scenarios for Long-Term Gold Prices".

We do not see a need to change our long-term gold price forecast. As we use discounted cash flow models to value our gold miners, and the bulk of a company's valuation stems from the cash flows we expect it to generate over the long term, we don't expect recent gold price movements to have a massive impact on our gold miner fair value estimates. However, our forecasts incorporate COMEX futures prices to project cash flows in years 2013-15 of our models. To the extent that lower near-term prices hurt near-term cash flows, our fair value estimates may fall as we update our models. Higher-cost miners' valuations are more likely to suffer in this environment. Further, as expectations for near-term operating cash flows fall, we may see gold miners defer or shelve expansion projects in order to preserve free cash flows. Dividend cuts may also be on the horizon, as dividend payouts had been ratcheted up aggressively as gold prices climbed.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Anglo American PLC2,219.50 GBX1.60Rating
Glencore PLC437.10 GBX0.85Rating
Rio Tinto PLC Registered Shares4,927.10 GBX1.13Rating

About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.

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