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The firm said in a recent note that of all the companies it’s ranked as “outperform,” they have the best balance sheets.
The last couple of weeks have seen a number of high-profile individuals make moves to exit the gold space.
At the end of October, German gold stock newsletter writer Oliver Gross dumped everything in his portfolio, while at roughly the same time, Sheldon Inwentash, CEO of Pinetree Capital( TSX:PNP), a firm known for investing in micro- and small-cap resource companies, began backtracking on many of his investments, some of which were in the gold space.
Those disruptions left many investors wondering if they should do the same — get out of the gold space now and perhaps return when times are better. However, while that approach might sound appealing, it’s not the only option available to investors.
One alternative is covered by Credit Suisse (NYSE:CS) in a Gold Sector Review published last week. In it, the firm suggests that investors still interested in buying gold stocks take a leaf out of its book and look at company balance sheets. The reason? Credit Suisse expects “a strong balance sheet to support a premium valuation at trough levels, while in the near term higher leverage will likely be valued as [the] gold price rebounds.”
To help investors out, the firm looked at 12 companies, both rating them either “outperform,” “neutral” or “underperform” and ranking their balance sheets. All in all, it awarded six “outperform” ratings, five “neutral” and one “underperform.” Ultimately, Credit Suisse determined that of the companies ranked “outperform,” Agnico Eagle Mines (TSX:AEM,NYSE:AEM) and Eldorado Gold (TSX:ELD,NYSE:EGO) have the best balance sheets.
Here’s a brief look at what Credit Suisse said about those companies, as well as the four others it placed in the “outperform” category:
- Agnico Eagle Mines: A “top pick for its operational consistency, strong FCF and solid growth over the next two years.”
- Eldorado Gold: “We believe the market will reward EGO for [its] growth spending given that the current state of its balance sheet is more robust than others.”
- Goldcorp (TSX:G,NYSE:GG): “GG remains our preferred senior gold equity due to its growth profile, strong balance sheet (low absolute level of debt) and longer average mine life.”
- Kinross Gold (TSX:K,NYSE:KGC): “KGC said on its Q3 call it wouldn’t put the balance sheet at risk with the Tasiast expansion, which sent the stock up ~11% relative to its peers over two days. We believe a JV partner for Tasiast or revisit of a smaller scale (less than 38ktpd) operating strategy would be a further positive.”
- Yamana Gold (TSX:YRI,NYSE:AUY): “Remains Outperform, but the company needs and is undertaking a reformulation of its portfolio assets.”
- AuRico Gold (TSX:AUQ,NYSE:AUQ): “Relative valuation at the lower multiple continues to drive our Outperform rating.” The firm also states, “AUQ also benefits significantly from a weaker CAD and a rebounding gold price.”
Companies with a neutral rating are Alamos Gold (TSX:AGI,NYSE:AGI), New Gold (TSX:NGD,NYSEMKT:NGD), Detour Gold (TSX:DGC), Barrick Gold (TSX:ABX,NYSE:ABX) and Newmont Mining (NYSE:NEM). IAMGOLD (TSX:IMG,NYSE:IAG) was the sole company to receive an “underperform” rating. Interestingly, Alamos and IAMGOLD were deemed to have the best balance sheets overall.
All in all, Credit Suisse continues “to see returns of +50% for most stocks” if the gold price returns to $1,300 and a “down side of ~25%” if it slips to $1,100. Certainly some food for thought for hopeful investors.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Related reading:
When the Streets Get Too Bloody: Oliver Gross Dumps Gold Stocks
Do Sheldon Inwentash and Pinetree Capital Want Out of Resources?