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Stonecap Securities slashes precious metal forecasts, company targets, though some survive the blow as analysts remain bullish

Published: 10:47 03 Jun 2013 EDT

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Analysts at Stonecap Securities have slashed their precious metal price forecasts to reflect recent price declines, seeing some major cuts to the gold and silver companies in the brokerage firm's coverage universe, though there were a few names that still stood out for the ability to weather the storm. 

The analysts lowered their forecast for gold by $200 an ounce for 2013-2015 and by $150 an ounce for 2016. For 2013 and 2014, Stonecap cut its gold price forecast from US$1,700 an ounce to US$1,500 as prices of the yellow metal plunged from around $1,800 an ounce in October 2012, to as low as $1,355 an ounce in mid-April. 

The firm's long-term forecast for gold remains at $1,350, which is around $50 an ounce below current spot prices. 

The silver price forecast was lowered to $26 an ounce, from $30 an ounce in all years. 

In addition to these lower prices, the analysts also changed their valuation methodology for companies, as many of their prior price targets for precious metal producers were generated using a blend of net asset valued-based and cash flow per share-based targets, usually with a 75 per cent weighting on net asset value. 

But while cash flow per share remains a relevant metric, the emailed research note sent out Monday cites the failure of the metric to capture capital expenditures, which in the mining space are often considerable, as well as a company's existing working capital balances and future development projects. 

"With bullishness in the precious metal space virtually disappearing following the recent downward move in precious metals prices, investor focus has shifted to the profitability of mining companies and ultimately their ability to generate free cash flow (i.e. after all expenses, including capital)," the analysts wrote. 

As a result, they said the metric that best captures this ability is net asset value, thus moving to a 100 per cent net asset value-based target generation. 

The impact of these changes was certainly felt for a number of gold and silver companies on which Stonecap does analyst research, with those hardest hit including Alexco Resource (TSE:AXR), Aurcana Corp (CVE:AUN), San Gold (TSE:SGR) and Chesapeake Gold (CVE:CKG). 

Alexco's price target was slashed to $1.80 from $3.00 previously as Stonecap's valuation for the company was "extremely sensitive" to the silver price forecast and revisions following the Canadian company's significant cost-cutting measures last week, which saw a 25 per cent reduction in employees at its Keno Hill silver mine. Meanwhile, Chesapeake's price target was cut in half from $23.00 to $11.50, mainly impacted by changes in Stonecap's long-term silver price assumption and the view that such large-scale projects as the company's Metates property in Mexico will likely face potential headwinds in terms of financing. 

Although, there were some standouts in the crowd, that despite the fact that their price targets were lowered in light of the gold and silver forecast reductions, the analysts at Stonecap Securities remained bullish on their prospects. 

"Although our new commodity price deck and revised NAV multiples have resulted in decreased target prices across the board, we remain bullish on Argonaut (TSE:AR), B2Gold (TSE:BTO), SilverCrest (CVE:SVL) and Timmins (TSE:TMM). Based on our analysis, all four companies will have no problem weathering the storm even in a US$1,000/oz gold environment," wrote the analysts in the research note on Monday. 

"In addition, all four companies have a solid asset base (i.e., mines either with a growing production profile or are already operating at steady-state levels) and low sustaining annual capital expenditures at their operations which means the cash-flow generated by their mining operations directly contributes to the health of their respective balance sheets."

Specifically, the analysts maintained that they continue to believe that Timmins Gold's San Francisco mine in Sonora, Mexico will continue to perform well, and is one of the few that will still be positive free-cash flowing at a US$1,000 an ounce gold price. "Based on our recent discussions with management, we expect that the company will have yet another record quarter of production in Q2/13 and is well on its way to achieving its production guidance for the year of between 125,000 to 130,000 ounces of production in 2013," the Stonecap analysts, which have an outperform rating on the shares, took note. 

In the developer realm, Atacama Pacific (CVE:ATM), Esperenza Resources (CVE:EPZ) and Midway Gold (CVE:MDW) were highlighted as favoured names in a sector where there remains limited appetite for non-cash flowing mining companies. 

And among the explorers, analysts at Stonecap Securities like Atico Mining (CVE:ATY), Golden Reign Resources(CVE:GRR), Premier Gold (TSE:PG) and Probe Mines (CVE:PRB), citing the belief that "any bifurcation in the market amid prevalent low gold price environment" will likely result in these companies ending at the top for the "quality asset base" they offer. 

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