Mining stocks jumped today as gold prices gained on a weaker US dollar after the Federal Reserve voted to raise interest rates but signalled future hikes would be gradual.
However, Goldman believes today’s rally in gold may be short-lived as the outlook remains “a bit uncertain” for the yellow metal.
“As such, we prefer equities which can generate cash at spot (about US$1,200 per ounce) and that can ramp-up shareholder returns,” the bank said.
Gold prices jumped 2.44% on the Comex to US$1,230 per troy ounce in afternoon trading, supported by a weaker dollar, which makes exports cheaper for investors trading in other currencies.
The increase in gold sent miners to the top of the FTSE 100 leaderboard, including Anglo American (LON:AAL), Glencore plc (LON:GLEN), Rio Tinto plc (LON:RIO), Fresnillo plc (LON:FRES), Randgold Resources Ltd (LON:RRL).
The US central bank yesterday raised its benchmark interest rates to a range of 0.75% to 1.0% from a previous 0.50% to 0.75%.
The move came as no surprise to analysts, though the Fed’s dovish tone on interest rates was unexpected and this sent the dollar lower. The Fed said further rate increases would be gradual, with officials repeating their estimate for two more rate hikes this year and three more in 2018.
“Our economists recently suggested that the Fed might be slightly behind the curve: this could require faster tightening than the market is currently pricing in, a potential negative for gold,” Goldman said.
Goldman said risks to the commodity remain “skewed to the downside” as strong US economic data and a pick-up in global demand indicators may lead to a rotation out of gold.
The bank said the key events to look out for including US consumer price inflation figures, the ISM’s US manufacturing report, US non-manufacturing data and jobs numbers.
The stocks are Goldman’s top picks as the bank believes they generate free cash flow (FCF) at a lower gold price and have the potential to ramp up returns.
“We expect all three to generate healthy FCF yields and have top-quartile dividend yields,” Goldman said.
Goldman was ‘neutral’ on Randgold, Gold Fields and Sibanye as it said the miners have a lower gold price and higher capital expenditure (capex), which lead to lower FCF and returns.
On the downside, the bank rated Fresnillo at ‘sell’ as it expect its cash generation to be challenged by a lower gold and silver prices and "significantly higher" capex. “Additionally, performance at the Fresnillo mine could disappoint to the downside in our view.”