ML: MTLS&MNG-GOLD:2002/03 Gold Price Assumptions Raised Part 1 08:05am EST 22-Mar-02 Merrill Lynch (M.Jalonen ABX.CA NEM PDG) ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML METALS & MINING - GOLD 2002/03 Gold Price Assumptions Raised Michael Jalonen (Part 1 of 2).
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Reason for Report: Change in 2002/2003 EPS/CFPS Forecasts
Highlights: o Year-to-date 2002, the spot gold price has averaged around $290/oz (above our current 2001 forecast of $280/oz). Based on several factors, we have raised our 2002 spot gold price forecast from $280 to $293/oz. In addition, we have increased our 2003 price forecast from $290 to $305/oz.
o These higher gold price forecasts for 2002 and 2003 are predicated on improving supply/demand fundamentals, including reductions to producer hedging, declining mine output and renewed investment demand (it would appear that gold has resumed its traditional safe haven role). Central bank sales (largely from Europe) and timely hedging, however, will likely slow price rallies. Table 1 below and Table 4 on page 4 set out Merrill's revised price forecasts for all metals under coverage.
o Table 2 on page 2 sets out the changes in EPS and CFPS forecasts for the North American precious metal producers in our survey. The impact of the higher gold price forecast is predictable, with the gold companies under coverage having modestly higher 2002 forecasts (or smaller losses), but more significant changes to 2003 forecasts.
o Not surprisingly, there is less impact to 2002 EPS & CFPS estimates for gold companies with low cost structures and/or strong hedge positions.
o While our long-term gold price forecast remains unchanged at $325/oz, the modest uptick in our price assumptions increases NAVs by between 3% and 9%. Conversely, gold producer valuations become somewhat more attractive. For example, the P/NAV ratio of the senior gold producers declines from 2.22 to 2.14 times. In bull markets for gold stocks, the senior producers can trade up to 2.75-3.00 times NAV, indicating upside potential.
Table 1: Merrill Lynch Commodity Price Forecast Revisions 2002E 2003E Old New Change Old New Change Gold (US$/oz) 280 293 +4.6% 290 305 +5.2% Silver (US$/oz) 4.38 4.50 +2.7% 5.00 5.00 unchg Palladium (US$/oz) 376 380 +1.1% 423 380 -10.2% Platinum (US$/oz) 460 493 +7.2% 470 450 -4.3% Copper (US$/lb) 0.693 0.696 +0.4% 0.838 0.838 unchg Zinc (US$/lb) 0.400 0.400 unchg 0.48 0.48 unchg Source: Merrill Lynch Global Mining Team
Earnings - Impact of Higher Gold Spot Forecasts
Year-to-date 2002, the spot gold price has averaged around $290/oz (above our current 2001 forecast of $280/oz). Based on several factors, we have raised our 2002 spot gold price forecast from $280 to $293/oz. In addition, we have increased our 2003 price forecast from $290 to $305/oz (and the 2004 forecast from $300 to $315/oz).
These higher gold price forecasts for 2002 and 2003 are predicated on improving supply/demand fundamentals, including reductions to producer hedging, declining mine output and renewed investment demand. Central bank sales (largely from Europe) and timely hedging, however, will likely slow price rallies. Tables 1 and 4 set out Merrill' revised price forecasts for all metals under coverage.
Table 2 sets out the changes in EPS and CFPS forecasts for the North American precious metal producers in our survey. The impact of the higher gold price forecast is predictable, with the gold companies under coverage having modestly higher 2002 EPS & CFPS forecasts (or smaller losses). The average change in 2002 EPS is around 15%, though the range is between 6% and 60% (with some outliers on the upper end), compared to a 4.6% increase in the spot gold price forecast.
Not surprisingly, there is less impact to 2002 EPS estimates for gold companies with low cost structures and/or strong hedge positions. These companies include Barrick Gold (up 6%), Placer Dome (up 9%), Goldcorp (up 9%) and Meridian Gold (up 10%). Companies seeing the greatest change in 2002 EPS forecasts include TVX Gold, Repadre Capital, Glamis Gold, Agnico-Eagle and Newmont Mining.
There are several mining companies whose earnings and cash flow are affected due to exposure through their respective gold mines. Reflecting its diversified asset base, Teck Cominco's 2002 EPS forecast changes only by 4%. Due to a reduction in the equity income contribution from 15%-owned Bruce Power, we have reduced our 2002 EPS forecast from C$1.42 to C$1.15/sh.
Gold Price Impact - Higher NAV's
Table 3 sets out our revised net asset values (NAV) for the gold and other mining companies under coverage based on the changes to the spot gold price forecasts in 2002-2004.
While our long-term gold price forecast remains unchanged at $325/oz, the modest uptick in our price assumptions increases the NAVs of gold producers under coverage by between 3% and 9%. Not surprisingly, the lowest-cost gold producers exhibit below-average change in their respective NAVs. The higher- cost gold producers exhibit the largest relative change in NAVs, led by Cambior (up 8%) and Kinross Gold (up 7%). Among the senior producers, Newmont Mining reports the largest change in NAV, at 6% (to $11.20/sh).
Among the mining companies, our NAV for Teck Cominco jumps by 4%, though this is largely due to modifications to asset values of its non-gold mines, rather than the higher gold price assumptions.
More Attractive Valuations
Price/2002E cash flow - Our assumption for a 4.6% higher spot gold price in 2002 reduces the estimated P/CF multiple of the senior producers by 6.2%, from 12.9 to 12.1 times. The senior producers have historically traded between 6 and 18 times CF, indicating upside potential for this group. All three senior producers are trading around 12 times 2002 cash flow.
Price/NAV. The estimated P/NAV ratio of the senior gold producers declines from 2.22 to 2.14 times. In bull markets for gold stocks, the senior producers can trade up to 2.75-3.00 times NAV, indicating upside potential for this group. The P/NAV ratio for the mid-cap producers declines from 1.80 to 1.65 times. The three key mid-caps, Goldcorp (2.28 times), Meridian Gold (2.37 times) and Agnico-Eagle (1.88 times) are now trading at more attractive levels compared to their recent highs (Goldcorp and Meridian traded over 2.6 times NAV).
---------------------------------- ML: MTLS&MNG-GOLD:2002/03 Gold Price Assumptions Raised Part 2 08:05am EST 22-Mar-02 Merrill Lynch (M.Jalonen) ABX.CA NEM PDG ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML METALS & MINING - GOLD 2002/03 Gold Price Assumptions Raised Michael Jalonen (Part 2 of 2).
Table 2: Merrill Lynch Metals & Mineral Commodity Price Forecasts NON-FERROUS METALS H1/02E H2/02E 2002E H1/03E H2/03E 2003E Long-term Aluminum $0.640 $0.665 $0.653 $0.775 $0.775 $0.775 $0.750 % Change +7.6% -3.6% +1.6% n/c n/c n/c n/c
Copper $0.702 $0.690 $0.696 $0.825 $0.850 $0.838 $0.900 % Change +5.6% -4.2% +0.4% n/c n/c n/c n/c
Lead $0.222 $0.260 $0.240 $0.225 $0.275 $0.250 $0.260 % Change n/c n/c n/c n/c n/c n/c n/c
Nickel $2.90 $2.90 $2.90 $3.30 $2.90 $3.10 $2.90 % Change +20.8% +7.4% +13.7% n/c n/c n/c n/c
Zinc 0.380 0.420 0.400 $0.490 $0.470 $0.480 $0.500 % Change n/c n/c n/c n/c n/c n/c n/c
PRECIOUS METALS H1/02E H2/02E 2002E H1/03E H2/03E 2003E Long-term Gold $290 $296 $293 $305 $305 $305 $325 % Change +3.6% +5.7% +4.6% +5.2% +5.2% +5.2% n/c
Palladium $380 $380 $380 $380 $380 $380 $320 % Change +14.3% -9.5% +1.1% -12.6% -7.3% -10.2% n/c
Platinum $500 $486 $493 $475 $465 $470 $450 % Change +14.9% +0.2% +7.2% n/c n/c n/c n/c
Rhodium $980 $980 $980 $950 $950 $950 $950 % Change +70.4% +30.7% +47.8% +35.7% +40.7% +38.1% n/c
Silver $4.50 $4.50 $4.50 $5.00 $5.00 $5.00 $5.25 % Change +5.9% n/c +2.7% n/c n/c n/c n/c Source: Merrill Lynch
(YAGE, KGC, YTEKB) MLPF&S was a manager of the most recent public offering of securities of this company within the last three years. (YIMG, YMAE, YRPD, YCCO, YPDL) The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company. OPINION KEY: Opinions include a Volatility Risk Rating, Intermediate-Term and Long-Term Investment Ratings and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Average, C - Above Average, D - High. INTERMEDIATE-TERM INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Strong Buy (minimum 20% -- more for High Risk securities); 2 - Buy (minimum 10%); 3 - Neutral (0- 10%); 4 - Reduce/Sell (negative return); 6 - No Rating. LONG-TERM INVESTMENT RATINGS, indicators of fundamental company factors demonstrating potential total return for the 3-year period from the date of the initial rating, are: 1 - Strong Buy (aggregate minimum 40%); 2 - Buy (aggregate minimum 20%); 3 - Neutral (aggregate 0-20%); 4 - Reduce/Sell (negative return); 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered be secure); and 9 - pays no cash dividend. Mar-22-2002 13:06 GMT |
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