"Free cash flow is king," write Credit Suisse's Anita Soni and Robert Reynolds in their gold company outlook, and those miners who have more of it (see chart) will see the best stock performance. Top picks are Agnico-Eagle (AEM -1.3%), Kincross (KGC -2.4%), and Osisko (OSKFF -2.5%).
The current price of gold near $1,200 is key, and if the metal stays near that level in 2014, expect Newmont Mining (NEM -3.6%) to consider a dividend cut, and Eldorado (EGO -3.9%) and New Gold (NGD -4.1%) to defer capital-spending plans. Agnico too would have to consider more cost cuts or a dividend trim to avoid drawing on its credit line.
Iamgold (IAG -2.1%) would have to convince its JV partner to shut down Sadiola or consider exiting the partnership.
AuRico Gold (AUQ +3.2%) and Osisko Mining (OSKFF.PK +6.2%) are upgraded to Outperform from Neutral by Credit Suisse.
The firm notes that AUQ has changed management, transformed its asset base divesting higher cost mines to lower costs mines, revised expectations, and has delivered against targets; market hesitation remains, providing an attractive entry point.
Osisko's Malartic project is progressing to full production, costs are improving to levels in line with the sector average, liquidity is no longer an immediate concern, and its valuation remains attractive.
Despite the upgrade, the firm cuts its price target for AUQ to $5 from $5.50; it raises its target for Osisko to $7 from $6.
Those wanting exposure to gold producers must pay close attention to both cash costs and balance sheets if they want to avoid ugly surprises, Clarus analyst Jamie Spratt says, suggesting a core holding of low-leverage names with longer-term upside, as they generally can fund their growth internally with relatively stronger free cash flow: ABX, IAG, BAA, OSKFF.PK, DRGDF.PK.
Analysts at RBC Capital think credit downgrades for some top gold miners are a strong possibility. There's a “moderate probability” Barrick Gold (ABX -0.1%) could trigger a one-notch downgrade at $1,400 gold; at $1,300, Newmont Mining (NEM +1.9%) could get downgraded, and Kinross Gold (KGC +1.8%) could get cut right to junk status. TD Securities also offers similarly disturbing conclusions. (also)
The two-week selloff in Osisko Mining (OSKFF.PK) since its purchase of Queenston Mining is overdone and creates an attractive entry point for investors, TD Securities says. The market is overlooking "encouraging" production results from the Canadian Malartic mine, the firm says; with ~$300M in free cash flow likely coming next year, Osisko will have “ample liquidity” to pay a dividend for the first time.
Agnico-Eagle Mines (AEM +0.9%) pushes near a 52-week high after agreeing to sell nearly 7.8M common shares of Queenston Mining (QNMNF.PK) to Osisko Mining (OSKFF.PK) for C$5.43/share, or total cash proceeds of ~$42M. Osisko's acquisition of the 9.2% stake in Queenston will be completed using available cash on hand.
Osisko Mining's (OSKFF.PK) $549M deal to buy Queenston Mining (QNMNF.PK) allows it to gain access to Ontario's Lake Kirkland region, which once produced more than 3.5M oz. of gold. The Upper Beaver project, expected to produce 1.1M oz. of gold over a 10-year mine life, has necessary permits to begin advanced exploration and is expected to go into production in 2016.