According to analysts at Canaccord Genuity, billions of dollars in capital are just waiting to flow into gold development companies or gold explorers. Canaccord is certainly convinced that the gold price still has room to grow. This means, according to the experts, that one must also be bullish on gold stocks – as they would offer the best leverage to rising gold prices.
The gold price has increased by nearly 40% in the past 12 months, but the majority of gold stocks are just starting to join this upward trend. According to Canaccord Genuity, the sector therefore still has a lot of room for growth. Currently, the experts consider the valuations of gold producers and gold stocks in general to be “modest”.
On the Australian Stock Exchange ASX, gold producers are trading on average at just 0.7 times their net asset value – and have been mostly in this range for five years, according to Canaccord. And this despite the fact that the gold price in Australian dollars has almost doubled in the same period!
Source: goldbroker.com
In the past, however, the analysts continue, gold stocks were traded at premiums, not discounts to net asset value. This means that despite the recent rise in gold producer stocks, there is still further upside potential.
Ample Capital Available for Mergers and Acquisitions
In the last six months, there has also been an increase in mergers and acquisitions in the gold sector. Most recently, takeover bids were made for three companies in the ASX 200.
These included the $6 billion offer from Northern Star Resources (ASX NST) for development company De Grey Mining (ASX DEG), which was completed at the beginning of the month, as well as the acquisition of Spartan Resources (ASX:SPR) by Ramelius Resources (ASX:RMS) for $2.4 billion. Not to mention that South African Gold Fields has bid $3.7 billion for Gold Road Resources!
According to Canaccord, equity of around $12 billion is now available, looking for a new home. And this will likely flow further to developers and exploration companies. And as margins and profitability of gold producers continue to rise, further mergers and acquisitions are expected. In particular, development companies are ripe for consolidation, the analysts believe. Especially companies with only one asset that is not yet in production are likely to become takeover targets.
