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Why this underperforming gold miner is starting to shine again

Gold stocks have found renewed favour with investors recently as the price of the precious metal has been rising on safe haven buying amid the latest global market shake-up.

This explains the outperformance of our gold producers like Newcrest Mining Limited (ASX: NCM) and Evolution Mining Ltd (ASX: EVN) although Regis Resources Limited (ASX: RRL) has been a big laggard.

But that could be about to change following the release of its September quarterly production report that prompted at least two brokers to upgrade their recommendation on the stock.

This was enough to spark a 1.7% rally in Regis Resources’ share price to $4.25 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.5%.

Even with today’s rally, Regis Resources is still down 16% over the past three months when Evolution is up 6% and Newcrest is 3% higher.

Regis Resources’ valuation is getting hard to ignore at these prices, particularly after its pleasing quarterly report.

While gold production for the three months to September was 90,879 ounces, which is inline with most analysts’ expectations, its all-in sustaining costs (AISC) of $923 an ounce was a standout as it was below guidance and lower than the $982 an ounce it achieved in the previous quarter.

This was a noteworthy achievement given that diesel costs have risen sharply along with global oil prices and contributed to its strong cash flow from operations, which reached $77.9 million for the quarter.

Credit Suisse used the opportunity to upgrade the stock to “outperform” from “neutral” with a price target of $4.45 per share.

The broker was also impressed that management showed good discipline by walking away from its proposed $66 million acquisition of Capricorn Metals Ltd (ASX: CMM) after it became apparent that its controlling shareholder wouldn’t accept the deal.

But Credit Suisse isn’t the only one taking a more bullish view on the stock. Citigroup upgraded its rating on the stock to “neutral” from “sell” on valuation grounds.

“RRL shares have pulled back ~16% in the past three months, while the falling AUD has lifted FY19+ earnings and added 50cps [cents per share] to our target price,” said the broker.

“There are downside risk from delays at McPhillamys but upside from growth of the Duketon underground.”

Citi has a $4.25 price target on the stock.

A word of caution though – investors looking to gain upside exposure to the gold price should buy a few gold miners instead of just buying one or two.

This is because the correlation of gold equities and the commodity is statistically weak as there are several other factors that impact on the share price performance of a stock – including production issues and quality of management.

Regis Resources may be looking more attractive in light of its underperformance but it shouldn’t be the only gold miner you hold if you are banking on a buoyant gold price.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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