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Is it too late to buy outperforming ASX gold stocks?

Pot of gold at the end of the rainbow

ASX-listed gold miners are probably going to be the best performing part of our market for FY19 with the S&P/ASX All Ords Gold (Index:^AXGD) (ASX:XGD) index surging by over 50% over the past year.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up less than 8% and the record high gold price is pushing several gold stocks to the top of the leader board today.

The Saracen Mineral Holdings Limited (ASX: SAR) share price is the best performer on the ASX 200 on Tuesday with a gain of 7.6% to $3.91, while St Barbara Ltd (ASX: SBM) share price and Resolute Mining Limited (ASX: RSG) share price are taking the second and third spots with gains of 5.8% and 4.6%, respectively.

How much good news is priced into ASX gold stocks?

I won’t blame you if you felt you’ve missed the boat as a lot of good news is priced in to the sector, but Credit Suisse thinks there’s value still to be found.

“Given the glittering gold price run with AUD denominated gold at record highs has stretched gold equity valuations,” said the broker.

“We have conducted an exercise to assess what gold price in perpetuity is being priced into current gold equities assuming unchanged operating estimates and spot FX/by-product commodity prices.”

It appears that medium to large cap gold producers are trading at a premium to the sector with the Newcrest Mining Limited (ASX: NCM) share price, Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price factoring in a gold price of more than US$1,750 an ounce, according to Credit Suisse’s calculations.

That’s a 25% to 29% premium over the current spot gold price of around US$1,400 an ounce.

“We suspect the premium associated with our larger cap names is ‘quality’ related, as they are benefiting from increased capital inflows from generalists seeking gold exposure and deploying capital into larger cap, higher liquid, gold equities with perceived lower operating risk,” explained Credit Suisse.

“If the gold price continues to advance, we expect the equity in these three companies will continue to outperform a broader portfolio of gold equities.”

ASX gold stocks that still represent value

Fortunately, the outlook for gold is bright – at least in my view. Threats of a US-led currency and trade war with the country’s major trading partners is supportive of the precious metal, while dovish central banks and the lower interest rate outlook is providing an extra tailwind.

But if you want to look for value, you will need to dig among the smaller cap gold names as investors in miners like St Barbara and Regis Resources Limited (ASX: RRL) are pricing in a gold price of US$1,277 to $1,339 an ounce, which is 4%-9% below where the yellow metal is trading today.

“Stretched valuation aside, we continue to like EVN on an overall portfolio quality, diversification, mine life basis. NCM is the most expensive gold company in our coverage,” said Credit Suisse.

Meanwhile, the broker’s pick of the small cap operators is ALACERGOLD/IDR UNRESTR (ASX: AQG) as it believes the stock has a clear opportunity to continue to re-rate higher vs peers on its sulphide performance execution and exploration conversion.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

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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