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Are ASX gold shares getting too expensive?

The ASX 200 gold miners have launched into all-time highs as the gold spot price has soared by more than US$250/oz since May. Coupled with the low interest rate environment and weak Australian dollar, gold producers are in a prime position to make a lot of money. 

Here’s how the three big ASX 200 miners’ share prices have moved since the start of the year:

  • Northern Star Resources (ASX: NST) share price is up 30% (with a peak of 50% in late July)
  • Evolution Mining Ltd (ASX: EVN) share price is up 47% 
  • Newcrest Mining Ltd (ASX: NCM) share price is up 65%

But while gold miners are delivering some incredibly impressive returns, are they getting too expensive?

A closer look at the gold sector

While resources can be evaluated by common metrics such as price-to-earnings (P/E), growth prospects, earnings-per-share and market capitalisation, they do so on a different tangent. Producers from iron ore to lithium to gold all move in tandem with the underlying commodity, thus they can become hugely overvalued and undervalued as the commodity price peaks or troughs.

The strong combination of gold prices at 6-year highs and the Australian dollar/US dollar at a decade low, gold miners are now priced at a historically high P/E ratio of mid 30s. However, gold producers are not delivering stellar results, despite a lift in gold prices.

Northern Star reported its full year EBITDA up 8% on prior corresponding period but a 15% drop in underlying profit after tax. This was impacted by the outlay associated with its Pogo acquisition, fair value adjustments and exploration write downs.

Evolution saw its full year underlying profit after tax decease by 13% as productivity improvements, cost efficiencies and a higher gold price was offset by a decrease in production.

Newcrest was standout, with a 22% lift in underlying profit as it reported its lowest annual all-in sustaining cost (ASIC) and a 6% increase in gold production.

I believe gold is in a comfortable position given the uncertainty surrounding the US–China trade war, recession fears and monetary easing. Gold is likely to maintain its current elevated levels, and unless it makes a significant, impulsive move down, gold producers are fairly valued at current price levels.

While the gold producers have not delivered outstanding figures like they have in the past, it is encouraging to see that they have reduced their ASIC across the board. The lower cost allows them to better leverage the bullish gold spot prices.

Foolish takeaway

I believe all three gold producers are strongly positioned for growth in the short–medium term. While Northern Star did not deliver the most impressive result, it is likely to see its acquisition contribute strongly to its bottom line in FY20. Newcrest and Evolution have cited flat to slightly weaker production figures for FY20 with flat to slight improvements in ASIC. From this perspective, I believe Northern Star and Newcrest are my top picks for the Australian goldies. 

Motley Fool contributor Lina Lim 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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