Is it time for ASX gold shares to make a comeback?

ASX gold shares have been spiraling lower since late 2020. Could it be time to give ASX gold shares another chance?

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ASX gold shares have been spiralling lower after gold prices topped in December 2020. With ASX gold shares recently bouncing off short-term lows, is it time for a comeback? 

What’s been driving ASX gold shares lower? 

Gold prices surged from US$1,200 to US$2,075 between May 2019 and August 2020. Similar to how soaring iron ore prices have propped up iron ore miners such as Fortescue Metals Group Ltd (ASX: FMG) and BHP Group Ltd (ASX: BHP), a higher gold price drove many ASX gold mining shares into all-time record territory. 

However, unlike iron ore, which has remained at elevated levels, gold has slumped roughly 15%. Down from US$2,075 to US$1,750 in recent months. 

To add further insult to injury, the soaring Australian dollar means that gold is even weaker when converted back to local currency. 

Why operational excellence is key 

Between late 2012 and early 2016, gold prices slumped from US$1,800 to US$1,050. 

During this period, Evolution Mining Ltd (ASX: EVN) increased its total gold production. This went from 346,979 ounces at a cash cost of A$771 per ounce to 803,476 ounces at an all-in sustained cost of A$1,014 per ounce. While its share price might’ve gone nowhere during this period, the company more than doubled its output. Furthermore, creating a runway for shareholder value when gold prices picked up. 

This might bring smaller ASX gold shares such as Bellevue Gold Ltd (ASX: BGL), Perseus Mining Limited (ASX: PRU), and Ramelius Resources Limited (ASX: RMS) into the picture. In particular, as gold producers are coming off of a lower production base and greater development upside.

Perseus, for example, is forecasting a 33% increase in gold production from 137,386 ounces in 1H21 to 182,500 ounces in 2H21. This is purely driven by the contribution of a new gold mine. 

What are brokers thinking about ASX gold shares? 

Back in March, Citi believed that gold prices had peaked in this cycle. It subsequently downgraded its gold price forecasts by 5% in 2021 to US$1,800/oz. However, the long term gold price remains unchanged at US$1,400/oz. 

The broker believes that key picks in the gold sector are ones positioned to generate cash through the next cycle. 

From an operational perspective, Credit Suisse prefers Evolution Mining. This is due to its low costs, strong free cash flow generation, and a positive production outlook. It believes Evolution shares come out ahead when it comes to quality, risk, value, and growth. 

Despite its preference for Evolution, the broker did acknowledge that its peers Newcrest and Northern Star offered more upside on a higher gold price scenario. 

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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