‘The bar has been set low’: Why this top broker just upgraded the Evolution Mining share price

ASX gold shares could be about to regain their sparkle, according to this broker.

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Key points

  • UBS has upgraded the Evolution Mining share price to “buy” as it believes investors cannot afford to ignore ASX gold shares
  • The growing risk of stagflation and recession, plus attractive valuations and production growth, are tailwinds for the sector
  • But not all ASX gold shares are equally well-positioned to outperform, and the broker has listed four others it prefers

Could sentiment towards ASX gold shares be starting to turn after a top broker highlighted the sector and upgraded the Evolution Mining Ltd (ASX: EVN) share price?

After all, gold hasn’t done much despite the global turmoil, rampant inflation, and market volatility.

While the precious metal may have held the line above US$1,800 an ounce as equities plunged, some may still feel disappointed that the safe haven hasn’t done more.

Evolution share price upgraded as sector underperforms

Some ASX gold shares, including Evolution Mining, have continued to underperform the  S&P/ASX 200 Index (ASX: XJO).

Over the past year, the Evolution Mining share price has tumbled 23%, while the Northern Star Resources Ltd (ASX: NST) share price has shed 17%. The Newcrest Mining Ltd (ASX: NCM) share price has also struggled, down 9%,

In contrast, the ASX 200 has declined around 12% over the same period.

Low bar for ASX gold shares to jump

But UBS believes investors cannot afford to ignore ASX gold shares in this environment. The broker said:

Despite the continued operational delivery risks of production and costs, we are seeing more value in the ASX gold sector and more need to hedge the rest of our portfolio.

While they may get a little cheaper as we look forward to the Jun-Q 22 production reports and FY23 guidance, the bar has been set low and share prices have retreated.

Why the sector lost its shine

Sentiment towards the Evolution Mining share price and other ASX gold shares has been hurt by several factors. Production issues, tight labour markets, supply chain challenges, and cost pressures have dragged on the sector.

Given the poor start to production in FY22, UBS estimates that ASX gold shares will need a 30% improvement in the June quarter versus the previous quarter to meet their full-year guidance.

Is it time to buy ASX gold shares?

But there are also several factors that will support the sector. The waning Australian dollar is one, with the gold price at around a healthy $2,600 an ounce. This leaves our miners with a good margin buffer.

If the Aussie weakens further as US interest rate hikes outpace ours, profitability may improve further.

Additionally, the sector could deliver significant production growth of around 10% to 25% into FY23, added UBS.

Many ASX gold miners are also looking good value with the sector trading on sub-five-times enterprise value-to-earnings before interest, tax, depreciation, and amortisation (EV/EBITDA).

UBS picks the Evolution share price and these others

But this doesn’t mean all ASX gold shares are a buy. UBS explains:

We remain cautious into results season for risks to FY23 production and cost guidance, and retain a preference for new(er) mines benefiting from new infrastructure, highest grades and limited or brownfield capex [capital expenditure].

Size can also shield exposure to COVID risks like “key man” absenteeism and disruptions.

UBS upgraded the Evolution Mining share price to “buy” with a 12-month price target of $4.05 a share. It also likes the Northern Star share price along with that of SSR Mining Inc CDI (ASX: SSR), Gold Road Resources Ltd (ASX: GOR), and De Grey Mining Limited (ASX: DEG).

Motley Fool contributor Brendon Lau has positions in Newcrest Mining Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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 Scott Phillips.

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