Investment bank Canaccord Genuity is upbeat on the gold price and production margins as recession looms and the United States dollar retreats. It also picks Endeavour Mining (TSX: EDV; LSE: EDV; US-OTC: EDVMF), Kinross (TSX: K; NYSE: KGC) and Probe Metals (TSXV: PRB; US-OTC: PROBF) among its top Canadian equity performers this year.
The gold price may hit an average of US$1,862 per oz. this year, up from its record average of US$1,802 an oz. in 2022 but down from its current spot price around US$1,925 per oz, analysts with the Vancouver-based company said in a forecast released Thursday.
“We’re bullish,” Canaccord said as it considered how efforts to curtail decades-high inflation are expected to slow the economy while the U.S. dollar has fallen 10% from a 20-year high in September, both factors that typically drive gold prices higher.
U.S. inflation slowed to 6.5% in Dec. from 9.1% in June and the market expects the U.S. Federal Reserve to prevent its benchmark interest rate rising above 5% this year after measures of employment and manufacturing declined.
“These headwinds look to have largely run their course with inflation and the economy slowing,” the bank said. “Gold and gold equities have more room to run ahead of a potential Fed pause and with a non-trivial chance of a recession emerging.”
The bank projected average all-in sustaining costs (AISC) for miners to fall 2% to US$1,265 an oz. after supply costs hit their highest in last year’s third quarter and oil prices have fallen 14% from an average of US$95 per barrel in 2022.
“Most producers indicate that input cost inflation appears to have peaked,” Canaccord said. “We forecast AISC margins improving 17% to US$597 an oz. in 2023.”
Canaccord also projected silver rising to US$24.38 an oz. this year and platinum advancing to US$1,084 per ounce. It increased its long-term gold price estimate to US$2,048 per oz. in 2026 versus US$1,922 per oz. previously. It raised its long-term silver price to US$26.97 per oz. in 2026 from US$23 an ounce.
Canaccord chose Endeavour Mining as a top stock pick among senior producers because it “ticks all the boxes” with strong execution, balance sheet and capital return. It has also fully funded growth and has an inexpensive valuation of 0.6 times net asset value versus a peer average of 0.74 times. Endeavour’s Lafigué project under construction in Côte d’Ivoire should increase company output to as much as 1.6 million oz. by 2025 from 1.3 million oz. last year, the bank said.
Kinross Gold is another leading pick among senior producers due to its steady annual production of about 2 million oz., reduced risk after leaving Russia, the potential of 500,000 oz. a year in output from the Great Bear project in Ontario by 2028 and an attractive valuation of 0.49 times net asset value, the analysts said.
In the intermediate space, Canaccord likes SSR Mining (TSX: SSRM; NASDAQ: SSRM; ASX: SSR) as a defensive stock and Fortuna Silver Mines (TSX: FVI; NYSE: FVI) as an offensive choice. It chose Orezone Gold (TSX: ORE; US-OTC: ORZCF) as its top junior, upgrading its rating to buy from spec buy because it moved to producer status in Dec. with the declaration of commercial production at its Bomboré gold mine in Burkina Faso, 85 km east of the capital of Ouagadougou
“We like SSRM for its operating prowess, emerging value at each of the assets, strong balance sheet and capital return program, capable management team, and attractive relative valuation,” Canaccord said. “Orezone has done an admirable job advancing Bomboré into commercial production on time and on budget.”
The bank ranks Probe Metals with its Novador project near Val-d’Or, Que. as the best gold explorer. The company’s proposed open-pit and underground operation may produce more than 200,000 oz. a year with a 33% internal rate of return assuming a gold price of US$1,500 an ounce, according to a 2021 preliminary economic assessment. Probe recently tripled resources from Novador’s Monique deposit, one of three on the site.
“Management strength is another key to our thesis, with CEO David Palmer, winner of PDAC’s 2015 Bill Dennis Award and the Northern Miner’s 2014 Mining Person of the Year, and chairman Jamie Sokalsky, former Barrick CEO, leading much of the same team involved in their success with Probe Mines, which was acquired by Goldcorp for $526 million at a significant premium back in 2015.”
Among streaming and royalty companies, Canaccord recommends Wheaton Precious Metals (TSX: WPM; NYSE: WPM) and intermediate Osisko Gold Royalties (TSX: OR; NYSE: OR). Wheaton should surpass rival Franco-Nevada (TSX: FNV; NYSE: FNV) in gold-equivalent output by 2025 and has a strong balance sheet of US$500 million, no debt and access to US$2 billion in credit, the bank said. It expects Osisko to grow production by 37% during 2022-27 as output starts or increases at the San Antonio, Cariboo and Windfall projects.
Canaccord lowered its rating on Newmont (TSX: NGT; NYSE: NEM) and Alamos Gold (TSX: AGI; NYSE: AGI) to hold from buy on valuation. It upgraded Coeur Mining (NYSE: CDE) to hold from sell.
Investors, who had to cope last year with inflation at 40-year highs, the most hawkish Fed in more than a decade, a surging American dollar and the conflict in Ukraine, now must consider the balance of interest rates and a potential recession, Canaccord said.
“One of the biggest questions among investors for 2023 is whether the Fed can pull off a soft landing or whether a recession ensues,” the bank said. “A potential recession scenario would likely force the Fed to cut rates sooner given the intensity of hikes to date which we would also view as positive for gold.”