…While the S&P/TSX Gold Index closed up 7.3%... with upside. Importantly, the repercussions of the LEAVE vote present a notable benefit for our Au and Ag co’s beyond a higher gold price. That is, a further improvement in the outlook for operating costs on currency weakness (CAD -2%; MXN -4% and poised to weaken further per the updated forecasts of NBF’s Economics and Strategy team) and on weaker pricing for key input such as steel and oil. With operating margins, FCF, and balance sheets poised to get a lift, the net effect should broaden consideration and application of multiples more typical of tailwind periods rather than inappropriate comparison to the last four years where the industry was mired in persistent headwinds. Consistent with prior benchmarking exercises, we point to the 2007 to 2011 period and corresponding valuations as a guide to the upside. We do not subscribe to the idea that all companies warrant valuations typical of this period since the complexion of the industry is now one of unavoidable production declines for many whereas before the majority of co’s offered production growth or the impression thereof. That being said, for the time being and until cost pressures trigger heightened differentiation we expect even our growth-challenged producers to benefit from heightened interest in the space. This will likely continue until cost pressures start to bite or valuations approach benchmark levels. Bottom line, the benchmarking exercise highlights that most of our Au co’s (less so Ag equities) offer significant upside to 2007 to 2011-type valuations even with scaling back benchmarks to capture scenarios with production declines

 

Eoin Treacy's view

Here is a link to the full report.

The response of gold prices to the Brexit vote was knee-jerk but understandable considering the desire for safe haven assets that have a history of performing during times of market stress. Of course Brexit is not the only reason gold prices have been rallying. The intensification of the negative yield environment that resulted from the vote is perhaps a better explanation of the surge that took place last week but the relative lack of supply is also important.

With deep oversold conditions evident in stock prices there is scope for some consolidation of last week’s gold price surge, but a sustained move below the 200-day MA would be required to question medium-term scope for continued upside.

The NYSE Arca Gold BUGS Index jumped to hit a new marginal recovery high last week and while it has not improved on that performance, it has held the gain. Some additional consolidation is possible but a sustained move below 220 would be required to break the six-month progression of higher reaction lows.