Upside In Gold Stocks Might Be Limited Without Gold Appreciation

UBS feels that an upside in gold stocks might be limited without appreciation in gold prices and downgraded ratings of Goldcorp Inc. (USA)

, Agnico Eagle Mines Ltd (USA)

and Franco-Nevada Corporation

to Neutral from Buy on valuation. Investors wonder whether gold equities continue to outperform without gold price appreciation. "We believe multiple expansion has little room to go, meaning equity upside is limited without higher gold prices. Our favored names on valuation (Silver Wheaton Corp. (USA)

and Royal Gold, Inc USA)

) have been discounted due to regulatory and financial exposures, but should see upside on closure of valuation gaps," analyst Matt Murphy wrote in a client note. UBS forecasts an average 2016 gold price of $1,225/oz and long-term price of $1,300/oz. In the near-term, UBS gold strategist Joni Teves notes that some price consolidation could be healthy for gold, however downside is likely to be contained and could present a buying opportunity. "In our view, the gold price is dictated primarily by safe-haven investment demand and inflation hedging. We believe the direction of the gold price will be a function of investor belief in the two dominant opposing narratives that we see in the market today," Murphy wrote. The analyst raised the price target on Goldcorp to $17 from $16.50, and believes several organic growth initiatives could proceed to improve the company's production outlook. Murphy also estimates GG's FCF could triple through 2017. On cutting AEM on share price appreciation, Murphy said: "We view AEM as one of the top quality gold miners given its stable production, costs, and free cash flow, as well as its low geopolitical and operating risk. AEM's attractively low cash cost means it has lower gearing to the gold price than comps, and hence has underperformed notwithstanding 37% appreciation year-to-date." On FNV, the analyst said: "FNV trades at an ~80% premium to its royalty/streaming peer group. While we believe FNV's shares deserve a meaningful premium to peers given the company's strong track record and solid liquidity position, we believe an optimistic outlook is now priced in." Meanwhile, UBS maintained its Buy rating on SLW and RGLD, Sell on CENTERRA GOLD INC COM NPV

and Neutral on Barrick Gold Corporation (USA)

, Kinross Gold Corporation (USA)

and Newmont Mining Corp

. Murphy increased price target on shares of AEM to $36 from $35, Kinross Gold to $3 from $2.85, Silver Wheaton to $21 from $20, Newmont Mining to $28 from $20.50, and Barrick Gold to $15 from $8.50. However, UBS slashed FNV target price to C$80 from C$84, Royal Gold to $59 from $65 and Centerra Gold to C$5 from C$6.