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Gold miners set for another banner year with focus on discipline

The good times for gold miners are expected to continue next year, especially for those that are able to tighten spending and increase returns to investors.

The rally in gold prices has helped miners expand their margins and generate record levels of free cash flow, allowing many to pass on profits to shareholders already, Scotiabank analyst Tanya Jakusconek said.

“With miners’ balance sheets in great shape, we believe investors will benefit from much higher dividends over the coming years,” Jakusconek wrote in a note to clients. Kinross Gold Corp., for example, offers “particularly compelling value,” as long as it continues to demonstrate sustainable cash flow over the coming quarters.

With the outbreak of the coronavirus, the price of gold hit a record in 2020 after demand for safe-haven assets surged against a backdrop of “lower-for-longer” interest rates, trillions of dollars in stimulus spending and a weaker U.S. dollar.

With none of those factors expected to change anytime soon, Credit Suisse analyst Fahad Tariq said he expects next year to be another “banner year for gold” with prices heading to an average of $2,100 per ounce.

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The “key differentiator” among mining stocks will be those with strict spending habits, Tariq said. If miners keep on a path of returning capital to shareholders, and continue to generate significant free cash flow, their valuation multiples should expand, he said.

Spot gold prices are down from an all-time high in August after the rollout of Covid-19 vaccines reduced demand for havens, but they remain up about 24% for the year. While the FTSE World Index of equities is on track to return 13% in 2020, the NYSE Arca Gold Miners Index has climbed 23%.

The selloff in the second half of the year likely facilitated a “shakeout of weaker names” that had participated in the first-half rally, Delbrook Capital founder and portfolio manager Matthew Zabloski wrote in a letter to investors. But now he expects a “big rebound” in precious metal prices, which could again lift the sector. He sees interest rates remaining low as swelling liabilities around the globe make rapidly increasing rates “intolerable,” he said.

Top picks by Credit Suisse’s Tariq include Newmont Corp.Barrick Gold Corp.Agnico Eagle Mines Ltd.Yamana Gold Inc. and Endeavour Mining Corp.

“The economy remains fragile and the post-pandemic recovery will be gradual at best,” Tariq said. “We think any near-term pullback in gold prices due to Covid-19 vaccine approvals and rollout is a good entry point.”

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