Australian gold mining: Boon or bubble? UBS analysts weigh in

Investing.com - UBS analysts noted on Wednesday that the performance of the Australian gold mining industry might be "too good to be true."

The note comes as most gold miners have lowered their production expectations through FY24, setting expectations at the lower end of guidance, which reduces risk in the upcoming June quarter updates.

While UBS remains optimistic about the sector due to bullish gold price predictions, expectations for volume growth, productivity gains and the winding down of the capital expenditure cycle, they also expressed concerns following the downgrade of Evolution Mining Ltd (ASX:EVN), which casts doubt on the sector's seemingly promising outlook.

The analysts ran a scenario which assumes no further increase in gold prices (currently at approximately US$2,350/oz), a 10% increase in operating expenses, and a 30% increase in capital expenditure. This scenario was inspired by the recent EVN update.

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While the sector appears to be entering a golden period, with attractive EV/EBITDA ratios and free cash flow yields, these metrics could be undermined by factors not accounted for in their modelling and potentially liberal spending.

Analysts identified several factors driving the increase in costs and capital expenditure, including inflation and aging mines.

A combination of record-high gold prices in both US and Australian dollars, healthy starting balance sheets, aging asset bases, and a general lack of exploration success has ushered in an M&A cycle. The analysts question whether the industry is reaching a tipping point, as deals start to become cash bids.

In their forecasts, UBS predicts gold prices to rise to US$2,800/oz by December 2025, with a long-term real price of US$1,950/oz. They maintain a "buy" rating for Northern Star Resources Ltd (ASX:NST), Newmont Corporation DRC (ASX:NEM), Gold Road Resources Ltd (ASX:GOR), De Grey Mining Ltd (ASX:DEG) and Bellevue Gold Ltd (ASX:BGL).