Precious metals stocks ‘substantially undervalued'-BofA Merrill Lynch

Bank of America Merrill Lynch analysts have raised gold price forecasts, but have reduced the copper price forecast from $4.64 to $4.32 per pound for 2011.

Author: Dorothy Kosich
Posted: Friday , 08 Jul 2011

RENO, NV -

In a report published Thursday Bank of America Merrill Lynch analysts say they are still bullish on gold "but headwinds have arisen."

While gold has resumed its upward trend, Merrill Lynch noted "the metal has faced increased fundamental headwinds, for instance, through a gradual removal of monetary expansion in many nations."

"Although we see limited upside during the summer months, we maintain a gold price target of $1,650/oz for late 2011," Merrill Lynch analysts said. "In the medium-term, we anticipate gold prices to remain at high levels, particularly because the real interest rates in key countries such as the US are set to remain negative until 2012."

"Central banks could also continue to increase their gold holdings," the analysts advised.

BofA Merrill Lynch research analysts Michael Jalonen, Mike Parkin and Lawson Winder increased the 10-year average gold price by 8% to $1,295/oz, and predicted an increase in bullion to $1,650/oz by October/November 2011.

The BofA/Merrill Lynch analysts suggest precious metal stocks are "substantially undervalued."

"Based on the higher gold and silver price forecasts (offset somewhat by the lower copper prices) we have increased our price objectives on most of our stocks under coverage," they said. "Our analysis indicates that gold stocks are reflecting a gold price in the $1,200-$1,300/oz range."

BofA Merrill Lynch's favorite senior gold producers are Goldcorp, Kinross Gold and Barrick Gold. Favorite mid-tier gold producers are Eldorado Gold, IAMGOLD, Agnico-Eagle and Yamana Gold. Favorite intermediate/junior gold producers are New Gold, Minefinders and Alamos Gold.

The favorite silver company of BofA/Merrill Lynch analysts is Silver Wheaton.

However, the analysts are downgrading Aurizon Mines and North American Palladium from Neutral to Underperform. Aurizon Mines was downgraded "based on a lower NAV multiple (from 1.75x to 1.25x) to reflect the longer term growth relative to the peer North American junior/intermediate producer group...and risk of capital cost overrun at the Joanna Project due to inflationary pressures (labour, materials, engineering costs, etc.) facing the mining industry."

"We are downgrading North American Palladium from Neutral to Underperform based on current valuation," the analysts added,

Meanwhile, Merrill Lynch analysts maintained their positive near term view of copper and "see scope for copper to trade up to $11,500/t ($5.21/lb.) in 1H12.

Supply issues for nickel persist, the analysts observed. Nevertheless, Merrill Lynch "would use any intermittent price strength as a selling opportunity and maintain a price target (as opposed to an average forecast) of $20,000/t ($9.07/lb.) for 2011."

The fundamental outlook for zinc remains overall subdued, the analysts noted. "Hence, we maintain a relatively cautious view of prices. Nevertheless, we continue to see scope for a structural strengthening of the zinc market and quotations into 2013, when several large mines will reach their end of life and should be shuttered."

In their analysis, Merrill Lynch analysts suggested silver prices do not reflect physical buying. While analysts believe that silver is "a good medium-term investment, we are concerned that prices may come under pressure in the short term and see a decline in quotations below $30/0z possible."

Finally, the analysts believe "the fundamental picture for PGMs is broadly unchanged, heavily influenced by ongoing supply problems" and relatively tight markets. "Hence, baring a further deterioration of global growth, we see upside for PGMs."