The ASX 200 stocks attracting the biggest broker upgrades: Red 5, Perseus Mining

Gold has become one of the most preferred commodities among brokers including Morgan Stanley and UBS. Soaring bullion prices, which briefly hit a record high of US$2,431 earlier this month, has prompted several analyst upgrades for local gold names.

Against the backdrop of soaring gold prices, miners are poised to transform into cash flow machines. This is reminiscent of FY20-21, before they encountered hurdles like adverse weather, inflation and hefty capex cycles.

While Newmont (ASX: NEM) isn't featured in the below list, the stock soared more than 12% last Friday after reporting better-than-expected first-quarter earnings. The below quarter-on-quarter improvements provide a glimpse of what's to come (provided gold prices stay high).

• Average realised gold price up 4.3% to US$2,090

• Net income of US$166 million, up from US$2.5 billion loss in the previous quarter

• Adjusted net income up 39.4% to US$630 million

• Capex down 7.6% to US$850 million

• Free cash flow of -US$74 million, down from -US$304 million in the previous quarter

Biggest ASX 200 Upgrades

'Target price' is an aggregate of Refinitiv broker target prices. % Dif compares target prices between Friday, 26 April and Friday 19 April 2024

Red 5 is expected to merge with Silver Lake in June, pending shareholder and court approval. Despite challenging conditions due to widespread rainfall in Western Australia, both gold miners surpassed cost and production expectations for the March quarter.

Averse weather conditions have resulted in a long list production downgrades from peers including Regis Resources (ASX: RRL), Gold Road (ASX: GOR), Capricorn Metals (ASX: CMM) and Westgold (ASX: WGX).

Red 5 produced 50,132 ounces of gold in the March quarter (Dec quarter: 53,018 ounces) at an all-in sustaining cost of A$1,926 an ounce (Dec quarter: A$2,328 an ounce). “With no further major shutdowns planned for the rest of the financial year, Red 5 is firmly on track to achieve the top end of the published FY24 production guidance range of 195,00 – 215,000 ounces, at an AISC of A$1,850 - $2,100 per ounce," said Managing Director Mark Williams.

Where to from here?

Gold's price action has surprised a lot of investors. As a non-yielding asset, prices should fall when yields rise, given it loses relative competitiveness. So why is gold defying the textbook and rallying into all-time highs?

Morgan Stanley says there have been 40 periods where the real gold price and real yields have had a positive correlation on a 3 month rolling basis. The key drivers include:

• Central bank purchases, with China's official gold reserves rising for 17 consecutive months

• ETF inflows, although this fact has not played a large role in the recent rally

• Safe haven and geopolitical risk demand, notably rising Middle East tensions, the return of inflation concerns and a heavy election year

"From here, price action is likely to be choppy with incoming economic data and changing Fed expectations, but this analysis shows us that we should not rely solely on macro drivers for gold analysis," the analysts said.

Looking ahead, the analysts believe "it's hard to see a reversal in the direction of central bank purchases, while ETF holdings may be showing the first signs of improvement."

With gold hovering around their base case of US$2,350 an ounce, Morgan Stanley says risk-reward is more skewed towards the bull case of US$2,760 in the second half of the year, than the bear case of around US$2,000 an ounce.