UBS still sees value in Aussie gold sector: Evolution upgraded to Buy

Despite concerns that gold miners could be impacted by higher electricity prices, due increased demand, rising fuel costs and unplanned coal generator outages, UBS still sees value in the local sector and has upgraded Evolution Mining (ASX; EVN) to Buy from Neutral (target price $4.05).

To the uninitiated, Evolution Mining owns four mines in Australia plus a mine in Ontario, Canada, and has a production guidance of about 650 thousand ounces of gold for FY22.

Threat of higher prices aside, Evolution’s share price has been struggling on the back of Wall Street’s S&P 500 market falling into a bear territory with gold prices also hitting a nearly four-week low on the back of the strong US$.

Despite operational delivery risks of production and costs, plus covid-related absenteeism and disruption the broker sees more value in the ASX gold sector and more need to hedge the rest of its portfolio.

Lower end of guidance

UBS’s preferred gold names are Northern Star (ASX: NST), SSR Mining (ASX: SSR), Gold Road (ASX: GOR), and De Grey (ASX: DEG) but notes the weaker start to FY22 has pressured the June quarter.

The broker now believes up to 30% improvement in quarterly performances is required to get some gold stocks to the lower end of their guidance.

Does the sector look cheap?

UBS reminds investors that while share prices may get a little cheaper heading into June quarter FY22 production reports and FY23 guidance, the sector offers substantial production growth or 10-25% into FY23 and is trading on sub-5 times earnings.

Due in part to a low exchange rate and potential tailwinds for some operations, the gold price remains at healthy levels ($2,600/oz).

However, caution reigns for risks to FY23 production and cost guidance heading into results season.

As a result, UBS prefer newer mines benefiting from new infrastructure, highest grades and limited or brownfield capex.

Evolution share price over three months.