Gold stocks are considered undervalued, claims JP Morgan analysts, highlighting potential investment opportunities in the gold mining sector.
In the aftermath of a robust rally for precious metals, some gold mining shares remain underpriced, according to JP Morgan's latest analysis. The bank's commodities team expects significant upside for gold producers, particularly if its bullish forecast for gold proves accurate.
The team estimates a gold price of $4,100 per ounce by 2026, which would surpass current spot prices of $3,320 and set a new record high. If this forecast materializes, JP Morgan anticipates around 40-50% growth in earnings before interest, tax, depreciation, and amortization (EBITDA) across the sector, compared to average analyst expectations.
While the American bank primarily focused on larger players such as Fresnillo and Hochschild, there's potential value in smaller and mid-cap companies. These stocks are increasingly disconnected from the rising gold price, instead of moving in tandem.
Undervalued gold stocks worth considering include Pan African Resources, which, with a market capitalization of £940 million, has moved beyond the small-cap bracket. Despite a 30% year-to-date share price increase, it still lags behind Endeavor (+51%) and Fresnillo (+80%).
Caledonia Mining stands out among smaller players due to stronger performance than Premier African and a generous dividend.
One potentially lucrative asset is Ariana Resources, which boasts modest production from its Turkish operations and ambitious expansion plans in Zimbabwe. Panmure Liberum analysts, following a site visit to Ariana's Dokwe project, described it as a potential multi-million-ounce asset with strong development prospects.
Despite this optimistic assessment, Ariana's stock market performance has declined more than 40% this year, suggesting there might be hidden value in Australia's AIM twilight zone, as the company prepares to list there.
As valuations decrease, the link between the gold price and share price weakens. This dynamic is demonstrated by Ariana Resources, which offers ambitions growth potential in Zimbabwe despite current struggles in the market.
In the wider market, the AIM All-Share continued to outperform its benchmark, rising 1.3% to 746.39 and outperforming the FTSE 100, which increased just 0.4%. May was a successful month for companies raising funds, reflecting growing confidence.
Blue Star Capital emerged as the week's standout performer, jumping 150% following news of its investment in cross-border crypto payments platform SatoshiPay. Avacta rose 43%, a strong performance that would have topped the leaderboard in most weeks, thanks to the appointment of two heavyweight independent directors, possibly signaling a strategic shift for the precision medicines group.
ATOME climbed 35% after the launch of a new renewable energy division, initially focused on Latin America. At the other end of the table, Totally collapsed 84% as investors grappled with the healthcare provider's seemingly insurmountable funding position. Watkin Jones dropped 21% following a loss and a bleak outlook for current trading.
In the small-cap market, individual stocks can react sharply to news, particularly when trading is thin or controlled by market makers. hVIVO, for example, saw shares plummet 45% on Friday following the loss of one contract and the postponement of another. However, sanity usually prevails over time, and stocks like hVIVO typically find their footing.
Investing in undervalued gold stocks could provide significant returns, especially if JP Morgan's forecast of a $4,100 gold price per ounce by 2026 materializes. Ariana Resources, despite a decline in its stock market performance, offers potential growth prospects in Zimbabwe and might be a hidden gem for investors.
In the broader market, while some stocks like ATOME and Avacta showed impressive gains, others like Totally and Watkin Jones experienced steep declines. Small-cap stocks, like hVIVO, can react sharply to news but usually find their footing over time.
