Gold prices have surged due to expectations that the world’s central banks—led by the US Federal Reserve—are close to peak rates. The run up in gold has been a tailwind to the share prices of gold miners.

Morningstar recently initiated coverage on three gold miners: Northern Star (ASX: NST), Evolution Mining (ASX: EVN) and Perseus Mining (ASX: PRU).

Before getting into the individual shares a primer on gold. While there is no direct relationship between interest rates and gold there have been historical patterns. An investor who buys physical gold receives no cash flows. When interest rates rise bonds become more attractive in comparison to an asset without cash flows.

Inclusive of the recent run in prices the spot price for gold has changed little over the past three years. At the same time gold miners have seen margins erode due to inflation in labour, fuel and other costs.

Morningstar’s assumption is that gold prices average around $1879 US per ounce from 2023 to 2025. Our midcycle assumption is $1,740 US per ounce from 2027. Currently gold is trading at around $2,020 per ounce.

Investment and jewellery make up most of global gold demand. A slowdown in either is the key risk to cash flows for gold miners. Gold has perceived countercyclical, safe-haven investment attributes and is seen as an inflation hedge.

The key risk for gold is that, unlike most commodities that are consumed, virtually all the gold ever mined still exists. This makes gold subject to the whims of investors’ sentiment, who can move as a herd.

Perseus Mining

Perseus Mining owns three gold mines in West Africa. All were purchased as exploration licenses or development projects. In 2004, the company purchased the Trengela project in Ivory Coast that became its 86%-owned Sissingue mine. The exploration license that became its 90%-owned Edikan mine in Ghana was bought in 2006, with its 90%-owned Yaoure mine in Ivory Coast acquired as a development project via the merger with Amara Mining in 2016. The purchase of Orca Gold in 2022 also brought the 70%-owned Meyas Sand gold project in Sudan into its portfolio.

We forecast Perseus to sell around 470,000 ounces of gold in fiscal 2028, down from about 540,000 ounces in fiscal 2023, driven by falling production at its Yaoure mine in Ivory Coast over our five-year forecast period. At the end of fiscal 2023, the company had roughly five years of reserves.

The company’s average all-in sustaining cost, or AISC, of roughly AUD 1,430—around USD 960—per ounce for fiscal 2023 places it comfortably within the first quartile of the gold industry cost curve.

Perseus’ focus is on Africa, with the goal of owning three to four gold mines with remaining lives of at least a decade. It is targeting maintaining production at around 500,000 ounces per year, and prefers to buy assets at the predevelopment stage and subsequently develop them.

We assign a no-moat rating to Perseus Mining. As a commodity producer, Perseus is a price-taker. Economic moats in mining require long-life, high-quality deposits that can underpin low operating costs from a capital-efficient operation.

Our Perseus Mining fair value estimate is $2 per share. The shares are currently trading slightly below our fair value estimate.

Northern Star

Northern Star is a midtier global gold miner with mines in Western Australia and Alaska. Its portfolio is a result of significant corporate activity, including 13 acquisitions and four asset sales since 2010. Notable transactions include the purchase of Pogo in Alaska in 2018 and half of the Kalgoorlie Super Pit mine, or Super Pit, in Western Australia, from Newmont in 2020. Northern Star subsequently merged with Saracen in 2021, adding the other half of the Super Pit, as well as the Carosue Dam and Thunderbox assets in Western Australia.

We forecast Northern Star to increase gold sales to about 2 million ounces in fiscal 2028, up from 1.6 million ounces in fiscal 2023, driven by increased production at its Kalgoorlie operations in Western Australia. Roughly 55% of the company’s midcycle sales in fiscal 2028 come from its Kalgoorlie operations. At the end of fiscal 2023, the company had roughly a decade of reserves.

The company’s average all-in sustaining cost, or AISC, of roughly AUD 1,760—around USD 1,180—per ounce for fiscal 2023 places it around the middle of the second quartile on the gold industry cost curve.

Northern Star focuses on buying and owning assets that have been undermanaged by their previous owners, whether due to strategic reasons or because they were relatively immaterial compared with the vendors’ other, larger assets. The company then aims to improve operations and grow production, as well as to increase reserves and mine lives through exploration and/or by acquiring nearby assets that can use the company’s existing processing facilities.

We assign a no-moat rating to Northern Star. As a commodity producer, Northern Star is a price taker. Economic moats in mining require long-life, high-quality deposits that can underpin low operating costs from a capital-efficient operation.

Our Northern Star fair value estimate is $11.30 per share. The shares are currently trading at a premium to our fair value estimate.

Evolution Mining

Evolution Mining owns 100% of four gold mines in Australia and one in Canada. In early December 2023 it also agreed to buy an 80% stake in the Northparkes copper and gold mine in New South Wales. Its portfolio is the result of numerous transactions since forming in 2011 via the merger of Conquest Mining and Catalpa Resources and the purchase of Newcrest Mining’s Mt Rawdon and Cracow mines. Cowal and Mungari were purchased in 2015, with an initial interest in Glencore’s Ernest Henry mine following in 2016, Red Lake in Canada in 2020, and the rest of Ernest Henry in 2022. Cracow was sold in 2020, and its deal to buy a majority stake in Northparkes is likely to close around January 2024.

We forecast Evolution to increase gold sales to about 850,000 ounces in fiscal 2028, up from roughly 650,000 ounces in fiscal 2023. This is driven by increased production at its Red Lake, Mungari, and Cowal mines, partially offset by its Mt Rawdon mine reaching the end of its life. Cowal, Red Lake, and Mungari account for about 85% of midcycle sales in fiscal 2028. The company’s average all-in sustaining cost of roughly AUD 1,450—around USD 980—per ounce for fiscal 2023 places it comfortably within the first quartile of the gold industry cost curve. At end fiscal 2023, the company had roughly 13 years of gold reserves.

We also forecast the company to sell about 75,000 metric tons of copper in fiscal 2028, up from 50,000 in fiscal 2023 driven by its Northparkes acquisition. Copper adds some diversification, accounting for around 25% of midcycle revenue in fiscal 2028.

Evolution is targeting owning up to eight mines in jurisdictions with low sovereign risk, such as Australia and Canada. Its focus is mainly on gold but also copper, aiming to purchase assets from motivated sellers and subsequently increase reserves and mine lives through exploration and development.

We assign a no-moat rating to Evolution Mining. As a commodity producer, Evolution is a price taker. Economic moats in mining require long-life, high-quality deposits that can underpin low operating costs from a capital-efficient operation.

Our Evolution Mining fair value estimate is $3 per share. The shares are currently trading at a premium to our fair value.