This month saw the US Federal Reserve cut interest rates for the first time in four years. Consequently, the spot price of gold has risen with as investors perceive lower real interest rates as bullish for gold.

Gold is typically a safe-haven commodity during times of political and financial volatility. Spot prices jumped not only in reaction to lower rates, but also the current escalation of conflict in the Middle Eas.

Gold production has rebounded from the covid-19-induced output constraints, and we forecast a more modest future supply growth across our coverage universe. In a recent video about the broader mining sector, Morningstar analyst Jon Mills said that “the best time to invest in any commodity is when that commodity is in a down cycle.”. With gold near all-time highs after rallying for much of the past two years, that is clearly not the case here.

gold price chart

Source: Morningstar. Data as of Sept. 30, 2024. 

The China effect

Gold has been an outlier in the commodity space. Most other commodity prices fell in the past quarter before being bolstered by China’s economic stimulus announcement reinvigorated hopes of a demand surge. The economic stimulus package has less of an impact on gold as jewellery is the biggest source of global gold demand led by China and India.

What is looking expensive?

In the context of recent spot price movements, this article will explore our most overvalued ASX gold miners right now.

Evolution Mining Limited EVN

  • Star Rating: ★★
  • Price to Fair Value: 1.57
  • Uncertainty Rating: High

The most overvalued in Morningstar’s ASX gold coverage is Evolution Mining Limited (“Evolution”) who focuses on mining and exploration operations in Australia. It’s current share price hovers at $4.70, trading at ~57%+ premium to its fair value estimate of $3.00.

Evolution’s fiscal 2024 result was a material improvement on the previous year and shareholders were rewarded with a dividend payout that was up 75% on the last year. Our fair estimate remains unchanged despite the results. Fiscal 2025 unit cost guidance was lower than assumed and there has been a decrease in forecasted gold sales volume down 3% from 760,000 ounces to 730,000 ounces.

We believe the premium to fair value is likely due to elevated spot gold and copper prices at USD 2,470 per ounce and USD 4 per pound, respectively. Investors could also be assuming higher long-term or midcycle prices. We continue to assume gold and copper prices fall to about USD 1,780 per ounce and USD 3.65 per pound, respectively, midcycle from 2028.

Given the relatively short reserve life of its existing operations, new investment in exploration, development or acquisitions will be required to maintain earnings. The company is in reasonable financial health with leverage set to decline comfortably over a five-year period. Existing cash on hand, undrawn credit facilities and internal cash flows leave Evolution in a position to fund expansion projects and acquisitions that are required for the next phase of growth.

Northern Star Resources NST

  • Star Rating: ★★
  • Price to Fair Value: 1.42
  • Uncertainty Rating: High

With a $19bn market cap, Northern Star Resources are a midtier gold miner with operations in Australia and Alaska. Current operations are the result of significant merger and acquisition activity, namely 13 acquisitions and four asset sales since 2010. Northern Star’s current share price of $16.48 reflects a ~42% premium to our fair value estimate of $11.60.

Increased production at its West Australian mine drives our forecast for an increase in gold sales to 2 million ounces in fiscal 2029, up from 1.6 million ounces in fiscal 2024.

The company averaged a 7.5% return on invested capital (“ROIC”), on par with its weighted average cost of capital (“WACC”) which is also ~7.5%. This was a substantial increase on historical numbers driven by the 2021 merger with Saracen increasing the company’s invested capital base. However, average ROIC in the four years to June 30, 2024, was ~4.5%. We forecast mid-single digits in fiscal 2029, which is well below its WACC.

Financial health is strong with a net cash and bullion position of ~$360 million but might slip into modest financial leverage due to a ~$1.5 billion investment to double mill capacity at West Australian operations. With a reserve life of 10 years, Northern Star will continue its long-term strategy of growing through acquisitions of previously undermanaged mines. 

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.