REGIS Resources, Perseus Mining and Papillon Resources remain Macquarie’s top Australian gold picks, though price targets have been downgraded due to the lower gold price.

Mining at Moolart Well

“Weaker investment demand for gold is likely to continue with reduced tail risks, low inflation, and a reduced prospect of more QE [quantitative easing],” Macquarie said.

“So important has investment become to the gold market that even a modest fall is likely to have a significant impact on the price.”

Macquarie downgraded its average 2013 financial year gold price estimate by 8% to $US1628 per ounce after recent weakness.

However, the news is worse for the 2014 financial year, with estimates revised down by 20.1% to $1470/oz.

“An analysis of supply/demand response suggests a plausible 400 tonne decline in investment will see the price weaken to $1530/oz in 2013,” Macquarie said.

“A further fall is likely in 2014/2015, although the longer-term outlook is brighter on strong jewellery demand and continued central bank flows.”

Forecasts for FY15 were lowered by 9.3% to $1395/oz, but the 2018 long-term forecast was raised by 31.6% to $1250/t.

The prices are used to calculate financial results for companies and Macquarie is tipping a hefty drop in earnings – averaging around 50% in FY14.

“Our earnings forecasts place us at the lower end of the street,” Macquarie said.

Several of the larger producers are expected to experience the biggest drop in earnings.

Alacer Gold’s adjusted earnings are expected to drop by 61% this financial year, 67% in FY 14 and 84% in FY15, while St Barbara’s are forecast to fall 58%, 73% and 61% respectively over the next three years.

Kingsgate Consolidated, Evolution Mining and Silver Lake Resources are expected to experience drops in adjusted earnings of around 60% for FY14.

However, Macquarie bases its target prices on forward price curves, which were only lowered slightly to $1620/oz in FY13, $1579/oz in FY14 and $1590/oz in FY15.

The lower forward curve estimates led to an average target price decrease of 16% across the gold companies Macquarie covers, with several companies whacked with a ratings downgrade as well.

Of analysts’ three top picks – Regis, Perseus and Papillon – Regis’ price target was lowered to $A5 from $5.80, Perseus target was dropped to $2.40/$C2.50 from $A2.90/$C3, and Papillon’s fell to $A1.90 from $2.20.

The three favoured picks retained outperform ratings.

Other key picks for Macquarie include Beadell Resources, which was lowered to $1 from $1.20, St Barbara, also lowered by 20c to $1.50 and developer Chesser Resources, which retained its 60c price target.

Alacer was downgraded to neutral and its price target was lowered to $4.40/$C4.60 from $A5.40/$C5.60, while developers Ampella Mining and Gryphon Minerals were also downgraded to neutral with price targets dropped to A50c and 70c respectively (from 60c and 90c).

Macquarie said weaker sentiment would continue to put pressure on gold equities, making the sector an underperformer over the short to medium-term, but it could be a chance to buy quality stocks at cyclical lows.

“That said, for those investors with a longer time horizon or those willing to trade the volatility in between, we believe that the opportunity to derive significant returns from the space will present itself,” Macquarie said.

“For us the key characteristics that we are looking for a combination of include: quality management, achievable production guidance and growth expectations, unchallenged balance sheets, cash generative, low operating costs and exploration upside.”

Macquarie acknowledged that the past 18 months had been difficult for the sector, with companies heavily punished by the market for even slight guidance misses.

But analysts believe current forecasts from producers were more realistic.

“Overall, we expect 2013 to be a much better year for the gold producers in the news flow department,” Macquarie said.

“While capital and operating cost headwinds continue, infrastructure challenges remain and resource nationalism continues, at least there will be less self-inflicted share wounds in our opinion.”

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