Morgan Stanley Initiates Coverage On 3 Gold Stocks Amid Downturn

Gold’s drop in value has been almost unstoppable since the metal gave up the $1,290 level earlier this week.

Morgan Stanley initiated several royalty and streaming gold companies Thursday morning. Brad Humphrey of Morgan Stanley began by saying, “The group’s [royalty gold stocks] distinct business model offers lower risk than traditional miners and higher leverage than bullion ETFs.”

Related: Gold and Gold Miners Give Up 2014 Gains

Royal Gold (NASDAQ: RGLD): Overweight, $77 Price Target

“We expect RGLD to be FCF positive in F2014 and will increase revenue ~50% by F2017. With minimal future capex commitments, its growth is already paid for,” stated Humphrey. “We believe the market remains cautious on its key asset, Mt. Milligan (currently ramping up), and that multiples will expand as the story continues to de-risk.”

Humphrey also emphasized that the company’s strong balance sheet will allow it to engage in additional commitments and that its current assets are in stable jurisdictions.

Silver Wheaton (NYSE: SLW): Equal-weight, $25 Price Target

Humphrey began by justifying the company’s current valuation. “SLW is trading at the lowest P/CF multiple of the covered royalty/streaming group; however, we feel it will remain somewhat under pressure given the company’s ongoing Canadian Revenue Agency tax audit and uncertainty surrounding the Pascua-Lama silver stream.”

The $25 price target was derived by using Morgan Stanley’s base case for metal prices and a 60/40 weighted average of 1.6 times NAV and 18 times forward cash flow.

Franco-Nevada (NYSE: FNV): Equal-weight, $25 price Target

“With its large diversified portfolio, management track record, and strong balance sheet, it is not entirely surprising that Franco-Nevada trades at a premium to its peer group (as it has historically),” said Humphrey. However, “Additional accretive agreements could tilt its profile more favourably.”