CA - Arizona Metals: Attractive Entry Point In Sight But Not Soon (Rating Downgrade)

2024-01-18 07:23:14 ET

Summary

• Arizona Metals Corp. receives a "Hold" rating after previously being rated as a "Buy".
• The company's mining projects in Arizona align with the U.S. government's strategic plan for domestic raw materials.
• The outlook is bright for copper and gold exploration and development projects in Arizona.

This Analysis Gives Arizona Metals Corp. a "Hold" Rating

In the previous analysis , Arizona Metals Corp. (AZMCF) ( AMC:CA ) stock was assigned a "Buy" rating.

This subsequent analysis lowers the rating to "Hold" to indicate that the share price for a while is seen to have a pattern in line with a neutral stance despite the potential of the company's mining projects.

In the previous analysis, the "Buy" rating was supported by the existence of a significant growth catalyst for Arizona Metals, which consists of mining projects aimed at establishing large and high-grade gold and copper production in Arizona. The prominence of Arizona Metals' mining projects is enhanced by their physical location and the role they play in U.S. mining energy policy.

The U.S. Mineral Strategy Bodes Well for Arizona Metals

The North American state of Arizona is home to several valuable deposits of critical metals, including gold and silver. Plus, because Arizona Metals' mineral projects are located on land that supplies most of the U.S. copper needs, the mineral target of the company must be part of the U.S. strategic plan, which was announced by one of its government envoys in early 2023. The announcement revealed the U.S. commitment to countering global warming through more sustainable domestic infrastructure and electrification of US transportation, but the country is going to achieve this target through increased use of domestic raw materials, thereby reducing dependence on foreign suppliers, particularly Chinese exports.

This information reveals a scenario that greatly improves the Canadian explorer's prospects for metal projects in Arizona; indeed, the US government has already issued two regulations on the subject, which are at least crucial to the future of the domestic metals and mining industry.

In the United States, there is likely to be a massive use of copper and other base metals for the renovation and construction of bridges and railroads, as the Infrastructure Investment and Jobs Act passed by the US Congress supports the implementation of these construction works through the use of public funds.

The rosy expectations for robust U.S. copper consumption are also supported by President Joe Biden's administration's goal of converting at least 50% of all new vehicles sold in the U.S. to electric vehicles (EVs) by the end of 2030 and strengthening the country's electric vehicle charging infrastructure with 500,000 chargers.

Copper is also commonly used by technology manufacturers in the aerospace and defense industries. Given that the United States is home to the largest aerospace technology and weapons industry in the world, the sharp increase in U.S. military budgets in recent years, and 15-year high U.S. arms sales volumes in response to the strong resurgence of conflicts and geopolitical tensions in the world only bodes well for the prospects of domestic copper exploration and development projects.

Not to mention the bright future ahead for gold if this precious metal is considered a safe haven to protect against risk and uncertainty. As these two threats to investors' portfolios become more commonplace with increasing geopolitical tensions and the complexity of macroeconomic issues, demand for gold for hedging purposes will continue to provide a solid foundation for gold prices.

Gold prices traded above $2,030 per ounce on Tuesday, January 16, representing a high price level relative to the last 52 weeks of performance. The trend over the past year suggests one more thing: Since early October 2023, around the time Hamas attacked Israel, the gold ounce has risen more than 12% to current levels from a low of $1,819/oz.

October's bull market in gold prices was significant: in terms of growth, it was at least as significant as the March 2023 bull market, driven by investors embracing the yellow metal's protective properties against the crisis of regional banks triggered by the collapse of Silicon Valley Bank of Santa Clara on March 10, 2023, and of Signature Bank (SBNY) (SBNYL) of New York on March 12, 2023.

As a safe haven amid uncertainty due to the escalation of tensions in the Middle East, analysts at Trading Economics forecast a higher gold price of approximately $2,090 an ounce by March 31, 2024, and a higher price of approximately $2,160 in 12 months.

As a Major Domestic Supplier, Mining Permitting Laws in Arizona Could Be Somewhat Streamlined

Given the number of years it usually takes to obtain all permits to build and operate a metal mine in the United States, including the state of Arizona, they are still somewhat daunting for those who want to invest in this sector. Based on estimates by US experts in the mining and environmental sectors, which were also recently confirmed by Italian experts as part of an update on the world's mineral resources, it took an average of about seven years to obtain a mining permit in the US. This was one of the slowest bureaucracies in the world and certainly required much more patience on the part of the applicants than the two to three years required in Australia or Canada. However, national strategic needs and the fulfillment of programs to combat global warming, which will provide very robust demand conditions in the short term, will most likely have a positive impact on mining permit issuance times, possibly by streamlining procedures.

Although alignment with Canada or Australia cannot reasonably be expected as commodity market players seek to benefit from robust price conditions, it remains possible that some results in accelerating red tape will be achieved anyway.

It should also be taken into consideration that it could take some time before the bureaucratic times are reduced somewhat, but such a disadvantage is unlikely to be seen as a major problem for the time being: At least until the interest rate cut that the Federal Reserve will implement this year leads to such a reduction in financing costs that investments in the construction of metal mines become attractive again.

Arizona Metals Corp. Conducts Exploration Activities in the Copper-Rich State of Arizona

Arizona Metals Corp. based in Toronto, Canada, is conducting exploration and development of mineral resource properties at the 100% owned Kay Mine Project in Yavapai County (approximately 50 miles north of the city of Phoenix) and the 100% owned Sugarloaf Peak Gold Project in La Paz County (west-southwest of Quartzsite, Arizona, about 6.2 miles from the city).

The following picture gives a better idea of the geolocation of the Kay Mine Project: Aside from the historic metal production near the Kay Mine Project, the primary focus of the reader should be on the state of Arizona, as this state is home to the largest copper producers in the entire United States. This profile of Arizona fits well with US President Joe Biden's administration's strategy to increase access to domestic critical raw materials and reduce dependence on China's mineral resources. This raises the bar for investment opportunities in this area and for growth projects in which Arizona Metals is also involved.

Globally, the state of Arizona is a leader in the exploitation of metal mining areas and ranks seventh out of 62 mining areas in the world due to its rich deposits. This is according to the Fraser Institute's Annual Survey of Mining Companies, which surveyed nearly 2,000 exploration, development, and mining companies worldwide in 2022.

The Kay Mine Project lies in an area characterized by the following aspects: a) multiple years of historical copper production on a site now comprising approximately 1,330 hectares of patented and unpatented claims; b) surrounded by deposits not only of copper; but also, other metals, including gold, silver, and ferrous metals. Thus, exploration activities are concentrated in an extended area where several important productions have taken place. Approximately 60 historic copper and precious metals productions using underground mining techniques have occurred within 150 km of the Kay Mine Project. c) the Kay Mine Project belongs to a Volcanic Massive Metal Sulfide (VMS) deposit, a type considered by experts to be one of the most productive deposits in the world in terms of copper and other base metals that can be exploited at profit. d) The Kay mining project is believed to have great potential for the production of relevant metals as there are traces of previous mineral activity since the discovery of the Kay deposit approximately 35 years ago, but mining has not lasted more than two decades, so abundant metal resources appear to still be housed in the property.

Arizona Metals Corp. is currently drilling the Kay Mine property as the Company plans to resume copper and precious metals mining in the area, but only after mineral resource estimates are updated. There are mineral resource estimates available, but these are based on very old mineral activities that have taken place there in the past.

Previous mining activities and exploration were summarized in a technical report prepared several years ago, but these do not currently meet the requirements for mineral resource estimation.

These mineral resource metrics indicate the following mine profile: Kay Mine property could be 37% copper and 45% precious metals, based on 5.8 million tonnes of metal ore grading 2.2% copper, 3.03% zinc, and 54.9 grams silver per tonne of ore (g/t) and 2.8 g/t gold.

Exploration activities consist of the following:

a) of the drilling activities that completed a Phase 1 program which resulted in a preliminary metallurgical review highlighting the strong possibility of producing payable copper concentrates with gold and silver as by-products while implying a low proportion of deleterious elements.

To date, drilling results at the Kay Mine Discovery Zone have returned broad intersections of high-grade gold and generally high-grade metal occurrences, which continues to bode well for the Kay Mine Project's prospects of installing a production of high-grade copper and precious metals.

b) the completion in late 2023 of the acquisition of 46 hectares of private land located 950 meters northeast of the Kay Mine deposit, which is royalty-free but includes mineral and water rights, representing a further de-risking step in support of a production decision. Arizona Minerals now has a total of 224 hectares of privately owned and patented land and the latest acquisition has increased by more than 40% the acreage capable of hosting infrastructure for mining and exploration activities.

c) The ongoing Phases 2 and 3 of the drilling campaign, which, upon program completion, will have explored more than 76,000 meters of areas west of the Kay Mine deposit, referred to as the Central and Western Targets.

Arizona Metals also has the Sugarloaf Peak Project in its mineral portfolio and an initial series of drilling activities completed in 2020 could provide the precursor to a subsequent Phase 2 of drilling activities.

After conducting metallurgical tests, the first drilling results showed the recovery rates and reagent consumption typical of mining activities.

While these tests offer hope for the possibility of establishing production in the future, further testing is currently aimed at optimizing certain stages of ore milling and extraction of the precious metal.

To date, the Sugarloaf Peak Project has reported gold recoveries of up to 95% for oxide ore and gold recoveries of up to 85% for sulfide ore. The sulfide was found at a depth of 500 meters or deeper.

The Financial Condition

Management's preliminary discussion and analysis for the three- and nine-month periods ending September 30, 2023, indicates that to cover the costs of additional expansion drilling of the Phase 3 program at Kay Mine and for metallurgical testing and optimization of stages of ore milling and mining at Sugarloaf Peak, the company will demand approximately $30.4 million. To finance the above-mentioned activities, the company can rely on funds from short-term securities.

During the first 9 months of 2023, Arizona Metals committed $85.2 million to short-term securities, spent approximately $0.16 million to purchase fixed assets, and received proceeds of almost $92 million from the repayment of previous investments. Net cash inflows from investing activities of approximately $6.64 million were not sufficient to cover exploration and development activities. The company has removed approximately $5.9 million from its cash positions compared to the situation at the end of 2022, so the net loss incurred by the company was about $14.7 million for the first 9 months of 2023.

The balance sheet had nearly $40 million in cash on hand and short-term securities at the end of the first 9 months of 2023. The company expects to be able to release up to $38.7 million which is potentially in working capital to support the aforementioned drilling and testing needs in Arizona.

The resource level must prevent the company from issuing new shares or expensive capital loans.

The Stock Valuation: More Convenient Entry Point in Sight, but Will Take a While

Arizona Metals Corp. on the US Over-The-Counter stock market:

Shares of AZMCF were trading at $1.56 per unit, giving it a market capitalization of $180.39 million as of this writing. Shares traded below the 50-day simple moving average of $1.67 and the 200-day SMA of $2.23. Shares also traded below the midpoint of $2.58 in the 52-week range of $1.48 to $3.68.

The 14-day RSI is at 39.67x, suggesting that the stock still has some room to the downside, making it a more attractive entry point into this stock if the economic cycle goes into recession. Gold stocks, including Arizona Metals Corp., could also be used to hedge against headwinds as they track the price action of safe haven gold, and the looming recession is sure to bring some of them on board. However, before gold stocks benefit from higher demand for hedging purposes, initially the headwind of the recession will also hit gold stocks, including Arizona Metals, and therefore be treated like any other US-listed stock.

The recession is predicted by the strong indicator of the inverted curve of the US Treasury yield spread, which at the time of writing corresponds to a 3-month rate of 5.399% versus a 10-year rate of 4.077%. The negative spread between yields suggests a recession because when short-term lending rates exceed the longer-term 10-year U.S. Treasury bond yield (a benchmark for the cost of borrowing), it means that the short-term outlook is perceived negatively by market participants as being riskier and more insecure. Normalcy requires that the shorter the term, the lower the risk of the borrower becoming insolvent, and the return can therefore only be lower than on loans with a longer term.

Duke professor and Canadian economist Campbell Harvey 's inverted yield curve for the spread between 10-year and 3-month US Treasuries is a strong indicator of an economic recession: in fact, this has correctly predicted each of the eight economic recessions of the past six decades.

The financial market is still talking about a soft landing, although there are clear signs of a "softening of consumer sentiment", as shown by the downward trend in US personal consumption expenditure - the core component of the US economy (almost 70% of US GDP).

Instead, a recession is inevitable; Rather, this negative scenario is needed to return the economy to the 2% inflation target, as the Fed's goal with its recession signals of a restrictive interest rate policy is to persuade consumers to spend less and companies to postpone growth projects. Without a significant reduction in these two components of the US GDP, where consumption accounts for the largest share (about 70% of the GDP), high inflation can never be fully curbed, and pesky inflation, as seen in the recent reading , does not rule out a continuation of "higher for longer" interest rates policy at this time which increases the likelihood of a sharp decline in economic activity. In terms of corporate investment, the number and value of IPOs are well below 2021 levels and these provide a clear indication that companies are not interested in raising funds to allocate to future demand as the outlook for this has worsened.

The labor market, whose stubbornness was the last pillar of the soft-landing thesis, is also showing signs of weakening that cannot be overlooked: To protect their ability to generate income, which is under increasing pressure from weakening consumption and the slowdown in end-user prices, companies are reducing labor costs, which account for too large a proportion of the company's total operating costs following a hiring boom during the economy's strong recovery from the COVID-19 pandemic. In 2023 companies announced plans to cut more than 720,000 jobs, doubling from the 2022 level. On top of this, as Andrew Challenger, labor expert and senior vice president of Challenger, Gray & Christmas, Inc., predicted in early December last year, companies are far from done with layoffs.

In fact, these continue in 2024.

The layoffs affect some of the "Magnificent 7" in the S&P500 index: Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOG) (GOOGL), Meta Platforms, Inc. (META) ( META:CA ) and Microsoft Corporation (MSFT) (MSFT:CA), among the world's largest technology companies, have announced plans to cut more than 75,000 jobs since the third quarter of 2022. Outside the components of the S&P 500, but no less relevant in terms of its potential impact on U.S. workforce development, video game developer Unity Software (U) announced last week that it will lay off approximately 1,800 employees, or 25% of its workforce.

But before a recession presents a more favorable entry point for AZMCF stock to capitalize on ahead of this gold prospector's promising growth outlook, uncertainty over the Fed's next rate hike is likely to push shares into a neutral stance. This situation could last longer than expected. The stock market may have already priced in the first 25 basis point rate cut forecast for March 20, and stubborn inflation data could lead the Fed to delay the first rate cut until the next meeting. Therefore, retail investors may want to stick to a "Hold" rating on AZMCF stock for now.

The same considerations apply to shares of Arizona Metals Corp. traded on the Toronto Stock Exchange.

Arizona Metals Corp. on the Toronto Stock Exchange:

Shares of AMC:CA were trading at C$2.09 per unit, giving it a market cap of C$243.47 million as of this writing. Shares traded below the 50-day simple moving average of CA$2.24 and the 200-day SMA of CA$2.99. Shares also traded below the midpoint of CA$3.47 in the 52-week range of CA$2.02 to CA$4.92. The 14-day relative strength indicator is at 41.97x, suggesting shares still have plenty of room to move down if a recession is the next phase of the U.S. economy.

Additionally, Arizona Metals Corp stock has a low trading volume in both markets. So, if the holding of Arizona Metals is too fat in shares count, it may be difficult to change the position quickly enough to reflect relevant changes in the commodity market scenario.

The average volume (3 months) was 175,016 shares on the US OTC exchange and 186,893 shares on the Toronto Stock Exchange. The stock has 116.04 million shares outstanding. The float consists of 108.59 million shares. About 17.57% of the float is held by institutions.

Conclusion

Arizona Metals Corp. is an exploration company that advances mineral projects in Arizona intending to establish future metal production through successful expansion drilling and metallurgical testing activities.

The property has very promising prospects due to its geographic location in Arizona, a US state with rich metal ore resources that account for the majority of the US domestic copper supply. The mining district where Arizona Metals operates is roughly where other operators had several underground operations for the production of copper and precious metals. The US strategy to increase reliance on its metal supply and reduce reliance on China's goods could have a positive impact on the bureaucratic times to obtain mining permits and potentially ease the burden for applicants in the US.

While the company continues to make progress on its metallic projects, the outlook for copper and precious metals is very positive. Copper will be a critical metal for electrification projects and the US government's strategy to strengthen infrastructure with domestic resources.

Gold is increasingly being used as a hedge against a macroeconomic and geopolitical environment that poses greater challenges to investor portfolios than ever before.

The stock price could fall if a recession enters the US cycle, as this appears to be the next scenario for the US economy due to negative trends in consumption, corporate investment, and employment.

Arizona Metals is also a gold explorer and can therefore follow the direction of the gold price if the price per ounce benefits from the metal seen as a hedge against recession fears. But the headwinds of the recession will initially hit Arizona Metals and other gold stocks as well, since, driven by panic, the market will for a while not distinguish between gold stocks and all other US-listed stocks. The lower price provides an opportunity to strengthen the holding of Arizona Metals and have a greater chance to benefit from the positive benefits of installing metal production in Arizona.

Before equities offer a more attractive entry point, this stock is likely to behave in line with a neutral stance in the North American equity markets under the influence of the uncertain situation regarding the Fed's next action on interest rates. Therefore, retail investors should consider a "Hold" rating for now.

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