CDE - Catch The Next Silver Bull With New Pacific Metals

2023-09-07 11:52:43 ET

Summary

• New Pacific Metals Corp. shares receive a Buy rating due to an improved outlook for the silver price.
• Analysts predict silver shortages in the coming years, supporting the valuation of the company's Silver Sand project.
• The correlation between silver prices and New Pacific Metals Corp. shares suggests potential for a strong recovery.

A Buy Rating for New Pacific Metals Corp.

This analysis changes the rating for New Pacific Metals Corp. shares (NEWP) (NUAG:CA) from the Sell recommendation of the previous analysis to a Buy recommendation of the current analysis.

Compared to the previous analysis, the rating update is based on a positive change in the outlook for the silver price due to recent macroeconomic developments.

Due to its high conductivity, malleability, and ductility, silver has various industrial uses, so its future price will be affected by the demand for industrial purposes. This is poised to be resilient as electrification increasingly takes place in our lives in the fight against the negative effects of climate change. Analysts believe that conditions for silver shortages will develop in coming years as demand for silver for clean technology applications will outstrip the supply, amid efforts to curb CO2 and other greenhouse gas emissions, according to Trade Economics .

This expected trend in the silver balance speaks for a price trading firmly above $21/oz or the five-year average for the silver bullion market, strongly supporting the valuation of the company's 100% owned flagship Silver Sand project, which is being developed in Bolivia and is targeting 14 years of continuous silver production at a rate of a mid-tier mining operator.

But the precious metal is also being used as a safe haven against headwinds, albeit perhaps to a lesser extent than gold (gold is the epitome of a safe haven). This characteristic will cause the silver price to rise significantly when, as some prominent economists are now signaling, a major headwind in the form of an economic recession occurs in late 2023 and early 2024.

The Upside Catalyst for the Silver Price: The Rising Risk of a US Recession

Proponents of an economic downturn include Rosenberg Research economist David Rosenberg, Duke Professor and Canadian economist Campbell Harvey, and Joanne Hsu, director of consumer research at the University of Michigan. David Rosenberg's position is now known through this Business Insider article , which cites the economist's interview published Aug. 31 on Blockworks' Macro Forward Guidance podcast, the article's author details. Campbell Harvey's position is consistent with the inverted yield curve indicator he developed that currently consists of three-month US Treasury yields exceeding 10-year US Treasury yields, and therefore signals a recession coming in a few months, according to this Yahoo Finance article . Joanne Hsu's comment on August US consumer confidence data - down 2.8 points to 65.50 from preliminary reading - seems to indicate that consumers are very cautious when asked to rate an improvement in the outlook, as reported by Trading Economics .

Therefore, the estimates of analysts at Trading Economics, who predict the price of silver bullion in a year at $26.60/oz, according to Trading Economics , appear to be well-founded, with an increase of almost 15% from the current price level.

Shares of New Pacific Metals Corp. are positively correlated to the price of silver futures -- the benchmark for the price of the precious metal -- according to the Investing.com chart below, so chasing the commodity that the company aims to produce in Bolivia, the stock is poised to have a strong recovery from current levels.

They are strongly positively correlated because the gray area for the last 3 years is abundantly above zero.

The next expected event of an economic recession, which could potentially trigger a significant bull market in silver and silver-based assets including New Pacific Metals, should move the investor towards a Buy rating.

The same considerations are made with respect to the shares listed on the Toronto Stock Exchange under the ((NUAG:CA)) symbol.

The Chance of a Lower Share Price

However, the retail investor should also consider the following aspect: he may not want to implement the recommendation until the Federal Reserve has hiked interest rates again. This is because such a maneuver, which is usually not favorable to the price of precious metals, can help the retail investor meet his expectations if he is aiming for a lower purchase price.

The share price of New Pacific Metals Corp shows a very negative correlation with changes in the interest rate on federal deposits and as recent history teaches us, the fear of a further increase in the cost of money is already enough to create a significant depression in the market value of the stock. This is the trend seen in the New Pacific Metals Corp. stock price curve near the mid-June Fed meeting - after which, however, no further rate hike was made - and close to the July meeting which resulted in the Fed's July 22 rate hike decision (see chart below from Investing.com).

Based on recent developments in some key economic indicators, such as some signs of easing labor market conditions and a slowdown in inflation, the Fed now appears to be hesitant about its decision to tighten further.

If that happens, it probably won't be from the September meeting, but there's a chance for a November raise, rates traders on CME Group's derivatives markets website estimate.

This summer's stock price trends have shown that it is not uncommon for New Pacific Metals' stock price to plummet on rumors of a rate hike in a high cash cost environment. With the US Federal Reserve determined to keep borrowing costs high for months, the specter of another rate hike will linger while putting downward pressure on the share price.

Therefore, much more attractive entry points can still form for the investor looking not just to benefit from the expected rally in the commodity but also to create a medium/long term position in New Pacific Metals Corp's potential to become a well-known silver mining company.

The same considerations are made with respect to the shares listed on the Toronto Stock Exchange under the ((NUAG:CA)) symbol.

About New Pacific Metals Corp. and the Risk of Operating in Bolivia

New Pacific Metals Corp. has metal mineral assets under investigation, primarily to deliver silver to the market at a rate that would envy many of the silver operators currently listed in this article on Investopedia.com, which the author titles: “10 Biggest Silver Mining Companies”.

The silver and other metals future mining centers where New Pacific Metals Corp. conducts explorations are all located in Bolivia - a country which, due to its political and social instability, is not exactly a paradise for companies with financial interests there.

The Sprott ESG Mining Risk Heatmap 2023 has assigned Bolivia an average ranking of 4.0, indicating a high risk of disruption to mineral activities in the country, but slightly improved from the 4.3 rate mentioned in the previous analysis . Political life in Bolivia has in recent years been marked by the resignation of Evo Morales in 2019 as the country's president according to this article on theguardian.com , and the subsequent installation of the interim government (2019 - 2020) of Jeanine Áñez Chávez who later was accused of coup d'état according to this article on the morningstaronline.co.uk .

The Metal Mineral Projects: Future Production and Costs at the Flagship of the Company, and Comparisons with Major Silver Miners

Among the mining projects of New Pacific Metals Corp. there is one in particular, called the Silver Sand project, which aims to become a silver-producing site at a rate of about 12.2 million ounces of the gray metal per year over 14 years of operation. Mining operations will result in an operating cash cost and total all-in-sustaining cost (AISC/oz.) averaging $8.45/oz and $10.42/oz of silver, respectively, over the life of the mine [LOM].

In terms of production, New Pacific Metals Corp's 100% owned Silver Sand Project in Potosi Department, Bolivia will rank slightly above the capacity of Coeur Mining, Inc. (CDE) which can deliver approximately 11 million ounces of silver annually. CDE is featured in the Investopedia.com article titled “10 Biggest Silver Mining Companies.”

At the time of writing, CDE has a share price of $2.35, giving it a market capitalization of $829.93 million, as the stock has 353.16 million shares outstanding. New Pacific Metals Corp. has a share price of $2.50 for a market capitalization of $404.62 million under the symbol ((NEWP)) and a share price of CA$3.36 for a market capitalization of CA$550.04 million under the symbol ((NUAG:CA)).

New Pacific Metals Corp. shares consist of approximately 157.6 million shares outstanding.

In terms of costs, New Pacific Metals Corp.'s 100% owned Silver Sand Project is not all bad in perspective compared to the first silver miner in Investopedia's above-mentioned ranking, which is Industrias Peñoles, S.A.B. by C.V. (IPOAF).

This Mexican global silver producer – also the parent company of Fresnillo plc (FNLPF) (FNLPF has a share price of $6.82 and a market capitalization of $5.22 billion at the time of writing) – reported cash costs and AISC trends for H1-2023 as follows: Cash costs were in the range of $6.84/oz. (at the Saucito mine) to $10.23/oz. (at the San Julián, disseminated ore body), and AISC were in the range of $12.53/oz. (at the San Julián disseminated ore body) to $22.24/oz. (at the San Julián Veins deposits), as reported by Industrias Peñoles in this PowerPoint presentation .

The same presentation also indicates that Fresnillo's silver mine had a cash cost of $7.41/oz. and AISC of $15.27 in H1-2023.

The Future Profitability of Silver Sand: Just an Indication

The following estimates are from the Preliminary Economic Assessment (PEA) study reported in the March 2023 corporate presentation by New Pacific Metals Corp, via Seeking Alpha .

However, the reader should exercise caution as the technical document is based on silver availability that has not demonstrated economic viability. These resources total 214.72 million ounces of measured and indicated (including inferred resources) resources, estimated as of October 2022.

As such, New Pacific Metals Corp.'s 100% owned Silver Sand Project has an after-tax net present value [NPV] of $726 million (or $4.61 per share, or 1.8 times the current share price level) and an internal rate of return [IRR] of 39%.

The final metric of IRR = 39% is indicative of the project's probability of success in recovering the precious metal at profit from the Silver Sand mine site. Of course, the higher the better, and with exploration projects, investors typically expect a minimum IRR of 30-35% for a project to be considered viable for future precious metals production.

In the base scenario (5% discount rate and $22.50/oz silver price), the Silver Sand project thus fulfills the requirements for a highly profitable project. However, with a more conservative discount rate and silver price, the decision whether or not to buy the stock for the medium/long term horizon may also require a lower entry price than the levels offered by the stock market today.

That said, with silver priced at $21 per ounce, which reflects the average price of the precious metal over the last 5 years, based on the PEA estimates we arrive at an NPV of $3.57/share and an IRR of 33%.

The first estimate, which still implies a good margin of 30% from the current share price, has non-negligible quenching effects on investment risk. Additionally, at 33%, the IRR would still be above the minimum level typically required for a project to be considered successful.

But since based on the 14-day relative strength indicator there is an opportunity to take advantage of an even larger margin, let’s say as much as 35% from the value that the PEA for the Silver Sand Project provides as an indication for the assessment of the stock in Pacific Metals Corp., the investor may then want to wait for interest rates to rise further before buying the stock. This type of event is depressing for New Pacific Metals Corp stock, as illustrated above. It's not certain that will happen in the coming months, it's just a possibility for now as the economy begins to give signals that would promote a pause in rate hikes rather than another hike.

However, it is still advisable not to be too hasty with the Buy rating: With the Fed appearing to be intent on keeping the cost of money high at least through the remainder of 2023, the climate will certainly not be one that promotes higher share prices, on the contrary. Therefore, until the upside catalyst of the recession occurs for the silver price (expected between late 2023 and early 2024), there is still time to set the stage for a further widening of the margin between NPV/share and share price, potentially as high as 35%.

The Silver Sand project isn't the only project New Pacific Metals is working on. In fact, the Canadian explorer is also involved in drilling activities as part of the plan to advance a second recently discovered metal occurrence, the Carangas silver-gold project.

Over the past two years, the company has drilled nearly 80,000 meters [m], and the 1,000 x 800-meter silver horizon discovered in late 2022 for future open pit mining over a broad gold field may be even larger given the recent exploration activities, according to the March 2023 corporate presentation by New Pacific Metals Corp, via Seeking Alpha .

On September 5, 2023, the company inaugurated an initial estimate of the resources contained in the Carangas silver-gold project comprising 559.8 million silver equivalent ounces of total indicated mineral resources and 109.8 million silver equivalent ounces of total inferred mineral resources with a strong potential of gold production through underground mining.

New Pacific Metals Corp's 98% owned Carangas silver-gold project is now expected to publish a PEA before the end of the current year.

Finally, there is a third project, the Silverstrike Silver-Gold Project, where drilling activities made it possible to discover last year an area of oxidized gold about 200 meters thick and located near the surface with a metal concentration that is valuable, which is approx. on the order of 1 gram of gold per ton of mineral. However, exploration activities have been suspended for this year.

Financially, the situation of New Pacific Metals Corp. is as follows: the company had a net loss of $8.10 million for the year ended June 30, 2023 (compared to a net loss of $6.42 million for the prior year), while operating expenses were $8.26 million (compared to 6.78 million dollars the previous year). The company states in its financial report via Seeking Alpha dated Aug. 24, 2023, that it intends to maintain exploration activities in Bolivia through cash and short-term investments, which amounted to approximately $7.1 million at the end of June 30, 2023.

The company has the potential to release up to $5.21 million of its working capital as of June 30, 2023, in support of the mineral projects.

The Stock Valuation

As of this writing, New Pacific Metals Corp. shares ((NEWP)) are trading not far from the 200-, 100- and 50-day simple moving averages, the chart below from Investing.com indicates.

Shares have also fluctuated between a low price of $1.86 and a high price of $3.04 over the past 52 weeks, and currently, they are also close to the middle point of $2.45 of the 52-week range.

However, the investor may be interested in establishing/increasing a position that is not from these levels. According to this analysis, he may want to wait before buying shares: based on a 14-day relative strength indicator of 52 (see chart below from Investing.com), there is room for lower share prices due to the considerations above in this analysis.

On the Toronto Stock Exchange, under the ((NUAG:CA)) symbol, shares were trading at CA$3.36 per unit as of this writing for a market cap of CA$550.04 million. Shares are trading close to the 200-day simple moving average of CA$3.2871, and slightly above the 50-day simple moving average of CA$ 3.1493.

Shares are close to the middle point of the 52-week range of CA$ 2.48 to CA$ 4.14. Additionally, the 14-day RSI's trend of 50 suggests that shares have plenty of room for downside in a high-interest rate environment, forming more attractive prices.

Conclusion

Compared to the previous analysis, New Pacific Metals Corp. shares now earn a Buy recommendation rating on an improved outlook for the silver price due to recent macroeconomic developments.

Due to its positive correlation with silver prices, New Pacific Metals Corp. is poised to make the most of the silver rally this analysis expects in late 2023-early 2024 as prominent economists point to a recession during that period.

Analysts believe that silver shortage conditions will develop over the coming years, suggesting a price trading well above the 5-year moving average of $21/oz, strongly supporting the valuation of the company's 100%-owned flagship Silver Sand project in Bolivia for 14 years of continuous silver production at a rate of a mid-level mine operator.

To better take advantage of the anticipated potential silver bull market, investors may want to hold off on buying shares, although they are interested in a medium to long-term horizon given the good prospects for the Silver Sand project. There is a chance of more attractive entry levels.

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