CA - Consider Arizona Metals Ahead Of Expected Gold/Copper Recovery

2023-09-26 02:18:45 ET

Summary

• Retail investors should consider buying shares of Arizona Metals Corp. to participate in the opportunities offered by the precious metals and base metals markets.
• The stock shows a strong correlation with the growth prospects of gold and copper, and analysts are forecasting gains for both metals.
• Arizona Metals Corp. is an exploration company in Arizona with potential for future production, and its stock price is expected to rise as drilling results come in and commodity prices recover.

A Buy Rating for Arizona Metals Corp.

To take advantage of the opportunities offered by the markets where precious metals such as gold and silver, as well as base metals such as copper are traded, retail investors should consider shares of Canadian mineral exploration company Arizona Metals Corp. (AZMCF).

The retail investor can of course invest directly in the commodity, but since he usually does not have the resources available to an institutional investor, US-listed stocks such as Arizona Metals Corp. are the easiest and most cost-effective way to participate in the metals markets.

This analysis suggests a Buy rating as this stock could be used to benefit from the gains analysts are forecasting for both precious metals and copper.

This stock is not already a gold and copper producer, but rather an exploration company in Arizona where the team is trying to lay the groundwork for future production.

Despite the lack of production, the shares appear to correlate well with the growth prospects of the commodities, given the highly prolific profile of Arizona's mining district, coupled with the company's encouraging exploration results in a largely undeveloped resource basin.

This stock appears to have the potential to rise sharply as more drilling results come in and a recovery in commodity prices is expected.

In fact, analysts at Trading Economics predict that copper, whose price per pound was $3.65 at the time of writing, will trade at $3.74 per pound before the end of the current quarter and then rise to $3.98 within a year.

Analysts also forecast gold to trade at $1,947.51/oz before the end of this quarter and even higher at $2,016.05/oz in 12 months, while the ounce is currently at $1,924.

How Long It Might Take to Build Mines in Arizona

It could take many years for Arizona Metals Corp.'s two mining projects, the Kay Mine Project in Yavapai County and the Sugarloaf Peak Gold Project in La Paz County, both in Arizona, to become profitable copper and precious metals mines.

As the study of exploration activities progresses, the potential for future profitable exploitation of the deposits will become apparent. However, the investor must be aware that, apart from the success of the exploration activity, it may take up to 7 years from the submission of the application to the receipt of all necessary mining documents and regulatory approvals.

This average time estimate of 7 years is reliable as it comes from experts in the mining sector. The estimate is the result of a very recent mapping revision carried out by Italian mineral experts not only for the domestic but also for the international mineral resources. Based on the available information, it appears that the revision was also carried out to assess how much bureaucracy affects the competitiveness of a country's economy.

Although Arizona Metals Corp. is not a producer of precious metals or copper, but merely an exploration company involved in financing exploration drilling in Arizona, its stock price, regardless of the effective construction of productive metal mines, already shows a strong correlation with the prices of the commodities in question.

The Correlation Between Arizona Metals Corp. Stock and the Metals

This stock already offers investors the opportunity to benefit from the development of metal prices. This can be seen in the charts below from Seeking Alpha.

The evolution of the correlation coefficient over the past year shows that the AZMCF stock price tends to move in the same direction as the price of gold and the price of copper, as the correlation coefficient charts (yellow and red areas) are almost always above zero. Several months of positive correlation coefficient imply the following relationship: when the price of the metals increases, the share price of the stock also increases and vice versa.

The reader could get confused by the fact that the share price has fallen by 26.56% in the last 12 months, while commodities have a plus sign. These performances are the result of the difference between prices 12 months ago and current prices, but they do not explain anything in between. The correlation between the securities remains positive, although Arizona Metals' share price has a different slope to the x-axis than the two commodities to the x-axis. This trend is due to Arizona Metals falling much faster amid bearish commodities than its ability to recover when commodities rose again.

In the chart above from Seeking Alpha, copper futures (HGV2023) are the benchmark for copper, while gold futures (GCV2023) are the benchmark for gold.

This analysis also estimated the approximate extent to which a recovery in the price of copper or gold would correspond to an increase in Arizona Metals Corp.'s stock price.

For this purpose, the last 52 weekly returns of the stock price are the output, while the 52 weekly returns of the gold futures or copper futures are the input of a linear model that has produced the following results.

Over the past 52 weeks, on average, Arizona Metals Corp's stock price rose 0.8% on a 1% increase in copper prices, while a 1% increase in gold prices caused Arizona Metals to appreciate 1.1%.

Therefore, the price of Arizona Metals stock appeared to be more volatile than that of gold and slightly less volatile than that of copper, but the betas are positive. So, if commodity markets recover as analysts expect, AZMCF stock should follow suit and rise, while exploration results and metallurgical testing in Arizona could add plenty of fuel to the potential upside.

Arizona Metals Corp.: How Explorations Deliver in Arizona

Based in Toronto, Canada, Arizona Metals Corp. is currently engaged in the exploration and development of mineral resource properties in Arizona. These are:

• the wholly-owned mineral interest in the Kay Mine Project, a past-producing copper mine in Yavapai County, Arizona, specifically on a property with surrounding patented and unpatented claims covering approximately 1,330 acres. The mineral area is north of Phoenix, about 50 miles from the city.

• the wholly-owned mineral interest in the Sugarloaf Peak Gold Project in La Paz County, Arizona. Specifically, this is a property with approximately 4,412 acres of Bureau of Land Management claims. The Mineral District is located west-southwest of Quartzsite, Arizona, approximately 10 kilometers from the city, specifically on the east side of the Dome Rock Mountains in southwestern Arizona.

Below is a map of the state of Arizona from Arizona Metals' September 2023 corporate presentation showing Arizona Metals Corp's two metal projects. The project areas are highlighted by the two dotted rectangles. The Mexican city of Puerto Peñasco on the Gulf of California at the bottom left of the map can give the reader a better orientation on the precise geolocation of the company's projects.

The Kay Mine Project is located in one of the most productive and open regions for mining activity in the United States of America: this is Arizona state.

According to the United States Geological Survey - Mineral Commodity Summaries 2022 – Copper, from Arizona Metals Corp. September 2023 corporate presentation , Arizona is the largest producer of copper in the entire United States. It follows that Arizona has very favorable legislation for the exploitation of natural resources through mining, as this is in the interest of the state's own economy and the United States. In this regard, investors consider Arizona to be a very ideal environment for allocating their investments to mining companies.

To confirm this, Arizona ranks seventh in a ranking of 62 areas that host mining districts worldwide, after the 2022 Fraser Institute Annual Survey of Mining Companies surveyed some 1,966 exploration, development, and mining companies worldwide in the second half of 2022.

Also, the potential to resume profitable metal mining at the Kay Mine Project is positively influenced by the fact that approximately 60 copper and precious metal productions have occurred in the area in the past. These productions were largely through underground mining techniques, within a radius of 150 km from the Kay Mine Project, as shown in the company's presentation just mentioned.

These mineral deposits, like the Kay Mine project, are characterized by being of the volcanic massive sulfide (VMS) type and thus host deposits that are among the most productive in the world in terms of copper production and other base metals.

Furthermore, these VMS deposits can also produce payable ounces of gold and silver, but in any case, as secondary production compared to copper or other base metals.

Among the mines that have historically determined the wealth of the area to which the Kay Mine project belongs, the United Verde Phelps Dodge mine stood out as follows: a total of 30 million tons of copper at an average grade of 5% was produced from open pits and 4 million tonnes of copper, with an average grade of 10%, was produced from underground mining.

Arizona Metals Corp. is currently drilling the Kay Mine property and operates in an area where some mining and exploration activity has occurred very far into the past, and therefore some of the mineral results available are now somewhat out of date. The aim of the company is to resume copper production as well as gold and silver production.

The first and the second phases of expansion drilling and a preliminary metallurgical review have been completed and the results are such that there is potential for the production of payable copper and zinc concentrates with gold and silver as secondary production, based on the company's drilling results available to the reader.

The company has commenced its Phase 3 drill program totaling 76,000 meters to test areas of the property that offer significant potential for resource expansion, and continued drilling looks set to deliver new high-grade zones.

The company will complete these exploration activities on at least all major mineral targets before making an initial mineral resource estimate. Important updates in this sense can possibly be expected later this year, potentially providing a significant upside catalyst.

There are historical resource estimates for the Kay Mine property and based on these, the Kay Mine property appears to be 45% precious metals and 55% copper and other base metals.

The most recent estimate of these historic resources and reserves is that the Kay mine contains proven and probable ores of 5.8 million tonnes (or 6.4 million short tons). Regarding the quality of these resources, copper ore has a grade of 2.2%, zinc ore has a grade of 3.03%, silver ore has a grade of 54.9 grams of silver (g/t) per ton of ore mineral, and the ore gold content is 2.8 g/t.

These historical resource estimates are reflected in the technical report prepared for Croesus Gold Corp. several years ago. It was created based on the activities of some operators who in turn have been active in the area, and some of them have also exploited it, which means that they have mined the metal for less than 20 years since the discovery of the Kay mine around 1990, although in a small scale.

However, the company does not wish to consider these estimates as current resources until they have been reviewed to ensure they meet the standards required by the mining industry from a scientific and technical perspective.

The moral of the story is that it is still impossible to say how many tons of copper equivalents, and ounces of gold and silver can be produced from the Kay mine property, for how long, and at what operating cost, as well as other indicators of the economic viability of projects in Arizona.

However, the exploration activities are delivering promising results, particularly in terms of the quality of the resources present on the property, more gold than copper, it must be said, and particularly in terms of the concentration of the target metal in an ore unit.

At the mineral property, the drilling results revealed wide intersections with a high gold grade, which seems to compare favorably to a good benchmark, which may be the one that shows more than 2 grams of gold as high-grade gold for mining in bulk tonnages. Some results from the company’s presentation even show more than 100 meters of high gold grade mineral, which is particularly sound in terms of the thickness of the resources that the Kay mine property could be potentially open to expansion. On this last aspect, the company adds that more than 97% of the expected mineralization horizon remains to undergo drill testing, which, combined with the strong premises of the drilling program to date, provides ample opportunities for the share price to rise significantly. Should these events be combined with the expected bullish sentiment in the commodities in question, the effect on the share price could be very positive.

Concerning the second mineral project of the Sugarloaf Peak project , this is currently undergoing care and maintenance, while metallurgical testing of drill results from the first batch of drilling activities completed in 2020 may greenlight the next Phase 2 drilling program.

The metallurgical tests showing the recoveries and reagent consumption typical of producing mines give hope for the possibility of setting up production in the future, while tests to optimize certain stages of ore milling and extraction of the precious metal are ongoing. 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.

These metallurgical tests are expected to be completed before the end of the year. Here too, there is potential for the share price to rise.

The Financial Condition

Management's interim discussion and analysis for the three- and six-month periods ending June 30, 2023, indicates that to cover the costs of additional expansion drilling at Kay Mine and for additional care and maintenance and metallurgical testing at Sugarloaf Peak, the company will require approximately $32.7 million.

The company will recover the necessary financial resources for the above expenses from short-term investments.

During the first six months of 2023, Arizona Metals committed $56.5 million to short-term securities, spent approximately $0.16 million to purchase fixed assets, and received proceeds of $59.7 million from the repayment of previous investments. Cash inflow from investing activities of approximately $3.03 million was not sufficient to cover exploration and development activities. The company has withdrawn about $6 million from its cash holdings, so the net loss incurred by the company was about $9.6 million for the first six months of 2023. The balance sheet had $43.1 million in cash and short-term securities at the end of the period. This also represents working capital that has the potential to free up resources to meet the aforementioned drilling, maintenance, and testing needs in Arizona.

Apart from the likely intelligent use of monetary resources for short-term investments, perhaps taking advantage of the high-yielding environment due to the Fed's restrictive interest rate policy, the value currently embedded in working capital should not require borrowing or, at least for the time being, the issuance of equity capital.

The Stock Valuation

As of this writing, shares of Arizona Metals Corp. were trading on the US over-the-counter market at $2.35 apiece, with a market capitalization of $271.98 million. Shares were trading below the 200-day simple moving average line, on par with the 100-day simple moving average line, and above the 50-day simple moving average line.

Shares are significantly below the middle point of $2.745 of the 52-week range of $1.81 to $3.68.

Given the expected recovery in metal prices, the positive correlation between stock and metal prices will continue to strengthen as further development of the expansion program and metallurgical testing improve the exploration company's growth prospects. Against this background, the currently low share prices should offer interesting entry points.

While gold prices should benefit from the expected recession due to the precious metal's safe-haven nature, the tailwinds of electrification will create a robust environment for copper prices due to the high electrical conductivity of this key element of the energy transition.

The recession indicator designed by Duke professor and Canadian economist Campbell Harvey indicates high chance of a recession as early as 2024, as the yield on three-month US Treasuries exceeds the yield on ten-year US Treasuries. The economist David Rosenberg of Rosenberg Research also believes that the downturn in the US economy will almost certainly be the next phase of the cycle.

The Possibility of a Lower Share Price

There is still the possibility of a lower share price, which would increase the success rate of the proposed Buy recommendation.

With Fed interest rates expected to peak at 5.6% this year compared to the current range of 5.25% to 5.5%, pressure will continue on equity markets and commodity prices, particularly gold, which do not like higher interest rates.

Due to the 24-month stock market beta of 1.11 (on this Seeking Alpha page , scroll down to the “Risk” section) coupled with a positive correlation with commodities, the above headwinds will result in lower stock prices for Arizona Metals Corp., which will potentially provide a more attractive entry point into this share.

The Risk

The risk is that metals will not experience the strong recovery expected, but this analysis appears to rule out that possibility. The growth prospects for copper as a key element of the energy transition are bright. Gold is increasingly being used as a safe haven. This is because headwinds are becoming more common due to the extremely uncertain global situation and increasing geopolitical tensions.

A well-funded pipeline of expansion drilling and metallurgical operations, as well as the high mineral profile of Arizona's mining district, help keep the risk at a low level.

The significant risk factor is instead represented by the low volumes of shares traded on the stock market. The average volume for the last 3 months was 128.37k shares traded. The average volume of shares traded over the past 10 days was 210.48k. The investor must be careful in building his position to gain exposure to the metals. If he has too many shares and the stock price starts to fall sharply, it may be difficult to quickly soften the position, with the risk of significant loss.

On the Toronto Stock Exchange, under the ( AMC:CA ) symbol, shares were trading at CA$3.16 per unit as of this writing for a market cap of CA$366.69 million. Shares are trading below the 200-day simple moving average of CA$ 3.70, a little bit above the 100-day simple moving average line of CA$ 3.14, and above the 50-day simple moving average of CA$ 2.83.

Shares are significantly below the middle point of the 52-week range of CA$ 2.43 to CA$ 4.92. On the Canadian stock market, trading volumes are low as well: The average volume over the past three months was 139.91k shares traded. The average volume of shares traded over the past ten days was 221.71k.

Conclusion

Arizona Metals Corp. is an exploration company advancing mineral projects in Arizona, where current expansion drilling and metallurgical testing activities are aimed at installing future metal production. The company has sufficient cash resources to continue to fund its operations in Arizona's highly productive mining district. It may take several years for copper and precious metals production to ramp up, but in the meantime, shares of this company will provide a good opportunity to participate in the profitable markets of the metals in question.

As a safe-haven asset, gold will benefit if the economy enters recession as expected, while copper will be supported by expected strong demand to meet the global need to be more environmentally friendly through the electrification of the production of companies and other human activities. The target of global efforts to reduce global warming, which is responsible for the abnormal effects of climate change, is industrial and other human activities that release enormous amounts of CO2 and other greenhouse gases into the atmosphere.

Due to high interest rates, this stock price could offer a more attractive entry point than current levels, while this analysis gives the shares a Buy rating.

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