USAU - Consider U.S. Gold Corp. For The Next Gold Bull Market (Rating Upgrade)

2023-08-22 09:11:57 ET

Summary

• U.S. Gold Corp.'s recommendation rating has changed from "Sell" to "Buy" due to the formation of conditions for a strong recovery in the gold price.
• The price of gold has retreated in recent months due to a decrease in inflation concerns and expectations of a soft landing for the US economy.
• U.S. Gold Corp.'s stock price is expected to benefit from the rising gold prices and the potential approval of a gold mine project in Wyoming.

A Buy Rating for U.S. Gold Corp.

This analysis changed the recommendation rating from "Sell" for the US-listed stock in U.S. Gold Corp. ( USAU ) - a gold and precious metals exploration and development operator based in Elko, Nevada in the USA, which was given by the previous article -- to a "Buy" rating.

The previous rating was based on a lack of momentum in gold price prospects, which actually materialized, leading to poor performance of USAU shares, due to a positive correlation between the two assets, versus the continued rise in US Treasury yields with 10-year yields rising north of 4.3% on Aug. 17.

Rather, this analysis now sees the formation of conditions for a strong recovery in the gold price, which, combined with an expected significant update on a company's project for future gold production in Wyoming, should have a very positive effect on the USAU stock.

Gold Price Outlook

At the time of writing, the precious metal gold is trading at around $1,917.70 per troy ounce in the gold futures market.

Referring to Gold Futures - December 23 (GCZ3), specifically, the price per troy ounce has retreated significantly over the past 2 months, shedding 4.6% from a high of $2,010.90/oz. reached intraday on 31 July 2023.

As a hedge against high inflation and fears of recession due to the US Federal Reserve's restrictive monetary policy to curb inflation, the precious metal has lost much of its attractiveness in recent months.

Indeed, the annual inflation rate has fallen remarkably from its record high of 9.1% in June 2022 to the current level of 3.2%, giving less concern about the potential impact on consumption, which, moreover, judging by the economic results of the second quarter of 2023 by US retail giant Walmart Inc. ( WMT ) – which can be used as a benchmark for US consumption trends – seems to be holding up very well after all.

In addition, the hypothesis of a soft landing for the US economy, rather than the recession that was initially feared, has gained acceptance over the past few weeks. So, there would not be much reason to demand gold as a hedge, and the troy ounce is losing momentum in that sense.

But the wind should soon turn in favor of the price of gold and gold-backed securities like USAU which have a strong correlation with the precious metal and a couple of other upside catalysts.

The further increase in the cost of money, which is expected to remain high until the US central bank is confident that the threat of a flare-up in inflation is over, will have a significant impact on consumption likely from late 2023 as excess US household savings (in May they were $500 billion compared to before the Covid-19 virus pandemic, Reuters reported ) are expected to support consumer spending no further than this year.

With consumer spending accounting for nearly 70% of US gross domestic product, given the magnitude of monetary tightening (11 interest rate hikes through July 26, 2023 - the most aggressive since the 2008 financial crisis) and with the most recent hikes that have yet to be transferred into the system, the effect in the form of a sharp downturn in the US economy is inevitable.

The following chart from Trading Economics extrapolates a very negative trend in the annual rate of growth of US GDP in 2024.

Apart from “ the largest climate investment in US history ” (says Yahoo Finance) by US President Joe Biden a year ago, which should boost the economy in the medium/long term, the other components of the US GDP will not support growth in the short term either.

With the high cost of money - last week the average 30-year mortgage rate was 7%, the highest in 21 years - and tighter access to credit due to the crisis of US regional banks in last springtime, the investment sector is doomed, and for the trade balance, there is no other fate waiting.

On the last point, US exports will certainly suffer from the poor economic situation that the US's main trading partners, the Eurozone and China, are currently in. If expectations for the European economy cannot differ from those of the US, given that the ECB is also pursuing an extremely aggressive monetary policy to reduce inflation, in China, the financial crises of property giants Country Garden Holdings Company Limited ( OTCPK:CTRYY ) ( OTCPK:CTRYF ) ( OTCPK:CGSHY ) and China Evergrande Group ( OTC:EGRNF ) are now raising fears of a possible shock to the economy, which was already struggling to find the path to definitive growth. Last week, Evergrande - saddled with more than $300 billion in debt - filed for Chapter 15 bankruptcy protection in New York's Manhattan Court.

So, there are all the conditions for a recession in the US economy between the end of 2023 and the first part of the year 2024, as even Fannie Mae -- Federal National Mortgage Association in the US -- has recently pointed out. Fannie Mae's view is one to take due consideration given its role as the government guarantor of mortgage loans to the economic class of American households - low/moderate income borrowers - who are by far the largest share of US consumption, which in turn accounts for more than 68% of US GDP.

Due to the hype around its function of protecting the value of asset portfolios from the negative effects of the economic downturn, demand for gold will increase rapidly, which will put strong upward pressure on the price. That is the opinion of this analysis, which, among other things, supports analysts' expectations of a rising price per troy ounce of gold.

Compared to around $1,917.70 an ounce at the time of writing, gold is expected to up trending throughout 2024 to trade at around $1,981.33 within a year.

Possible Performance of U.S. Gold Corp. in the Context of Rising Gold Prices

In a very positive environment for the price of gold, shares of the stock in U.S. Gold Corp. will likely have a huge advantage. This should be possible thanks to a positive correlation that exists between the price of gold - benchmarked by gold futures - August 2023 (GCQ2023), see the chart below - and the share price of USAU stock.

Even though U.S. Gold Corp. is not a gold producer, yet it strongly identifies with the commodity for which it has a number of future gold production projects, including one in Wyoming.

At this time, it is extremely difficult to estimate when the CK Gold Project could commence gold production as the site is awaiting construction, operating, and deposit closure permits.

In terms of obtaining the necessary permits, Wyoming follows a policy that favors the exploitation of natural resources, as the state has traditionally been on the Republican side.

However, should Joe Biden, whose popularity seems to be rising according to recent trends in recent polls , win the next presidential election in 2024, the outcome of the CK Gold Project's mining authorizations will be more uncertain as Democrats are much more sensitive to environmental policies.

However, meanwhile, USAU shares will continue to follow gold's price action in the face of a strong positive correlation coefficient [“CC”], as shown in the chart above, where the yellow area curve has been above zero for almost all of the past 12 months.

Additionally, based on a statistical model where the weekly return on gold futures represents the input and the weekly return on USAU stock represents the output, we find that the share price of USAU stock tends to double the change in the price of gold over the past 52 weeks.

So USAU stock should perform well if, as a result of the recession, the price of gold needed to hedge against headwinds rises as expected by analysts' estimates.

While the correlation between the two assets creates the above effect, the CK gold project in Wyoming could provide another boost by increasing the likelihood of the scenario just outlined.

In fact, last June the Wyoming Department of Environmental Quality issued an Industrial Siting Permit ((ISP)) – usually required by the state of Wyoming if the project's construction and mining capital costs are expected to be $254 million or more – paving the way for the Go-ahead for the final permit to build a gold mine and conduct gold mining activities at the CK Gold Project.

What separates USAU from reaching the milestone is obtaining a second critical permit covering the Mine Operating Permit and Mine Closure Plan, which must also be issued by the Wyoming Department of Environmental Quality and is expected to arrive sometime in H1 2024.

The CK Gold Project is located in Laramie County in the State of Wyoming and USAU owns 100% of this mineral project which consists of a series of mining leases associated with other mineral rights covering approximately 1,120 hectares.

Pending USAU's completion of a feasibility study expected by the end of the current quarter, the CK Gold Project has a 2021 pre-feasibility study that considers a metal mining-based operation where revenues will depend on gold for 70% and copper for 30%.

Thus, CK Gold Project will also produce some copper according to the company's plan and in terms of equivalent gold, the mine is poised for yielding 108,500 ounces annually over at least 10 years of continued operations implying that the metal will be produced enduring an all-in sustaining cost [AISC] of $800 per ounce.

The Pre-Feasibility Study indicates that the 1.44 million gold equivalent ounces that the CK Gold Project hosts are currently estimated in terms of proved and probable reserves, therefore with a maximum degree of confidence.

The following table, taken from the company's investor presentation issued this month, provides some economic data supporting the project's feasibility.

Looking at the base case, i.e., in line with a forecast for a gold price of $1,625 per ounce, which is lower than the most recent five-year moving average of $1,695.35, the CK Gold Project predicts the following:

After tax, the project has a net present value of $265.7 million, a high Internal Rate of Return [IRR] of 33.7%, as investors consider an IRR of at least 30-35% for a project to be profitable, and a payback period of 2.2 years, which means that the initial investment, which is approximately $222 million, should be recovered in just over 2 years.

While the company is pursuing other mining projects, the CK Gold Project is the most important at the moment in terms of the upside catalysts it can offer in the near term, just as the precious metal is expected to get a bull market from the expected recession.

These other projects are the Keystone Project located in the Eureka District on the Nevada's Cortez Trend, consisting of 650 unpatented mineral claims covering approximately 20 square miles, and the Challis Gold Project located in Lemhi County, Idaho, consisting of 87 unpatented vein mines covering approximately 1,710 acres.

Since Keystone is located in the same gold-bearing region in which Barrick Gold Corporation ( GOLD ) is exploiting a potential of about 45 million ounces of gold over the years, this could imply that the USAU project might have business prospects similar to the Canadian gold mining giant Barrick.

From a mineralogical perspective, the two companies' projects share roughly the same characteristics, which bodes well for investors who are also pinning their hopes on Keystone.

As for Challis Gold, this project is expected to total approximately 313,825 ounces of gold in resources, with each ton of gold ore containing approximately 1.22 grams of precious metal, but the information is not very reliable due to a fairly outdated technical document.

November last year, USAU sold the Maggie Creek project on the Carlin Trend, one of the world's premier mineral trends, to Nevada Gold Mines – a joint venture between Barrick [61.5%] and Newmont Corporation ( NEM ) [38.5%] based on which Barrick operates the single largest gold producing complex in the world - for a total consolidation of $2.75 million plus 0.5% net smelter return [NSR].

The Stock Valuation

Shares of U.S. Gold Corp. were trading at $3.76 apiece as of this writing giving it a market cap of $34.86 million and a 52-week range of $3.50 to $7.48.

Shares are not expensive at all in light of the strong upside potential highlighted before as they are significantly below the 200-, 100- and 50-day simple moving average lines of $4.38, $4.37, and $4.24.

Shares are also more than 30% below the 52-week range median of $5.49.

According to the 14-day Relative Strength Indicator of 31.08, which indicates that the stock is close to being oversold, current valuations present an intriguing opportunity to take a position in this stock, which has the potential to deliver a fruitful margin of return during the expected gold bull market between the end of 2023 and the first quarter of 2024.

In the coming weeks, it is possible that the US central bank will continue with another rate hike as forecast by Minneapolis Federal Reserve Bank President Neel Kashkari last week and Federal Reserve Governor Michelle Bowman earlier this month , leading to more headwinds for the price of gold, as higher interest rates do not bode well for gold, which instead provides no income.

However, a lower gold price should not really have a negative impact on USAU's share price, which already looks very devalued, according to the above indicators.

If the retail investor sees this as appropriate, in line with a more conservative approach, he could potentially still wait for the US Federal Reserve to deliver the next rate hike and let the decision play out its impact on the financial markets before investing in USAU.

Conclusion

Retail investors should consider investing in U.S. Gold Corp. as the Nevada-based explorer and developer of gold properties in Wyoming and Idaho has a stock price that shows a strong and positive correlation with gold.

The relationship implies that USAU shares do the same when gold prices rise, with the potential to double gold price gains.

In addition, USAU is expected to receive the second and final critical approval from Wyoming regulators to begin construction of a gold mine in the Laramie County for 10 years of operation at an interesting internal rate of return [IRR], assuming a reasonable price of gold.

The second authorization should act as an additional powerful catalyst, according to this analysis, as it is expected to be issued sometime in the first half of 2024 when gold is likely to experience a bull market due to various macroeconomic factors.

The combination could have very positive effects on USAU's stock price, which is trading very low, near oversold levels at the time of writing.

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