DC - Dakota Gold: Offers Upside Potential But Gold Needs To Rally (Rating Upgrade)

2023-09-01 21:56:20 ET

Summary

• The "Buy" rating is based on Dakota Gold Corp's upside potential given the expected gold bull market.
• Investors may want to wait for downward pressure from the Federal Reserve's tightening monetary policy to create a more attractive entry before buying.
• The correlation between Dakota Gold Corp and the price of gold suggests that the company's share price has the potential to move higher.
• The market may still identify this stock with the metal: the stock is a gold explorer in what has historically been a highly profitable gold mining area in the United States.

Dakota Gold Corp. Has Now a Buy Rating

This article is about the recommendation rating for shares of gold explorer Dakota Gold Corp. ( DC ) based in Lead, South Dakota.

This article has changed the rating from the previous analysis "Hold" rating to a "Buy" rating.

The Buy rating is based on Dakota Gold Corp's upside potential given the expected bull market for gold.

But investors may wish to wait for downward pressure from the Fed's tightening monetary policy to further impact Dakota Gold Corp's stock price before executing a buy stance.

The downward pressure is currently being fueled by the Federal Reserve's willingness to keep interest rates in restrictive zones as inflation remains an issue.

Shares of Dakota Gold Corp. Are Well on their Way to Fetching a More Attractive Price

Federal Reserve Chairman Jerome Powell, speaking at the Jackson Hole Symposium in Wyoming last week Friday, went a little further than the scenario of deliberately keeping rates high while core inflation persists, pointing to the possibility of further rate hikes, Trading Economics reports . However, as rising interest rates reflect high monetary costs hurting consumers, the Fed's maneuver increases the likelihood of a recession and prompts investors to focus on gold to hedge against the negative effects of the economic downturn.

Due to a positive correlation with the price of gold, which is therefore on the verge of a bull market that could also be significant, the prospects for a significant share price recovery for this gold vein explorer in South Dakota's Homestake Mining District remain robust.

Since the previous analysis, the share price has fallen significantly on headwinds to gold prices from a slowing down in manufacturing activity, persistent inflation, and the possibility that interest rates will remain in the tight zone for all of 2023.

Further headwinds from a possible renewed tightening of monetary policy, as inflation remains too problematic for the Fed, should weigh on the stock prices and likely lead to a share price contraction. Aside from macroeconomic reasons, there is also technical room for the price to fall further after the next hike, which is likely to happen at the November meeting, according to interest rates traders on the CME Group's derivatives market website.

Strong Harbingers of a Recession: The Catalyst for the Gold Bull Market

Certainly, the economy across multiple sectors is now signaling two things: the persistence of benign conditions for difficult-to-quell core inflation, but at the same time, there are signs of a deterioration in the US consumption which is nearly 70% of the US gross domestic product, according to US Personal Consumption Expenditures . In fact, conditions in the US labor market remain resilient, as reflected in the latest initial US jobless claims, Trading Economics reports . With regard to consumption, Joanne Hsu, director of consumer surveys at the University of Michigan, commenting on August's U.S. consumer confidence data — down 2.8 points to 65.50 from July — seems to have pointed out that consumers are perceiving a slowdown of economic conditions while being very reluctant when asked to confirm an improvement in future prospects. By the way, US GDP growth for the second quarter was revised downward based on the second estimate on August 30, Trading Economics reports .

Therefore, elevated borrowing costs combined with stubborn inflation are affecting consumption, leading to strong assumptions of an economic recession that some prominent voices believe will hit no later than the first quarter of 2024.

David Rosenberg, economist at Rosenberg Research, warns of the real risk of a recession as a result of deterioration of macroeconomic conditions (while the majority no longer expect a recession but a soft landing), according to this businessinsider.com article, referencing the economist's interview published on the Blockworks Macro Forward Guidance podcast on Aug. 31, the article's author explains.

The downturn of the US economy is also predicted by Duke Professor and Canadian economist Campbell Harvey, the designer of the inverted yield curve indicator (3-month Treasury yields are currently higher than 10-year Treasury yields), who calls for the “lull before the storm,” as reported by Yahoo Finance on August 23, 2023.

Since gold is a safe haven from headwinds, the recession will increase its demand as investors are confident in the ounce's ability to appreciate as financial markets feel the pangs of rising uncertainty. The resulting rally in the price of the yellow metal can only be positive for Dakota Gold's share price.

Dakota Gold Corp. and Gold Price Are Positively Correlated

Meanwhile, analysts at Trading Economics expect the gold bar to trade above the current price of $1,944.52/oz in the coming months. The 12-month estimate stands at $2,007.76, which must be interpreted as a perception of an improving outlook for the yellow metal among analysts.

The chart below shows that Dakota Gold Corp. tends to follow the gold price trend, except for the last market month when the coexistence of a disappointing August for the US stock market (Yahoo Finance reports ) and the prevailing perception of a soft landing for the economy, may have been responsible for the temporary trend break. But when you look at Dakota Gold Corp's share price and gold futures prices over a 12-month period, there appears to be a positive correlation between the two securities. This means that with Dakota Gold Corp. mimicking the trend in gold futures prices, the North American gold explorer's share price has the potential to move higher given the expected gold bull market.

Additionally, if we compare 52 weekly gold futures returns (input) to 52 weekly Dakota Gold returns (output) and equate them linearly, we get that the price of Dakota Gold stock nearly doubles on average when the gold price trades up. But it must also be pointed out that forecasts based on this model have a low degree of reliability due to a low coefficient of determination. However, this figure still supports expectations of a stock price rally as bullish sentiment builds around the precious metal.

Dakota Gold Corp in South Dakota's Mythical Homestake Mining District

The correlation with gold price action comes from the fact that Dakota Gold Corp. operates its 100% interest in a mineral project in the Homestake Mining District of South Dakota.

Dakota Gold Corp is not yet a gold producer, but the fact is that the North American gold explorer is prospecting for gold deposits in an area that, along with the Carlin District of Nevada, was considered one of the most productive mining districts and largest gold suppliers to the United States Treasury Department. In fact, Dakota Gold Corp indicates that it operates nearly 46,000 acres, including mineral properties and surrounding mines at the Homestake Mine district, which has produced the precious metal for 126 years and has produced a total of well over 40 million ounces over those years, according to this article on Lead Historic Preservation website.

Thus, this leads one to believe that sooner or later the North American operator should be able to stake out a strong concentration of yellow metal to build a profitable mining operation.

Dakota Gold has been engaged in exploration activity consisting of drilling in the Homestake Mining District for approximately one year with a particular focus on the Maitland Gold and Richmond Hill gold exploration projects.

With gold prices having increased eight-fold over the past 20 years, the mining district has recently attracted renewed interest from explorers like Dakota Gold after the district became uneconomically viable for gold production in 2002 as operating costs became disproportionately high. Gold market conditions in 2002 were absurd compared to today. In 2022, the average gold price was $265/ounce compared to today's levels, which have never been below $1,600 an ounce in more than five years.

Based on this situation for the gold price and above expectations, therefore, an investor with a medium and long-term vision can be encouraged to buy shares of Dakota Gold Corp. when these are at their lowest levels to ensure maximum benefit when, after the start of production, the market will reserve completely different attention to this stock.

However, this does not rule out that positions are also being prepared for a sharp rise in the price of gold, which, as illustrated above, may soon become possible due to an expected recession between the end of 2023 and the first quarter of 2024. Sure, it's good to take advantage of the positive underlying trend that characterizes the yellow metal's price action over time, but since this also develops through cyclical trends, it's also fair to take advantage of the fluctuations, as operating in the market is not about wasting time but creating wealth.

And since even investor gurus increase or decrease their positions in gold stocks depending on their opinion of future gold movements, the retail investor will do the same, given the cost of trading of course.

Returning to what Dakota Gold Corp. is doing on the site, it should be mentioned the discovery of the new Unionville zone, a Tertiary fracture in the Precambrian basement rock reported by the company on February 8, 2023, and the discovery of the JB gold zone in the Precambrian gold mineralization reported by the company on May 4.

In addition to these discoveries, subsequent drilling activities conducted last spring (April/May), which results have also been reported by the company in May, perhaps have confirmed the presence of recoverable precious metals in various directions and at depth and set the stage for subsequent exploration activities in the larger mineralized areas of both findings related to the Maitland Gold exploration project. Of these subsequent exploration activities, a key intersection result of 19.55 grams/ton over 5 meters allowed the company to extend on August 3 the JB Gold zone by 171.3 meters.

Instead, activities at Richmond Hill are currently testing Twin Tunnel's breccia pipe as part of the company's infill and validation drilling program and the results indicate the presence of high-grade mineralization in that portion of the mineral property.

The company believes that with $15.44 million in cash and zero debt as of June 30, 2023 report, and the ability to scale down the exploration program, if necessary, it shouldn't really be a question of how to continue exploration activities that are critical to the future market value of this stock.

The Stock Valuation

Shares of Dakota Gold Corp were trading at $2.88 apiece giving it a market cap of $246.51 million as of this writing. Shares were below the 200-, 100- and 50-day simple moving average values, as shown by the chart.

The stock price is also currently well below the $3.375 midpoint of the 52-week range of $2.61 to $4.14.

These price levels could already be leveraged to buy shares of Dakota Gold Corp and gain exposure to gold ahead of the expected bull market, but as mentioned earlier, under pressure from the hawkish Fed, the stock could form lower levels than currently and indeed 14-day Relative Strength Indicator at 44.053x indicates good margin for another downside.

Owning shares of Dakota Gold Corp implies the risk that the expected return from the price rally will not be realized if the bull market doesn’t occur or the positive correlation to gold unexpectedly stops working.

As for the first risk factor, judging by the reliability of recession forecasting sources and the signals from monetary policy and the economy, a clear downturn in the business cycle is on the horizon, and no one will be able to turn a blind eye anymore soon, this analysis believes.

As for the second risk factor, at least in the short term, this should not be a problem as long as the company can continue with exploration activities in search of deposits to be exploited. Advances in exploration activities allow the market to continue to identify Dakota Gold Corp. with the commodity it intends to produce one day.

Conclusion

Dakota Gold could be used to benefit from the expected rebound in gold prices that would occur as a result of a recession major rumors confirm between late 2023 and early 2024.

Investors may want to take advantage of the positive correlation between Dakota Gold and gold and therefore buy shares of this gold explorer, which are also trading low compared to past valuations.

However, continued downward pressure from the Fed's monetary tightening raises the likelihood that shares can still decline from where they are currently, and not a little.

At this point, the market may still identify this stock with the precious metal because the stock is a gold explorer operating in what has historically been a highly profitable gold mining area in the United States, the Homestake Mining District.

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