DC - Dakota Gold: Possible Upside But The Stock Could Get Cheaper

2023-06-13 04:26:33 ET

Summary

• Dakota Gold is expected to benefit from a likely bull market in gold prices in the second half of 2023.
• The company is exploring the Homestake Mining District in South Dakota, which has a history of high gold production.
• Investors should consider buying Dakota Gold shares after the possible interest rate hike in July 2023, as shares could become more attractive than current levels.
• Higher interest rates increase the likelihood of a recession, which is good for safe-haven gold, as well as shares of Dakota Gold Corp. as the stock positively correlates with the metal.

This analysis represents a change from the previous bearish rating on this stock as the macroeconomic conditions also discussed here paint a different scenario for the gold environment than some time ago, which is affecting sentiment around the stock.

The previous rating was based on a gloomier scenario for gold prices while the stock was near an exploitable high. Additionally, given the bearish gold sentiment, progress in exploration activities would have done little to move the stock price.

But now with the gold price expected to rise sharply in the second half of this year, the company's exploration activities in South Dakota should attract more attention, particularly as drilling and material testing continues to provide encouraging results on some recent discoveries.

Take Advantage of the Expected Gold Bull Market: About Dakota Gold Corp

Amid a more-than-likely bull market for the price of gold, which this analysis forecasts for the second half of 2023, shares of the US-based gold exploration and development company have the potential to rise significantly. A surge in gold prices should follow a quick recourse to the precious metal's safe-haven features to counter the risk of depreciation from the economic recession that economists expect in late 2023.

One stock that this analysis suggests should benefit from the expected rise in gold prices is Dakota Gold Corp. (DC). The shares of this gold exploration company may not yet be trading at the most attractive levels but could become such after the end of July.

Thus, this analysis suggests a Hold rating for Dakota Gold Corp.

Although this company is not yet a producer but an exploration company, the stock price of Dakota Gold Corp. is strongly tied to the performance of the precious metal, as the assessment of the company's perspective on exploration projects depends on the scenarios assumed by gold.

Dakota Gold Corp and the Gold Price

Let's measure the relationship between Dakota Gold Corp and the precious metal. First, the chart below from Investing.com seems to indicate that there is a positive correlation between the two assets, meaning that shares of Dakota Gold are likely to rise in the second half of 2023 if the gold market experiences a bull market.

In addition, Dakota Gold Corp.'s stock price was put in a linear relationship with the price of gold, and the model, which used the weekly returns of the metal price as input, influenced the stock's weekly returns according to the following beta-gold coefficient of 2.2x. Of course, the assumption is that there is a cause-and-effect relationship between the stock and the metal. Beta gold implies that shares of Dakota Gold Corp tend to amplify the change in the price of gold by a significant multiple, as the chart above also seems to suggest, and this is very interesting given the expected rise in the price of gold.

Dakota Gold Corp. Wants to Resume Profitable Gold Mining in the Mythical Homestake Mining District

Dakota Gold Corp.'s mineral project is represented by its 100% interest in the Homestake Mining District of South Dakota. In this mining district, known to host multiple precious metal occurrences, the company operates virtually on an area covering 46,000 acres, including mineral properties and surrounding mines. Along with the Carlin District of Nevada, the Homestake Mine was one of the most productive mining districts in the United States. It produced the precious metal for 126 years and mined a total of 44 million ounces.

Mining and exploration activities ceased in 2002 as gold market conditions and exorbitant operating costs prevented profitable exploitation of the deposits. However, with the price of the metal appearing to have settled well above $1,850 per ounce, plans to further develop the Homestake Mining District now make economic sense.

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

On February 8, 2023, the company in Maitland announced the discovery of the new Unionville Zone, a Tertiary breccia in Precambrian basement rock that may provide evidence of gold mineralization beyond the prolific and historic Homestake mine. On May 4 Dakota Gold Corp announced that it has discovered the JB gold zone in Precambrian gold mineralization. Drill results from last April and May were encouraging for the company as they provide reasonable confidence that the Unionville Zone and JB gold zone may be open along strike in both directions while addressing subsequent exploration activities towards the larger areas of mineralization. Instead, activities at Richmond Hill are currently testing the Twin Tunnels breccia pipe and the results show the presence of high-grade mineralization in the part of the mineral property.

The company is on track to report more exploration activity results in the coming months, which implies strong upside potential for the share price should gold sentiment be bullish. The company believes that with $20.3 million in cash and zero debt as of March 30, 2023, it is able to continue its exploration activities for several years.

The Stock Valuation

Shares of Dakota Gold Corp. were trading at $3.33 giving it a market cap of $250.80 million as of this writing. Shares were approximately in line with 200-, 100- and 50-day simple moving average values, as shown by the chart from Investing.com

At first glance, these price levels do not seem bad if the strategy is to increase the position in this gold explorer in anticipation of a potentially strong uptrend in gold prices expected in the second half of the year.

However, I think these prices could become attractive after July 26 when Federal Reserve governors meet to decide on the interest rate. A further increase in the interest rate will make it significantly more profitable to lend cash than to buy gold.

The expectation of a rate hike that takes the target range up to 5.25-5.50% from the current 5.00-5.25% is based on the fact that the stubbornness of the labor market, despite the aggressive monetary policy, is making core inflation more difficult to contain than initially expected.

In fact, the US unemployment rate remained historically low at 3.7% in May 2023, suggesting that labor market conditions are still too tight. While the monthly evolution of US core consumer prices shows no signs of easing.

However, the second half of 2023 is expected to see a bull market for the precious metal and with it a more favorable environment for Dakota Gold Corp.'s stock to grow. A higher cost of borrowings from July 26 would further increase the likelihood of a negative economic cycle, dampening consumption and investment activities.

Strong consumption, particularly in the leisure and travel sectors, will keep the recession at bay for now, but once the holidays and pandemic-era savings are over, the last bastion of sustained US and global expansion will fail. In fact, the Eurozone economy is already in a technical recession.

As gold is seen as a safe haven against the headwinds of the economic downturn, its price should recover strongly thereafter.

I, therefore, anticipate a possible strong rally for gold and Dakota Gold Corp. shares in the second part of 2023.

Conclusion

Dakota Gold could be used to benefit from fluctuations in the price of gold as the stock tends to be heavily impacted by changes in commodity prices. As I anticipate a bull market in gold prices in the second half of 2023, investors would be wise to maintain a position in Dakota Gold. The shares should eventually be bought after another rate hike, which I think could occur with the July 26th Federal Reserve meeting. Higher borrowing costs bode ill for gold and gold-backed securities. Because Dakota Gold Corp. aims to resume profitable gold mining in the mythical Homestake Mining District gold mining district, any encouraging exploration results from this area, which was once the second most productive area in the US, could add even more upside to the stock's price.

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