FTCO - Fortitude Gold: Could Fall On Expected Lower Prices And Output

2023-04-04 04:45:19 ET

Summary

• Gold and silver are on course to trade lower as fears of a collapse in the banking system have passed, while OPEC+ oil supply curbs raise expectations for higher interest.
• Investors may want to reduce their positions in Fortitude Gold Corporation as this Colorado-based mining company's shares could fall as fast as they have risen during the bull market.
• The company anticipates mining fewer metals in 2023, which coupled with expectations of lower prices and higher costs, could impact margins and organic growth.
• Investors will need less uncertainty protection due to some macroeconomic circumstances, so they are likely to reduce demand for safe-haven assets like gold and silver.

Analysts Predict that Precious Metal Will Go Down in 2023

The tailwinds that have been driving gold and silver prices for a while in March are completely dissipating as fears of a banking system collapse have now sharply receded. Investors turned to the precious metal as a hedge amid uncertainty over fears that an emerging risk to the banking system could threaten the value of their assets.

Additionally, the possible extension of central banks' interest-rate hike policy due to the expected inflationary impact of OPEC+'s decision to cut daily oil supplies is worsening the outlook for gold and silver demand as the no-yielding gold or silver loses competitiveness against fixed-income assets.

For roughly these reasons, analysts are forecasting the following declines in gold and silver prices per ounce.

Gold Futures - June 23 (GCM3), priced at $1,981.15 an ounce as of this writing, is expected to fall to $1,779.15 by the end of the current year.

Silver Futures - May 23 (SIK3), priced at $23.915 an ounce as of this writing, is expected to fall to $18.58 by the end of 2023.

As lower gold and silver prices are also likely to affect the market value of publicly traded securities tracking the two metals, investors should not further increase their exposure to gold and silver-backed securities.

They may even want to reduce their positions, particularly in assets that could fall faster than metals, and use cash to make other financial market decisions.

Why reduce Fortitude Gold Corporation

Based on the below chart there is a high indication of selling shares of Fortitude Gold Corporation ( FTCO ).

With shares of this company growing faster year-to-date relative to the metals, it's not unreasonable for investors to expect that they'll also fall quickly in a bearish precious metals market.

About Fortitude Gold Corporation and its Nevada mines

Based in Colorado Springs, Colorado, Fortitude Gold is a gold producer that claims to have mineral properties in its portfolio with low operating expenses which would allow for high margins and good returns in terms of stock price appreciation and dividend payments.

The characteristics of its assets from an economic perspective would allow the company to pursue organic growth instead of mergers and acquisitions while remaining debt-free.

Fortitude Gold produces the precious metal from open pit deposits called the Isabella Pearl Mine complex, located on approximately 9,000 acres along the Walker Lane mineral belt in Nevada [USA], a historic mining trend.

From this mine, Fortitude Gold produced 41,231 gold ounces throughout 2022, exceeding the company's target for early 2022 by 3%.

Miners were able to recover some silver from the Isabella Pearl Mine in 2022, approximately 56,876 ounces (or approximately 690 ounces of gold equivalent), but gold production did not fare well compared to higher production of 46,459 a year earlier.

The company reported the following year-over-year changes in costs: total cash cost before by-product credits rose 6.7% to $651 per gold ounce sold, total cash cost after by-product credits rose 5.8% to $621 per gold ounce sold, while total all-in sustaining cost rose 2.8% to $725 per gold ounce sold.

Despite a 0.4% year-on-year higher realized gold price of $1,802 per ounce, higher costs impacted net income, which decreased 17.8% year-on-year to $14.7 million in 2022. Net sales also decreased 9.4% year-on-year to $74.4 million due to a 9.3% year-on-year decrease in sales volume of 42,157 gold equivalent ounces.

Net cash from operations increased by 15.8% to $28.6 million but thanks to significantly lower inventories, while gold grade from operations was lower at 3.71 grams of gold per tonne (vs. 3.76 g/t in 2021). Therefore, the mining activity could have performed better to take advantage of a higher gold price, but it did not.

As of December 31, 2022, the balance sheet showed $45.05 million in cash and marketable securities while total debt was only $3.83 million represented by operating lease liabilities.

Fortitude Gold Corporation pays a monthly dividend of $0.040 per share. The last was paid out on March 31, 2023. As of this writing, the stock offers a forward dividend yield of 6.67%.

Company Outlook for 2023

For 2023, Fortitude Gold expects lower gold production in the range of 36,000-40,000 ounces (vs. 41,231 ounces in 2022), which at a lower precious metals price (as analysts expect) could have a potential impact on margins with headwinds for the company's dividend payment and implementation of growth plans.

Should this occur, the stock price could come under downward pressure, making it unlikely to reach higher levels than current ones.

There is a significant likelihood in favor of such a negative event in 2023 as, in addition to the company's expectations for lower production during the year as a result of a drop in gold grade and mineral throughput, the following negative catalysts are driving analyst forecasts for the worse in gold and silver prices.

Negative Catalysts for Gold and Silver Prices

OPEC+, which announced a production cut in May, will deliver 1 million barrels less oil per day and this new trend will continue through 2023.

The move will put further pressure on oil prices, and hence inflation, as manufacturing and service companies will try to pass higher energy costs on to end users through price hikes.

This OPEC+ decision thus complicates the plans of the central banks, which have been trying for about a year to dampen the rapid rise in prices for goods and services (inflation) by raising interest rates on federal deposits.

As the rise in fossil fuel prices will bolster the foundations of already hard-to-eradicate inflation, monetary tightening, i.e., raising interest rates, could result in some more rate hikes than originally planned.

Further rate hikes will impact precious metals prices, leading to price declines after the ounce benefited from short-term tailwinds from renewed demand for gold and silver to hedge against uncertainty stemming from the collapse of Silicon Valley Bank and Signature Bank (SBNY).

Investors are no longer afraid of the banking crisis. As the chart below shows, they have regained confidence in risk since mid-March. As a testament to this, the SPDR S&P 500 Trust ETF (SPY), a benchmark for the US stock market, has recovered very well from March 13, 2023, low of $383.89 and has returned to mid-February 2023 higher levels.

The collapse of US regional banks, which increased investor risk aversion with negative consequences for US-listed equities, occurred around March 8th. Under the guise of safe-haven assets, the precious metal has moved in the opposite direction against the resulting uncertainties, i.e., it was in bullish mode until a few days ago when, following reassurances from economists and policymakers about the resilience of Western banking systems, the kind of fears that investors had were allayed. If someone still fears for the stability of the banking system, he is likely being influenced by an idea that seems to have lost its basis.

In addition, interest rate hikes must continue as inflation, to be brought down to 2%, is still a long way from the current annual rates of 6.9% in the Euro zone and 6% in the US. This makes both the US dollar and fixed-income assets more attractive investment vehicles than the precious metal.

Investors are likely to exit the precious metal somewhat as its function as a hedge against uncertainty has diminished, implying a higher opportunity cost than holding US dollars or fixed-income securities.

This situation is likely to dampen investment demand for gold and silver and potentially create strong headwinds for precious metals prices.

The Stock Valuation

Shares of Fortitude Gold Corporation are trading at $7.18 per unit at the time of this writing, giving it a market cap of $171.72 million.

Shares are trading heavily at a premium compared to the long and short trend lines as follows. The 200-day simple moving average line is $6.05, the 100-day simple moving average line is $6.11 and the 50-day simple moving average line of $6.46.

Current stock prices are also much closer to the top than the bottom of the 52-week range of $5.25 to $7.65.

Therefore, these are price levels to be exploited and get some profit from the investment if, consistent with this analysis, shares of this stock are believed to be moving towards lower prices.

The risk is that Fortitude Gold Corporation shares could trade significantly higher than current levels, and for that to happen, the stock needs a tailwind from the price of gold and silver.

In terms of production and costs for 2023, history seems to have already been written by Fortitude Gold. The amount of bullion ounces will decrease, and costs may increase due to lower production.

Either a pause in monetary tightening or an economic recession would be required for the precious metal to recover. Both have little chance according to the following trends.

The number of Americans who filed for unemployment benefits for the week ended March 25 came in at 198,000, higher than expectations of 196,000 but still at historically low levels.

Trading Economics reported that initial jobless claims data in the United States "continued to point to a stubbornly tight labor market, in line with the hot payroll figures for February and the Federal Reserve's outlook of low unemployment."

Also, low unemployment is not associated with an economic recession. The tight labor market implies higher wages to attract and retain employees, and the resulting inflation is putting additional pressure on the central bank to raise interest rates further, boding ill for safe-haven gold-silver assets.

Conclusion

Fortitude Gold Corporation shares look set to trade lower, not higher, as the company should mine fewer precious metals in 2023 while prices are expected to move down due to strong macroeconomic circumstances.

Investors may wish to ignore the high dividend yield and sell shares of this stock and then use the money elsewhere in the financial markets.

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