TRX - Fortitude Gold: Improved Production Prospects (Rating Upgrade)

2023-09-05 21:44:03 ET

Summary

• Fortitude Gold Corporation is given a Hold rating as the company appears poised to benefit from an expected gold bull market.
• Analysts predict a potential recession, leading to a rise in gold prices, which would benefit Fortitude Gold Corporation.
• The company's solid second-quarter performance and improved gold price outlook support its plan to continue producing gold beyond 2024.

A Hold Rating for Shares of Fortitude Gold Corporation

This analysis assigns a Hold rating to shares of Fortitude Gold Corporation ( OTCQB:FTCO ) - a gold company based in Colorado Springs, Colorado, but with production, development, and exploration activities located in western Nevada.

This new recommendation rating comes as the high-margin gold business, which encourages a positive correlation between the stock price and gold prices, is now positioning the stock price to benefit from an anticipated bull market in the precious metal.

A solid second quarter in 2023 combined with an improved gold price outlook raises the odds for Fortitude Gold Corporation's plan to continue producing the yellow metal for several years beyond 2024 while still allowing investors exposure to gold prices.

The rating update represents an improvement over the previous Sell rating, but despite the aforementioned stock price catalysts, it cannot yet be higher than Hold, as the stock could become cheaper from current levels and investors may then consider buying shares of Fortitude Gold Corporation.

Expected Recession in a Few Months: Gold's Rise as a Safe Haven Bodes Well for FTCO

As a safe haven from headwinds for the value of US-listed stocks, the ounce of gold is likely to experience a market rally following a strong headwind that some leading economists believe will materialize within months, and which will be largely attributed to the US Federal Reserve’s hike of interest rates to counteract high inflation. This is the recession.

The chance of a significant downturn in the business cycle is gaining momentum, as more and more views join the thesis that 11 straight rate hikes to combat exceptionally high inflation, coupled with US regional bank-triggered credit tightening and a lack of momentum in China's economic recovery (America's largest trading partner), will inevitably lead to a recession.

Proponents of an economic downturn are the following voices:

• Rosenberg Research economist David Rosenberg, according to this Business Insider article , citing the economist's interview published on Blockworks' Macro Forward Guidance podcast on August 31, the article's author specifies.
• 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), as reported by Yahoo Finance on August 23, 2023.
• Fannie Mae Chief Financial Officer Chryssa Halley, as reported by Yahoo Finance on August 1, 2023. As the government guarantor of mortgages for low- and middle-income borrowers (according to OECD Library , these borrowers account for the largest share of US consumption), who can better predict the next business cycle than Fannie Mae, as YCharts indicates that almost 70% of US GDP is driven by consumption.

Probably based on the forecasts of the above economists and real estate experts, the analysts of Trading Economics, who are convinced of the anti-recession properties of gold, expect that in 12 months the price of gold will rise to $2,033.46 an ounce, which is a strong upside from the current level of $1,940.54/oz.

The Chance of a More Attractive Entry Point

The increase in the cost of money required to ensure price stability, which is considered as re-established when the annual inflation rate realigns with the medium-term target of 2% (currently 3.2%), has put strong downward pressure on shares of Fortitude Gold Corporation so far.

In fact, since the first Sell rating , FTCO's stock price has lost 12%, then the stock has continued to decline, and after the second Sell rating , FTCO has lost another 7%, while the price of gold futures has decreased by 2.7%.

Before the FED's restrictive interest rate policy pushes the cycle into recession – most likely leading to a rise in gold prices – higher borrowing costs, which policymakers want to maintain at least through 2023, will therefore continue to impact the FTCO, not in a positive way. Interest rates could even strengthen a bit more from current levels, more likely with the November meeting than the September meeting, according to interest rate traders on the CME Group's derivatives market website . Speaking at the Jackson Hole Symposium in Wyoming on Aug. 25, the chairman of the Federal Reserve emphasized the widespread belief among policymakers that another rate hike may be necessary because core inflation is still too entrenched. Indeed, the annual rate of US core PCE prices excluding food and energy, which is the Federal Reserve's preferred measure of inflation, continues to rise, albeit at a slower pace, as reported by Trading Economics .

Because there is room for shares to reach lower levels, investors may want to wait for those levels to materialize as more headwinds from the Fed's aggressive policy are on the way. The lower the share price with which a position is expanded or established, the higher the chance of a good return on the investment.

The Positive Correlation between FTCO and Gold Futures

Returning to the outlook for the gold price between the end of 2023 and the first quarter of 2024 when the recession is expected, the price of the ounce should see a rally favoring Fortitude Gold Corporation shares due to a positive correlation between the assets as the chart below from Seeking Alpha illustrates.

The “CC” Correlation Coefficient Index chart, which shows the yellow area chart at the bottom of the Seeking Alpha chart, shows that FTCO and gold futures have almost always moved in the same direction, as the yellow area has almost always been positive.

Solid results from the financial and operational activities in the second quarter of 2023 further fueled the positive correlation, leading the market to identify FTCO more with the gold outlook.

How Fortitude Gold Corporation Is Performing and Its Future Production Plan

Fortitude Gold Corporation's metals mining, development and exploration activities portfolio currently consist of only one producing deposit, the Isabella Pearl Mine Project property, located in a traditionally favorable mining and exploration region of the state of Nevada. The Isabella Pearl Mine is a 9,777-acre property in Mineral County, Nevada, specifically on the Isabella Pearl mineralized trend.

In total, Fortitude Gold Corporation's Nevada Mining Unit consists of five gold properties in the Walker Lane Mineral Belt and one additional gold property in western Nevada.

In addition to the gold-producing mine of the Isabella Pearl Mine Project, FTCO is also engaged in resource exploration and delineation. Of these exploration and delineation activities, the County Line and Golden Mile properties appear to be the best-positioned assets in the company's portfolio as part of the company's plan to continue production after the end of mining on the property of the Isabella Pearl Mine Project.

According to the Economic Analysis section of Isabella Pearl's February 22, 2023, Technical Report , the mine will supply the market with 40,163 ounces in 2023, 40,020 ounces in 2024 and 19,850 ounces in 2025.

According to the company's August 2023 presentation , County Line Property, which submitted an operating plan to the Nevada Bureau of Land Management in May, and Golden Mile Property, which is seeking a decision on potential resource development this year, would enable FTCO to produce approximately 40,000 ounces of gold annually through 2028.

Currently, the only mine in production — Isabella Pearl — has produced gold, and in the second quarter of 2023 , miners recovered 9,687 gold-equivalent ounces, down from 13,082 in the second quarter of 2022, as the facility nears the end of mining operations. However, the higher price realized from the sale of the yellow metal was key to the gold margin improvement, as well as lower all-in sustaining cost per ounce sold (AISC/oz.). The average price realized from the sale of one ounce of gold increased 6.1% year over year to $1,990/ oz. in Q2-2023, while the AISC/oz. dropped 7.2% year over year to $680 in Q2-2023.

The company reported total revenue of $19.2 million for the second quarter of 2023, down 20% year-over-year due to lower volume of gold ounces sold, resulting in GAAP net income of $0.15 per share.

The higher gold margin per ounce had a positive impact on cash on hand ($46.913 million as of June 30, 2023) and allowed the company to fund ongoing operations, including $6.1 million for exploration activities and the dividend payment.

Primarily, $6.1 million in exploration work was used to fund the metal project pipeline and advance the County Line Property and Golden Mile Property projects through the production permit cycle, which Mr. Jason Reid, CEO and President of Fortitude Gold Cop believes moving forward commenting on Q2 2023 results.

While the expected recession does not bode well for U.S. listed stocks, the effect of robust demand for gold offsetting headwinds will instead bode well for FTCO's growth expectations as the resulting higher gold price per troy ounce increases the chances that the County Line and Golden Mile properties projects are delivered timely.

How much these projects will cost to extract the precious metal is currently unknown due to the lack of data in that sense as well as an economic analysis of the feasibility of the two projects. However, both mining projects have the potential to develop two high-grade open pit mines where mining techniques likely to be employed will generally keep costs under control. This aspect should be maintained even in a scenario where the company could report a greater uptake of resources to cover truck fuel and maintenance costs, as the location of the two sites is not very close to Isabella Pearl's processing plant. The County Line project is approximately 35 kilometers away from the processing facility.

However, assuming the cost of supplying the market at 40,000 ounces per year through 2028 remains a question mark, the chances of profitable gold production beyond 2024 should remain plentiful thanks to analysts' encouraging forecasts for future gold prices.

Knowing that analysts see the bullion price continuing its recent 5-year positive trend through the rest of 2023, and in 2024 and 2025, as the chart below from Trading Economics shows, is of great comfort to anyone interested in capitalizing on the momentum in the precious metals market through FTCO shares.

Additional Benefit of Holding FTCO

A position in Fortitude Gold Corporation stock, while benefiting from a rising gold price, offers a quarterly dividend of 4 cents per common share, with the last payment on August 31, 2023, which can also be increased with such rosy prospects for metal. As of this writing, the payment results in a forward dividend yield of 7.95%, reports Seeking Alpha , compared to the S&P 500 yield of 1.52%, reports S&P 500 Dividend Yield .

During the second quarter, the company also had sufficient resources to finance the payment of a special dividend of 4 cents per common share that was paid on May 31, 2023. This form of remuneration also has the chance of being proposed again in the future.

The balance sheet seems strong. Fortitude Gold Corporation has no debt, while the Altman Z Score of 8.33 (scroll down Seeking Alpha’s webpage to the Risk section) indicates safe areas and no chance of bankruptcy. In addition, an estimate of cash on hand, after deducting exploration expenses, is sufficient to fund the quarterly dividend for at least five years.

In addition, as of June 30, 2023, there is $45 million in working capital (net of cash), which will provide additional resources as well as operating cash flow ($12.8 million for the first six months of 2023 versus $14.5 million for the first six months of 2022) if the gold price remains strong.

The Stock Valuation

Fortitude Gold Corporation shares are trading attractively at the time of this writing, trading well below the 200-, 100- and 50-day simple moving averages of $6.39, $6.59, and $6.28, respectively. Shares are trading at $6.04 per unit for a market cap of $145.47 million.

Shares have also fluctuated between a low price of $5.22 and a high price of $7.37 over the past 52 weeks, and currently, they are also below the middle point of $6.295 of the 52-week range.

Also compared to its peers TRX Gold Corporation ( TRX ) and Caledonia Mining Corporation Plc ( CMCL ), Fortitude Gold Corporation shares are currently trading attractively based on a 12-month EV/EBITDA ratio. The EV/EBITDA ratio of FTCO is 3.20x, while TRX's EV/EBITDA ratio is 12.31x and CMCL's EV/EBITDA ratio is 6.83x, reports Seeking Alpha .

However, the investor may be interested in increasing a position not from these but lower levels, and according to this analysis, he is not wrong to try to do so: based on a 14-day relative strength indicator of 41.98 (see the chart below from Seeking Alpha), there is room for a further fall in the share price.

The effect that FTCO's shares may become even cheaper compared to the outlook described above is likely to be due to the rise in interest rates.

The rate hike, which will briefly make gold less attractive relative to bonds, will also dampen demand for FTCO shares for a while before gold starts to rally again if investors see it as a cure for the ravages of the expected recession.

Conclusion

Given its properties as a safe haven to protect the values of US portfolios from a recession, gold is expected to stage a significant rally between late 2023 and the first quarter of 2024 as prominent economists forecast recession headwinds for the same period.

Since Fortitude Gold Corporation stock is highly positively correlated with gold prices, it will also benefit from the gold price rally, so investors may be interested in buying shares of this gold operator in Nevada. However, since shares can get cheaper, investors should just Hold the stock for a while.

However, since shares may become cheaper, investors should Hold shares of FTCO for the time being.

A Hold means the opportunity to add exposure to gold in the short term through FTCO's stock at a more attractive price. Be aware that FTCO's plans to expand gold production well beyond 2024 have seen their outlook improve significantly after the gold outlook turned dramatically positive.

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