FTCO - Fortitude Gold: Rosier Outlook Could Deliver Well As Gold Rise

2023-12-05 04:47:54 ET

Summary

• Hold rating assigned to Fortitude Gold Corporation shares based on improvement in profit margin and positive correlation with gold prices.
• Outlook for safe-haven gold prices strengthens as the risk of economic recession increases.
• FTCO offers exposure to the price of gold and has a strong financial position for long-term gold production.

A Hold Rating for Shares of Fortitude Gold Corporation

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

The recommendation rating was assigned based on improvement in profit margin, which promotes the positive correlation between the stock price and gold prices, positioning this stock to benefit from an expected bull market in the precious metal.

The outlook for safe-haven gold prices has strengthened: the risk of an economic recession is now greater than it was a few months ago, as higher interest rates and elevated inflation have continued to damage the pillars of the US economy. Once a deterioration in the labor market begins, the bigger picture will be complete, and the downturn in the business cycle will justify strong demand for safe-haven gold to protect against portfolio headwinds.

Gold analysts forecast that gold is on track to achieve significantly higher prices than currently, while results from the third quarter of 2023 have been robust and FTCO's financial position raises good hopes for a company's plan for longer gold production beyond 2025. If the company is successful in its project, its shares will continue to provide interesting exposure to the price of gold.

FTCO stock is still not a buy today: There are stocks in the mining industry with higher gold beta coefficients, indicating greater upside potential amid the gold price rally. Additionally, the stock market could provide better entry points for FTCO stock in 2024 if the Fed raises interest rates again.

The Gold Price Outlook

Gold prices as measured by Gold Futures - February 2024 (GCG4) rose above $1,130 an ounce early on December 4, 2023, hitting new record highs before paring some of those gains at the time of writing, reflecting expectations that the Fed will not change the rates from current 5.25%-5.5% range with the next decision scheduled for December 13, 2023.

Market participants are also accounting for the various calls from analysts for the Fed's rate-cutting policy to begin in 2024, which is also causing the price of gold to rise very sharply right now: lower interest rates encourage investment in gold as the opportunity cost of holding gold instead of fixed-income assets gets pushed down.

Analysts who forecast gold prices expect the ounce to continue rising in the coming months: they expect it to reach $2,163.75/ounce in 12 months. This is a significant increase in their forecasts, considering that just a few days ago they projected the price of gold to reach $2,090.27/ounce in a year.

It appears that this rise in gold prices is being fueled by traders who are very confident in betting on a rate cut, which is at odds with the view of Federal Reserve Chairman Jerome Powell, who instead sees a rate cut now as "premature", although the risks of a policy that is not restrictive enough and one that is too aggressive balanced out.

The sharp rise in gold analysts' forecasts is likely not due to traders recently doubling down on interest rate cuts, but rather to the negative impact on the US economy from the Fed's hawkish stance coupled with the elevated core inflation rate. Gold investments are seen as effective safe-haven remedies against the headwinds of a deterioration in the US economy.

The Next Growth Catalyst for Higher Gold Prices: The Economic Recession

This article presents several macroeconomic trends that lead to the following. Under pressure from more expensive credit and while the prices of goods and services are still rising too quickly, the budgets of both companies and families are taking big steps backward compared to a future scenario that currently appears very uncertain. The increased perception of investment risk in a more uncertain context makes it much more difficult for companies to recover the necessary financing, both by taking on loans and listing new shares on the stock exchange to support growth projects.

Strained by expensive loans on credit cards, lagging wages relative to the increased cost of living, and the return of student loans after several years of forbearance, families' spending plans are facing greater structural scrutiny as they tighten their belts on discretionary categories of goods and services to focus on more pressing needs. The result is that both corporate investment and consumption are weakening, and this condition poses many downside risks to both current and future demand, leading to a major problem for the growth prospects of the US economy as consumption and investment are the most important components of the US gross domestic product. Just consumption accounts for nearly 70% of GDP.

The Inflation Act and other public spending projects currently appear to be the last resort for reviving the American dream, but it is important to note that these government initiatives also increase the risk of national debt. It was thanks to political agreements between both parties within the US Congress that a last-minute increase in the debt ceiling could avoid serious consequences for public utilities and services, provided that propaganda did not try to make the problem bigger than it was actually.

Also, the contribution of the trade balance is missing from the US GDP equation because the US's most important trading partners, i.e., the EU and the People's Republic of China, are also in an unfavorable cycle.

In the EU, there is a risk of a sharp economic slowdown due to the European Central Bank's restrictive policy to cushion the sharp rise in prices. The European Union faces more or less the same consequences for consumption and investment as the US, apart from the phenomenon of anti-immigration, anti-green programs, and anti-EU cohesion populist movements worryingly gaining consensus among important (though not core) economies within the Euro "geopolitical" and market big agreement between countries. China has its particular situation: the cycle which has no momentum but risks falling into deflation, bears the consequences of three years of extremely strict measures against the free movement of the population to prevent the spread of the virus and prove that its political system is still valid despite the Covid-19 virus pandemic, probably originating at the fish market in Wuhan. In addition, the real estate sector, the bulwark of the domestic economy, is faced with the fact that its major developers cannot meet their obligations to international creditors.

Due to negative stimulus from multiple fronts, the US economy is on the verge of entering a recessionary phase, as predicted by a significant group of economists , including UBS Group AG ( UBS ) who sees a strong downturn for the US cycle as early as 2024.

The recession will cause investors to flock to the safe-haven properties of gold to protect the value of their portfolios from the headwinds of the negative turn in the US cycle. For this reason, gold analysts today predict a huge increase in the price per ounce.

A Position in Fortitude Gold Corporation to Take Advantage of the Gold Rally

Retail investors are wondering why they should take advantage of this rise in gold prices by investing in Fortitude Gold Corporation shares rather than directly in the physical metal. The answer is straightforward: investing in the metal requires capital that only a large investor (an institutional investor or a bank) can have, but a retail investor usually cannot. This latter category of much smaller investors must rely on the ability of US-listed gold stocks to profit from rising gold prices, and Fortitude Gold Corporation offers them a strong option based on two metrics: a strong positive correlation with the gold price and relevant beta-gold coefficients.

As for the first metric, FTCO shares have a very strong positive correlation with the price of gold, as shown by the yellow area of the chart, which is almost always in the positive part of the chart: that is above the zero line.

The strong yellow area is a graphical representation of the correlation coefficient between the two assets, suggesting that FTCO shares will follow suit as gold price rallies on safe-haven tailwinds. The chart above also illustrates a more insightful signal: after a couple of weeks in which the area was in negative territory, starting at the end of November 2023, it has returned to the upper part, indicating momentum in favor of an expected recovery in the share price should be in place now.

Good to know: The bull market in gold prices (as gold analysts predict as investors' response to the impending economic recession) will likely be followed by a sharp increase in the price of FTCO shares.

The second metric of the Beta-Gold coefficient (the historical slope of the change in FTCO's stock price relative to the change in the price of gold) is constructed as follows: A linear model plots the changes in the price of FTCO stock (the output) in combination with the changes in the price of gold futures (the input). The 52-week returns for the two assets are considered price changes for the two securities over the past 52-week period.

The next markets will be influenced by roughly the same geopolitical and macroeconomic factors such as the consequences of conflict, as well as higher interest rates and increased core inflation, so the past year provides a sufficient and reliable series of price changes to support the construction of the estimate of Beta-gold coefficients.

The model suggests that if the price of gold rises by 100%, FTCO shares will rise by an average of 66%. So, based on historical data, they are rising less than the price of gold, but a 66% upside potential is still a good reason to consider FTCO as an investment vehicle to participate in the expected gold bull market, even with higher gold-beta gold stocks out there.

About Fortitude Gold Corporation, the Current State of Its Operations, and the Opportunities for Its Growth Prospects

Thanks to the gold production installed in Nevada's traditional mining district, investing in Fortitude Gold Corporation stock offers the opportunity not only to benefit from gold price cycles but also from the payment of the dividend.

On November 6, 2023, Fortitude Gold announced the payment of a monthly dividend of $0.04 per share, which the shareholders received on November 30, 2023. The payment was consistent with the previous one and resulted in a forward dividend yield of 7.88% at the time of writing.

The monthly dividend was introduced in 2021 when it was just $0.02/share and was gradually increased thereafter.

However, investors choose to participate in the gold price action through FTCO shares, not because of the dividend, but because of the positive correlation that the stock has with the price of the precious metal.

Higher gold prices allow the FTCO to maintain a robust balance sheet that funds gold production, which in the third quarter of 2023 developed as follows:

The company produced 11,122 ounces of gold in the third quarter, an increase of 17.1% year over year, and produced 32,293 ounces of gold in the first 9 months of 2023, an increase of 6.4% year over year, which led management to maintain 2023 production outlook unchanged at 36,000 to 40,000 ounces.

The improvement in production is a good sign, as this came in despite some downward trend in ore mining (329,765 tonnes in 9M-2023 versus 490,764 tonnes in 9M-2022) and gold grade (3.07 grams of gold per ton of ore in 9M-2023 versus 3.30 g/t achieved in 9M-2022), indicating robust activity at the processing plant.

At this time, due to the strong performance of the facility, FTCO will likely reach the upper limit of the production target corridor, which correlates very well with the forecasted higher gold price. The combination leads to expect a positive impact on the share price.

From a profitability perspective, things are also progressing well as sales are up 32% y-o-y to $21.3 million in Q3-2023 and up 11.8% year-on-year to $62 million in 9M-2023.

Costs were lower and positive trends are expected to continue as effective Fed monetary policy will help mitigate inflationary pressures on energy and raw materials procurement costs.

Total cash cost after by-product credits, as the company also mines and sells some silver, decreased 10.8% year-over-year to $547 per gold ounce sold in Q3-2023 and decreased 19.8% year-over-year to $523 per gold ounce sold in 9M-2023.

Total all-in sustaining cost sold decreased 5.2% YoY to $651 per gold ounce sold in Q3-2023 and decreased 15.5% year-over-year to $633 per gold ounce sold in 9M-2023.

This analysis estimated EBITDA (earnings before interest taxes, depreciation, and amortization) at $10.51 million for the third quarter of 2023 and $29.32 million for the first nine months of 2023, representing growth of 111.3% and 27.8% year-on-year, respectively.

Year-on-year, EBITDA margin increased by 1,855 basis points to 49.4% in the third quarter of 2023 and by 595 basis points to 47.3% in the first nine months of 2023, driven by higher productions but especially higher metal prices. Year-over-year, the average realized gold price rose 12.3% to $1,931/oz in Q3-2023 and rose 3.4% to $1,934/oz.

As a result of the above, the financial condition of the company strengthened despite the payment of dividends (up 11.4% YoY to $9.63 million) and CapEx (down 50.4% YoY to $5.05 million) in the 9M-2023, reflecting the lower CapEx but also robust cash flow generated by operating activities which was $22.62 million in 9M-2023 vs. $21.03 million in 9M-2022.

The balance sheet was almost debt-free and had cash and cash equivalents of $52.035 million at the end of September 2023, up from $42.196 million a year earlier.

The company will utilize these financial resources and those from future sales of gold ( approximately 40,163 ounces in 2023, 40,020 ounces in 2024, and 19,850 ounces in 2025) to mine at its sole producing deposit of the Isabella Pearl Mine Project property on a 9,777 acre in the Mineral County, Nevada (specifically on the Isabella Pearl mineralized trend).

Current and future financial resources will be used to maintain dividend payments and to finance the resource exploration and delineation activities. As discussed in the previous article about FTCO, the County Line and Golden Mile properties represent the best opportunities within the company's portfolio (five gold properties in the Walker Lane Mineral Belt and one additional gold property in western Nevada) to continue the business of producing and selling gold beyond the Isabella Pearl Mine.

The company's presentation of August 2023 indicates that the County Line Property, which submitted an operational plan to the Nevada Bureau of Land Management in May 2023, and the Golden Mile Property, for which the board is expected to decide on potential resource development before the end of 2023, would allow FTCO to produce approximately 40,000 ounces of gold annually at least until 2028.

To lay the foundation for production beyond that of Isabella's property, from a financial strength perspective, an Altman Z-Score of 8.86 (on this web page of Seeking Alpha, scroll it down until you reach the "Risk" section) shows that FTCO is not at risk of financial insolvency and can therefore count on solid financial pillars.

The Stock Valuation

Fortitude Gold Corporation shares are still trading attractively at the time of writing, with shares trading below the 200-day simple moving average of $6.14 but slightly above the 50-day SMA line of $6.02. Shares are trading at $6.18 per unit, giving it a market cap of $146.67 million.

Shares have also fluctuated between a low price of $5.38 and a high price of $7.37 over the past 52 weeks, and currently, they are also below the middle point of $6.375 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 2.63x , while TRX's EV/EBITDA ratio is 7.40x and CMCL's EV/EBITDA ratio is 8.05x .

The retail investor who may be interested in remaining exposed to the gold price has another option with FTCO shares: but he may also want to wait until early 2024 to see if the market can offer even lower prices to increase the position slightly. Until then, this analysis suggests just holding on.

As discussed in the "Stock Valuation" section of this analysis , if the holiday shopping season in December provides some stimulus to consumption, there could be another interest rate hike by the Fed to re-energize the disinflationary process. Since higher interest rates do not bode well for gold prices and gold-backed securities, FTCO could fall relative to current valuations ahead of the gold bull market expected sometime in 2024 when the recession officially enters the cycle.

A lower share price than the current one would offset FTCO's less compelling gold beta coefficient compared to other gold stocks.

The retail investor should also pay attention to the low trading volume (average volume (3 months) of 42,641, see the trading data section here ), which means risk with too large a position, assuming circumstances require a quick sale of shares.

Conclusion

As a safe haven to protect the values of U.S. portfolios from a recession that economists believe will occur sometime in 2024, gold demand for hedging purposes will surge, driving up the price per ounce.

Since Fortitude Gold Corporation stock is positively correlated with the price of gold, it will also benefit from the gold price rally, so investors may be interested in maintaining exposure to the outlined growth opportunity through Fortitude Gold.

There is a chance of further attractive entry points into this stock in 2024, but until then this analysis suggests investors should maintain a position in FTCO. A position in this stock has upside potential and offers retail investors the opportunity to benefit from rising gold prices.

A solid financial position will help FTCO plan for gold production well beyond 2025.

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