CA - GoldMining: Potential Downside Ahead

2023-04-13 10:25:58 ET

Summary

• GoldMining Inc. is a Canadian gold exploration company traded on the North American stock exchanges. The company has a small portfolio of metallic assets in America that require significant development.
• Shares have the potential to fall sharply when gold turns bearish. Analysts assume that a bearish mood will prevail on the gold market until the end of the year.
• The conditions for a bearish gold are indeed in place.
• Gold is on an upward trend amid speculation of a recession, but the risk of a recession arose when the central bank started raising interest rates months ago.
• Instead, central banks are watching the labor market, and from the governors' perspective, there is no certainty that there will be just one more rate hike before monetary tightening can be considered complete.

Investors May Want to Consider Selling Shares GoldMining Inc.

GoldMining Inc. (GOLD.TO) (GLDG) is a Canadian gold exploration company whose shares are traded on the North American stock exchanges. Shares currently have high market valuations compared to the recent past and holding them in your portfolio carries the risk of significant loss. The latter factor is due to analysts' expectations of a lower gold price in the coming period and the high volatility of the stock compared to the commodity. Therefore, investors should consider selling some shares of GoldMining Inc.

The Outlook for the Gold Price: Factors Preparing for a Bearish Reversal

Gold is holding $2,022.75 an ounce as of this writing, well above the $2,000 an ounce level seen for several sessions, but there are two main threats to the bullish metal price action.

The continuation of the disinflation process and the possibility of further rate hikes. Both factors are undermining the bullish sentiment that is currently allowing gold to hold its ground.

The rise in the price of an ounce of gold helps protect portfolio value from the negative impact of rapidly rising prices for goods and services. However, as inflation slowly returns to the US Federal Reserve [Fed]'s target of 2%, incentives to invest in precious metals are fading.

The annual inflation rate fell for the ninth consecutive month from 9.1% in June 2022 to 5% in March 2023, as a result of the increase in the rate of interest implemented by the Fed on federal funds.

When interest rates rise, investors also wonder whether it is better to borrow money to take advantage of the higher interest rate (the price of money) or to buy gold at very high prices. This mindset would likely impact demand for gold as an investment but does not appear to be dominant at this time.

Regarding the expected development of the gold price for the coming months, analysts forecast that the troy ounce will fall by around 12% by the end of 2023 to a price target of $1,779.15 an ounce.

Given this outlook for the yellow metal, investors should refrain from further expanding their positions in US-listed securities if these assets follow gold's price action by moving much faster than the commodity and if their shares appear to be running out of gas. The relationship between a security's price and the price of gold is known as "beta gold" and measures the price movement of a US-listed security when the price of gold changes.

Investors Should Place GoldMining Inc. Stock on a Sell List

Canadian gold explorer GoldMining Inc. shares have a high positive gold beta, so their relationship to gold prices means this stock's holdings could take a serious hit if the commodity turns bearish, as analysts expect.

Seeking Alpha's chart summarizing the performance of GoldMining Inc. shares and Gold Futures - June 23 (GCM3) shows a positive correlation between the gold explorer and the commodity.

But to get a better idea of the relationship measured by beta-gold and how this might affect the expectation of future stock prices in a bearish gold scenario, the following model is run over the past 52 weeks of weekly price changes for the two securities.

This technique involves the weekly change in the price of GoldMining Inc. as the output (the dependent variable) and the Gold Futures - June 23 (GCM3) as the input (the independent variable) in a linear model.

The model provides a gold beta metric for GoldMining Inc. of about 2.1x, meaning GoldMining Inc.'s stock price could potentially lose more than double what the price of gold futures loses if the yellow metal turns bearish in the market.

This gold beta also suggests that the increase in GoldMining Inc.'s stock price could be significant if the commodity rises, but analysts expect the price of gold to fall, while any further rise in the stock price is currently facing stiff resistance for additional gains.

Analysts' expectations of the price of gold to trend downwards in the coming months have already been mentioned. As for GoldMining Inc.'s stock price performance, based on past fluctuations in the 14-day Relative Strength Index [RSI], it appears that it has little room for further growth before reaching overbought levels. The upper bound signaling overbought levels is the 14-day RSI of ? 60 versus currently ? 50. While the oversold levels are at ?35 based on the past performance of the indicator.

Furthermore, shares of GoldMining Inc., which are currently trading at CA$1.55 per unit on the Toronto stock exchange, are above the 200-day simple moving average of CA$1.39 and on par with the 75-day simple moving average of CA$1.55.

On the Toronto Stock Exchange, the stock has a market cap of CA$260.59 million and a 52-week range of CA$1.03 to CA$2.26.

GoldMining Inc. shares are also traded on the NYSE market under the symbol GLDG and are priced at $1.15 per unit at the time of this writing. The current level is almost at the level of the 75-day simple moving average, while it is well above the 200-day simple moving average of $1.0372, as the below chart from Investing.com illustrates.

The 14-day RSI of 50.34 is not so far from an overbought level of approximately 60, which is based on past fluctuations of the indicator.

The stock has a market cap of $193.344 million and a 52-week range of $0.7600 to $1.80.

About GoldMining Inc. and Its Mineral Assets

GoldMining Inc., based in Vancouver, Canada, is known in the gold industry as an exploration company currently engaged in the development of certain metallic assets in the Americas.

GoldMining supports its mineral operations with CA$ 8.3 million [?$6.2 million] in cash plus CA$ 8.8 million [?$6.5 million] available in credit facilities.

In addition to developing gold deposits, its team of experts is also exploring growth opportunities for gold-copper mineral projects, but most of these projects, located throughout North America, Brazil, Colombia and Peru, are still at the resource stage or pre-resource stage.

Overall, GoldMining Inc.'s portfolio of gold and gold-copper resources accounts for 16.4 million gold equivalent ounces in Measured and Indicated resources and 16.3 million gold equivalent ounces in Inferred resources. The resource portfolio is therefore still small or relatively undeveloped.

These resources break down as follows: 81% gold, 18% copper and only 1% silver, making the company's share price highly dependent on the price of gold.

The following recent developments stand out in the mineral resources portfolio:

• At the "La Mina" deposit in Colombia, the company has received results from its maiden exploration drilling program identifying a significant discovery at one of the deposits located there, called "La Garrucha". This mineral deposit has added more than 1 million gold-equivalent ounces to the Inferred Resources, which now total 1.45 million gold-equivalent ounces. Indicated resources increased by 200,000 gold-equivalent ounces for a total of 1.15 million gold-equivalent ounces. The event had no positive impact on the share price, and the share even fell a few days after the announcement. Recognizing this aspect may give clues that the mining-type updates are not so much a cause for interest in this stock as the movements in the price of gold. This information may prove useful in guiding the trading strategy when targeting this stock. The La Mina mineral complex in Colombia is a porphyry gold-copper mineral system undergoing a Preliminary Economic Assessment ((PEA)) expected to be released between June and August 2023. However, based on what has already been observed, traders should not have high expectations of a significant impact on the share price.

• The company also has the potential to raise $16.5 million because of an option agreement with NevGold Corp. (NAUFF) on the Almaden property in Idaho. NevGold is a Canadian exploration and development company for polymetallic gold and silver deposits in the United States and Canada.
• On February 27, 2023, the company formed its subsidiary U.S. GoldMining, which will be focused on the Whistler gold-copper project in Alaska. The objective is to unlock value through the development of 2.99 million gold-equivalent ounces in Indicated Resources and 6.45 million gold-equivalent ounces in Inferred Resources.

GoldMining Inc.'s portfolio also includes more than 21 million shares of Gold Royalty Corp.'s common stock (GROY), or about 14.6% of total common shares outstanding of GROY, a Canadian precious metals-focused royalty company currently operating net smelter return royalty rates ranging from 0.5% to 2.0% related to 17 gold properties. GROY ended 2022 with a loss of $11.1 million in EBITDA on sales down 21% year over year, and its shares are down more than 43% over the past year while gold futures have been in the green.

The Risk of Selling GoldMining Inc. Stock

The risk of GoldMining Inc.'s sell rating-based stance lies in the price of gold, which could continue to rise instead of the decline analysts had been predicting.

If this occurs after GoldMining Inc. stock has been sold, the trader is missing out on a tremendous opportunity for significant value appreciation of a position due to the stock's relationship to the metal (that is, due to the high beta gold).

Gold prices could rise on fears of a recession resulting from the US Federal Reserve raising interest rates to curb runaway inflation. A slowdown in the business cycle cannot be ruled out as monetary tightening has been fairly aggressive, and markets are watching consumption closely and fearing for US-listed equities if household spending falls sharply. Consumption accounts for 70% of the Gross Domestic Product [GDP] of the world's largest economy, so it is worth following the development of this component of the GDP.

But central banks are instead monitoring the developments in the labor market and believe they can only pause on higher interest rates if conditions there deteriorate.

The governor of the US Federal Reserve has repeatedly emphasized this aspect since the start of the restrictive monetary policy. As a result of a system that continues to create jobs and prove its resilience in the face of elevated inflation and the high financial costs associated with funding growth projects, the risk of a gold price spike on recession fears is somewhat reduced.

The following views of some Federal Reserve officials also reinforce optimism that the risk associated with the sale of GoldMining Inc. may be less serious than one might think, given the probable recession.

New York Fed Chairman John Williams, an FOMC voter - more dovish than hawkish - is unconvinced that all rate hikes to date have fully translated into tighter credit conditions, a key requirement for bringing inflation back to 2%.

A resilient labor market is currently supporting consumption, and this could be delaying the desired effect of a tightening monetary policy on credit conditions. But Williams' perspective also suggests that if inflation remains above, say 3-3.5% in 2023, further increases may be needed after the likely May 3 hike, when policymakers are expected to take a break to assess the impact on the economy.

Chicago Fed President Austan Goolsbee - a dovish FOMC voter - doubts whether credit conditions are tight enough to efficiently quell high inflation on the back of an incredibly strong labor market, and his perspective suggests that the rate hike policy can be extended if necessary.

Minneapolis Fed President Neal Kashkari - a hawkish FOMC voter - made it clear that the key concern for policymakers will be inflation, even if the economy enters a recession. From his point of view, a negative economic cycle after the restrictive monetary policy would not endanger further interest rate hikes if prices continued to rise too quickly.

These hints from the governors could be enough to extinguish bullish sentiment for gold, but that is not the case as the positive catalysts prove to be more persuasive.

These catalysts have recently gained momentum thanks to the renewal of two key concerns of economic growth and the outlook for core inflation.

As for the former, the International Monetary Fund [IMF] has lowered its estimate of global GDP growth, putting it at 2.8% this year and 3% in 2024, both 0.1% lower than the previous estimate.

As for the second, the disinflation process continues, but core inflation is proving very difficult to abate and because of the latter, markets fear that it could disrupt the economy, suggesting that downside risks remain. "Core CPI which excludes food and energy, increased 5.6% on the year and 0.4% on the month as expected", Trading Economics says .

Conclusion

Gold continues its bullish sentiment, which is helping it stay afloat above the $2,000 an ounce surface, and the risk of a recession being felt in the markets is currently creating upward pressure.

Although central banks' worries lie elsewhere, markets are now focused on recession risk after the turmoil of the banking crisis has dissipated. To be honest, the risk of a recession has been there all the time gold has hovered well below current levels.

There is reason to believe that these valuations of the precious metal are exaggerated and imply a risk of significant loss if the metal begins to decline.

The impact on GoldMining Inc. can be very negative as this stock is more volatile than the price of gold. Therefore, it wouldn't be a bad idea to do something now to reduce the risk.

Shares are at the top end of the price cycle and have much more room downwards than upwards. Then why not sell some shares and take advantage of those price levels?

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