CA - NovaGold To Release Q2 2023 Results But There's More To Learn

2023-06-27 09:28:25 ET

Summary

• NovaGold Resources is expected to release its Q2 2023 financial results, which will likely reflect an operating loss due to the costs associated with setting up the company's future gold production.
• NovaGold share price will fluctuate with the price of gold. In the meantime, the company is pursuing its plan to mine gold at the Donlin Gold project in Southwest Alaska.
• Investors may want to consider a Hold rating for the time being, as NG stock price may still trade slightly below current levels due to expected further rate hikes.

A Hold rating for NovaGold Resources

This analysis of NovaGold Resources ( NG ) stock includes a change in the recommendation rating from the previous Sell to a Hold stance.

NovaGold to Release Financial Results for Q2 2023

NovaGold Resources is expected to release its financial results for the second quarter of 2023 after market close today June 27. These results will most likely reflect an operating loss due to the costs associated with setting up the company's future gold production, which may occur in a few years. This analysis does not expect that the release of Q2 2023 financial results will lead to any significant changes in the share price.

Why NovaGold Stock Is Attracting Investors' Interest

If not the second quarter 2023 financial results, what sparks investors’ interest in NovaGold Resources?

As NovaGold Resources continues its plan to one day begin mining gold from a mineral asset -- known as the Donlin Gold Project -- in southwest Alaska, the share price will fluctuate with the price of gold. Since my previous analysis , which suggested a Sell rating, shares of NovaGold Resources have lost more than 20% on the downtrend in gold prices and are trading more attractively today.

This share price could soon come under pressure again due to the expected further rate hikes, which bode ill for gold. Due to the positive correlation between NovaGold and the precious metal, an even more attractive price than the current one cannot be ruled out if gold continues to move downwards.

But that's not all.

The specter of an economic recession due to rate hikes could push NovaGold's share price back to the highest peaks of the cycle. The economic recession would significantly enhance the precious metal's safe-haven properties and, given the strong positive correlation mentioned earlier, would create strong upside potential for NovaGold's share price. However, a soft landing of the economy is also possible, which economists describe as the scenario in which consumption and investment behave robustly despite higher interest rates on borrowed capital. In this case, the driving force behind the share price of the Canadian gold properties developer would be much less, or absent.

Retail investors are better off waiting and watching how the economy develops by keeping an eye on some key indicators such as the interest rate decision, inflation, job market conditions and the US gross domestic product growth rate.

Over time, it will become much clearer to retail investors which of the two scenarios (economic recession or soft landing) is more likely between the end of 2023 and 2024. That means going forward, individual investors will need to take the same approach that the Federal Reserve intends to follow to bring down high inflation. The Fed will make each interest rate decision session by session, depending on the impact of monetary policy on economic activity, inflation and financial developments.

About NovaGold Resources

NovaGold Resources, headquartered in Vancouver, British Columbia, is developing the Donlin Gold Project in Alaska. It is located just a few miles north of the village of Crooked Creek in southwest Alaska's historic Kuskokwim Gold Belt.

Based on the NI 43-101 Technical Report and S-K 1300 Summary Technical Report on the Donlin Gold Project, the project anticipates future gold mining to average production of approximately 1.1 million ounces per year for 27 years of operation but mine construction should not start before 2026. The project is jointly owned 50:50 by NovaGold Resources Inc. and Barrick Gold Corporation ( GOLD ) (ABX:CA), one of the largest gold mining and exploration companies in the world.

Based on these ownership interests, NovaGold Resources Inc. has the right to benefit from mineral activity on a total of 19.5 million ounces of gold in the measured and indicated mineral resources, of which 87.2% are in proven and probable mineral reserves grading 2.09 grams of gold per ton. All of these ounces must be developed through the extraction and processing of 541 million tonnes of gold ore, averaging 2.2 grams of precious metal per tonne of ore.

The Donlin Gold Project also hosts six million ounces of gold but at the Inferred Resource level. Their existence is highly uncertain as they are based on very rough estimates, and it is therefore uncertain if they can be mined.

This potential future shareholder value has been unlocked through years of exploration work, particularly in 2022 , and now the team is focused on completing the preparatory work before moving forward with updating the feasibility study.

There is no doubt that Donlin Gold has the long-term potential to become a mid-tier gold producer with 27+ years of operation in a friendly mining district as the open pit resource can be explored further along strike and at depth. But until activity for effective gold production begins, perhaps in 2027, changes in gold prices will be the main factor driving the NovaGold Resources Inc. stock price.

As has been the case during the last five years of trading (for example) - see chart below - I believe the market will continue to offer investors the opportunity to expand their holdings with a buy-and-hold approach, taking advantage of the formation of dips. That doesn't mean, however, that one must forgo the opportunity to sell some shares whenever a sharp rise in the price of gold presents an opportunity to earn an undeniable capital gain.

The chart shows NovaGold Resources Inc.'s performance on the American Stock Exchange under the NG symbol and on the Toronto Stock Exchange under the symbol NG:CA. What can be gleaned from the above chart is that while the company's exploration activities paved the way for high-grade, large-scale mining of gold, the stock price developed through fluctuations with dips formed on the downtrend in gold prices (light yellow line).

It is also possible that the Donlin Gold Project may not even start gold production in four years’ time, as there is always a risk that things will not go according to the company's plan. But in the meantime, given its stock's heavy exposure to the precious metal, NovaGold Resources Inc. will most likely have presented ample opportunities to benefit from both dips and bull markets in gold prices.

NG Stock Valuation

As the chart below shows, shares of NovaGold Resources Inc. are trading at $4.61 apiece at the time of this writing, giving it a market cap of $1.54 billion.

The stock has a 52-week range of $4.06 to $6.98, so the stock price is currently below the median of $5.52. The shares are also below the 50-day simple moving average of $5.473, below the 100-day simple moving average of $5.061, and below the 200-day simple moving average of $5.632.

There is a possibility that a late July Fed rate hike to combat inflation, as suggested at the June 14 meeting, could hurt the stock price, and cause it to fall below current levels. Higher interest rates will likely cause investors to flock to bonds, reducing demand for gold somewhat. Due to the strong positive correlation between the precious metal and the NovaGold Resources Inc. stock price, NG shares could also come under downward pressure in my view.

The margin for the lower share price is slim, as evidenced by the chart above where the 14-Relative Strength Indicator of 28.113x indicates oversold levels. However, as the factors that could lead to strong downside sentiment towards gold appear to be in place, it would be better I think for an investor to stick with a Hold rating for the time being. Therefore, there is no reason to buy NovaGold stock now in anticipation of a possible gold bull market in late 2023 and 2024.

At the end of the mid-June meeting, the Fed left interest rates unchanged between 5% and 5.25%, but the chairman warned that rates could rise to 5.6% by the end of the year if neither the economy nor inflation slows down remarkably, as reported by Trading Economics. The problem is that despite the rising cost of money, consumption (70% of GDP) is holding up well thanks to a resilient workforce. As a result, inflation likely cannot diminish fast enough to prompt the Federal Reserve to change monetary policy. Rate traders are betting on a 76.9% chance that the federal funds rate target will be raised to 5.25-5.5% at the next Federal Reserve meeting on July 26th.

The correlation between NovaGold and the price of gold (the gold futures curve line has a light-yellow color) presented in the chart below is positive and strong since the correlation coefficient [CC] has been above zero 99% of the time over the past 10 years.

The same conclusions can be drawn for the stock of NovaGold Resources Inc. that under the symbol NG:CA is traded on the Toronto Stock Exchange.

Shares of NG:CA are trading at CA$6.06 apiece at the time of this writing, giving it a market cap of CA$2.02 billion. The stock has a 52-week range of CA$5.35 to CA$9.33, so the stock price is currently below the median of CA$7.34. The shares are also below the 50-day simple moving average of CA$7.14 and below the 200-day simple moving average of CA$7.48. While the 14-Relative Strength Indicator of about 23x suggests oversold levels.

Between late 2023 and 2024, I think there could be either an economic recession or a soft landing, with the first scenario triggering demand for gold as a safe haven against the fallout from the negative cycle. Shares of NovaGold Resources Inc. could potentially benefit enormously from the positive correlation mentioned above, but it is premature to say now whether we are heading into a recession or a soft landing. But one thing is for sure. US Fed chairman Jerome Powell's testimony last week fueled the notion that there could be at least two more rate hikes this year to fight inflation, which could be detrimental to the economy.

Conclusion

NovaGold Resources Inc. is advancing a gold project in Southwest Alaska for high-grade, long-term gold production, and the stock may one day serve as a powerful tool to take advantage of the high gold prices forming during bull markets.

The company is currently completing the preparatory work and will then update the feasibility study. However, construction of the mine is not scheduled to begin before the next three years. Meanwhile, NovaGold Resources shares continue to be primarily driven by changes in the price of gold. Shares have fallen significantly recently and appear oversold.

Should the economy enter a recession later this year or in 2024, NovaGold Resources could offer an interesting solution to benefit from the expected bull market in gold. This is possible as gold serves as a safe haven against the negative cycle while between gold and the stock there is a strong and positive correlation.

But before a recession potentially hits, the Federal Reserve could very likely raise rates twice this year, and higher rates bode badly for gold. As such, NovaGold Resources' share price may still trade slightly below current levels, although the margin is tight. So, investors may want to consider a Hold rating for the time being.

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