PMNXF - Perseus Mining Is Well-Positioned To Take Off With Bullish Gold

2023-09-16 09:45:59 ET

Summary

• This analysis suggests a Buy stance on Perseus Mining Limited shares as the price of gold is expected to rise.
• Perseus Mining Limited delivers strong operational results and efficient mineral resource development, making it well-positioned to benefit from the expected fast recovery in the price of gold.
• The stock offers an attractive entry point, but risks include country risk and low trading volumes.

A Buy Rating for Perseus Mining Limited

This analysis suggests a Buy stance on Perseus Mining Limited ( PMNXF ) shares. This company engages in the production of gold in West Africa.

Analysts at Trading Economics expect the price of gold, which is currently trading at $1,904.29 per ounce, to rise to $1,941.73 per ounce in the current quarter and then further up to reach $2,011.97 per ounce around this time in 2024.

There are several ways to take advantage of the next rise in gold prices. One of these is direct investment in the yellow metal, but generally, this is not the most practical route for retail investors. The retail investor can also take advantage of the price differentials that occur in the gold futures markets, or he can invest in the equities of gold companies that are listed on the stock exchange. The last solution offers many opportunities to profit from the price of gold via the stock market.

Among the many publicly traded companies exploring and producing the precious metal, retail investors should consider shares of the Australian gold producer Perseus Mining Limited ((PMNXF)).

The shares of this producer of gold from mines in countries of the West African region are likely to witness a strong upward trend with the expected increase in the price per ounce of gold, as the company's assets are currently in a positive moment: efficient mineral resource development allows production at the high end of the company's forecasts, keeping costs under control and lower than many major competitors in the mining industry.

In such a situation, any increase in the price of gold will lead to an improvement in the gold margin per ounce, which will strengthen the company's project to achieve further growth while respecting the needs of the local communities where it operates.

Why a Bull Market in Gold Will Help Perseus Mining Limited Trade Higher

With macroeconomic conditions favoring an increase in the price of gold, Perseus Mining Limited has excellent opportunities to further improve its profitability, which should have a very positive impact on the market price of the stock. The latter aspect is based on a strong positive correlation between Perseus Mining Limited's ((PMNXF)) share price and the gold price.

The correlation between the share price ((PMNXF)) and the price of gold futures (GCV2023) - gold futures is the benchmark for the price of gold - is represented in the Seeking Alpha chart below by a solid yellow area above zero.

Based on a linear model where the last 52 weekly returns of an investment in PMNXF stock represent the output and the last 52 weekly returns of an investment in gold futures represent the inputs, it appears that the change in PMNXF stock price averages 2.8 times the change in the price of gold futures.

As just estimated, this circumstance is very promising if gold enters a bull market as expected, while the coefficient of determination R^2 is around 45%, indicating that gold price changes have a large influence on stock price determination. Therefore, if a prediction of the future development of the PMNXF stock price uses the results of this model, it is more likely that the forecast is supported by a reliable assumption.

The past 52 weekly returns were considered rather than a broader range of returns, as going forward the market is likely to be affected by most of the macroeconomic factors we have seen recently, such as higher interest rates, persistent inflation, and geopolitical instability. These factors play an important role in determining the price of gold.

The Costs at Perseus Mining Limited to Mine Gold in West Africa

An improvement in the gold margin can also have a very positive effect on the share price. If Perseus Mining Limited performs effectively, the stock will rise in the analysts' rankings and attract even more bullish sentiment that would otherwise be picked up by other stocks.

As already described, the outlook for the price of gold is rosy.

Instead, taking into account the costs incurred by Perseus Mining Limited to produce and sell gold, the all-in site costs were $959/oz for the trailing 12 months ended June 30, 2023, and the company appears to be well ahead of many operators in the global mining industry.

The benchmark is provided by S&P Global Market Intelligence, which in this article uses an all-in sustaining cost metric (AISC/ounce) of $1,289 per ounce of gold (as of Q1-2023) as the average of a group of selected top gold mining companies such as each of these gold operators produced in 2022 at least 500,000 ounces. S&P Global Market Intelligence also notes that AISC/ounce is rising significantly at nearly three out of four competitors analyzed. Rising costs are not currently the case at Perseus Mining Limited's production sites either.

With the US Federal Reserve keen to maintain its restrictive monetary policy at least until the end of 2023, especially after the US annual inflation rate rose to 3.7% in August for the second month in a row (as reported by Trading Economics ), there is potential for a significantly more attractive stock price for Perseus Mining Limited. Why this is the case is explained below. For now, however, we are comfortable with the fact that stock prices can be lower than they are now as interest rates remain high. Therefore, the retail investor may want to wait for these levels to form before taking action based on a buy recommendation.

It must be said that Perseus Mining Limited ((PMNXF)) shares appear to offer a far more interesting entry point today than they did a few months ago.

Today, they are the result of a downtrend that yielded back 25-30% of the profits accumulated on gold's safe haven effects amid last spring's crisis in some US regional banks.

Therefore, these stock prices, which are also confirmed by the analysis of some technical and fundamental indicators, provide another reason to be bullish on Perseus Mining Limited ((PMNXF)) shares.

The only disadvantage that doesn't speak for investing in this gold stock is the country risk. The company has mining projects in West Africa, where countries are constantly exposed to factors of political instability, social tensions, and terrorist attacks. The company also has a mineral project in Sudan, where the population has been affected by an internal crisis since April 15 due to the armed conflict between the Sudanese army and the Rapid Support Forces paramilitaries.

In addition, low trading volumes on the stock exchange also increase the risk, although a high float is not yet in the hands of institutional investors.

About Perseus Mining Limited and its Performance

Based in Subiaco (a suburb of Perth, the capital of the state of Western Australia), Perseus Mining Limited ((PMNXF)) has completed its full 2023 financial year, which ended on 30 June 2023, delivering a record year of financial performance thanks to strong operational results across the board according to the company's report on Seeking Alpha .

In the 12-month period through June 30, 2023, the company's three producing mines combined have exceeded Perseus Mining's annual target rate (indicates the company), delivering 535,281 ounces of gold at a weighted average all-in site cost of $959 per ounce.

These gold-producing mines are the 90% owned mineral interest in the Edikan gold mine in Ghana, the 86% owned mineral interest in Sissingué in the Republic of Ivory Coast, and the 90% owned mineral interest in the Yaouré gold mine project in the Republic of Ivory Coast.

Production grew 8.4% year over year while the weighted average all-in site cost increased by only $7 per ounce (or 1% year over year). The improvement was possible, especially thanks to the strong performance of the Edikan and Yaouré mines.

Thus, the company sold 537,564 ounces of gold (up 12% year over year) in the full fiscal year 2023 which coupled with an average realized gold price of $1,803/oz (up 7% year over year), led to 27% year over year increase to AU$ 1.43 billion in total revenues (or US$950.1 million for a 22.3% year over year increase). AU$ stands for Australian dollars.

The improvement in net income was notable with a 70.4% year-on-year increase to AU$476.7 million (or approximately US$317.5 million) for the year.

Cost of sales and income taxes increased due to higher sales volume, while depreciation was unchanged. However, the conflict in Sudan led to some write-downs and higher write-downs regarding the company's 70 percent share in the mineral project in the country. Instead, financing costs were lower because the foreign debts were repaid in full.

So, full-year 2023 generated an operating cash flow of AU$648.36 million (approximately US$431.8 million), up 24% year-on-year (in Australian currency terms), or operating cash flow of AU$47.44 cents per share (or approximately $31.63 cents per share), or operating cash flow of AU$1,206/ounce (or about US$803.46/oz).

As of this writing, the price-to-operating cash flow is 3.45 which, according to Seeking Alpha , compares favorably with the following peer group: 11.46 for Sandstorm Gold Ltd. ( SAND ), 5.77 for EQX Equinox Gold Corp. ( EQX ), and 7.41 for Eldorado Gold Corporation ( EGO ).

The 12-month EBITDA was AU$821.31 million (or approximately US$547.18 million) as of June 30, 2023, rising 46% year over year, while the 12-month EBITDA margin rate was 57.6% as of Q2-2023 vs.12-month EBITDA margin rate of 50.1% as of Q2-2022.

In fiscal year 2023, the production of one ounce of gold resulted in an all-in site cost of $959/ounce while the sale of this ounce of gold resulted in a realized price of $1,803 (about 5% lower than the average market price of $1,838.49/ounce). The combination led to a profit margin of $844/oz. As the profit margin built, the company financed the following:

• The payment of an annualized dividend of AU$ 0.027 per share. This is because the company paid two semi-annual dividends of AU$ 0.016 per share on October 12, 2022, and AU$ 0.011 per share on April 6, 2023. The next semi-annual dividend of AU$ 0.025 will be paid on October 12, 2023. The annualized dividend generates a dividend yield of 2.10% versus the S&P500 yield of 1.53% (reports S&P 500 Dividend Yield ), as of this writing.
• Year-on-year, the value of net tangible assets increased 41.1% to AU$1,675 million (about US$1,116.7 million, including cash) or AU$1.22 per share (about US$ 81.3 cents) as of the second quarter of 2023, providing further foundation and tools for shaping future gold ounces.

The chart below from Seeking Alpha shows the performance of Perseus Mining Limited's tangible book value (= tangible assets minus tangible liabilities) over the past three years.

The company has proven and probable [P&P] reserves of just over 2.9 million ounces of gold grading 1.45 grams gold per ton of mineralized ore as of fiscal year 2023, providing a production horizon of six years. The estimate of P&P reserves and other categories of mineral resources can be found on the company's website here .

• Debt reduction from AU$86.5 million (about US$57.63 million) as of June 30, 2022, to AU$3.9 million (about US$2.6 million) as of June 30, 2023.
• The 1.7x year-on-year increase in cash reserves, which reached AU$728.9 million (about US$485.61 million) in the second quarter of 2023.

The chart below from Seeking Alpha shows the performance of Perseus Mining Limited's cash per share over the past three years.

The balance sheet appears to be strong enough to attempt to unlock further potential, which could arise from an additional 1.3 million ounces classified as Measured and Indicated resources grading 1.31 g/t.

The Valuation of the Shares of Perseus Mining Limited

Let's assume that the profit margin for the entire calendar year 2023 is calculated based on the following inputs:

• We expect Perseus Mining to generate approximately $1,865 per ounce by the end of the current year. The estimate is 95% of the $1,900 that analysts are forecasting per ounce of gold for the 2023 calendar year. The estimate is based on the trend observed for the TTM period through the second quarter of 2023.
• For calendar year 2023, the company expects all-in site costs to be between $1,035 and $1,085 per ounce. They will increase slightly compared to their actual for the 2023 financial year, as production in the second half of the 2023 calendar year is expected to be lower on average than in the first half of the 2023 calendar year: 242,500 to 272,500 ounces are expected for the second half of 2023, compared to 266,909 ounces in the first half of 2023, the company indicated.

Therefore, the profit margin should fluctuate between $780/oz and $830/oz, which, combined with the range of the production expected for calendar 2023 and with the total volume of shares outstanding, results in forward earnings of approximately $0.2 per share and Price-to-forward earnings per share ratio of 7.1 times.

This metric compares favorably with the GAAP price-forward earnings ratio of the following peer group: 48.47 for Sandstorm Gold Ltd. ((SAND)), and 29.40 for Eldorado Gold Corporation ((EGO)), according to Seeking Alpha . It also compares favorably with the sector median price-forward earnings ratio of 14.59, according to Seeking Alpha .

The stock seems now to be offering an interesting entry point also from a more technical standpoint.

Shares of Perseus Mining Limited ((PMNXF)) were trading at $1.09 apiece on the US over-the-counter market as of this writing, giving it a market cap of $1.54 billion. Shares have fluctuated between a lower limit of $0.85 and a higher limit of $1.67 over the past 52 weeks, and current levels are 13.5% below the middle point of $1.26 of the 52-week range. They are also 28.2% above the lower limit and 34.7% below the higher limit of the interval, to offer a better localization of its position in the 52-week range.

Furthermore, as you can also see from the above chart of Seeking Alpha, current levels of the stock price are below all longer-term trends of the 200-day simple moving average line of $1.34, below the 100-day simple moving average line of $1.27 and below the 50-day simple moving average line of $1.15.

Below you'll find the Seeking Alpha chart of the 14-day relative strength for shares of Perseus Mining Limited ((PMNXF)). The indicator has a reading of 41.83 and a falling trend. They currently suggest that shares in the US OTC market are still far from oversold levels even though they plummeted from the May peak. They also signal that shares are likely to continue to move lower under the negative pressure in this environment causing high yields among fixed-income securities.

Higher interest rates raise the opportunity cost of holding gold and not bonds (which is the most striking example in the fixed-income asset class), so investors are flocking to the latter rather than the former causing strong adverse pressure on the price of the yellow metal, and gold-based assets such as PMNXF.

As long as interest rates remain above 5%, investors will continue to push for money market funds. As evidence of this dynamic, Yahoo Finance reports that major banks appear to be struggling to retain holders of large pocket money accounts at the moment.

The reality is that central banks have no choice but to raise interest rates. Ensure that the smaller banks can attract wealthy customers who enjoy higher interest rates on savings accounts and certificates of deposit, thereby switching from the more financially stable larger banks. In this way, strength is better distributed across the banking system before a downturn in the economic cycle occurs.

On the other hand, the latter inflation data does not encourage an easing of monetary policy by the US Federal Reserve but rather fuels the intention of its policymakers to keep borrowing costs very high for several more months. This will be enough to prevent a short-term recovery in the gold price and Australian gold producer shares, allowing time to form an easier entry point for investors who may be interested in taking advantage of the likely bull market that this analysis expects as a result of the recession for the American economy in 2024. Rosenberg Research economist David Rosenberg, whose position is now known via this Business Insider article , believes that a downturn in the US economic cycle in 2024 is almost certain. The price of gold will rise and possibly experience a bull market given the headwinds of the recession.

Fearing that the value of their assets will be damaged, investors will consider investing in gold and gold-based securities, as these safe-haven assets allow the creation of a barrier against the risk of devaluation of the assets in the portfolios.

As the chart showing a positive correlation between the gold price and PMNXF above illustrates, the bullish sentiment surrounding the precious metal will also lead to a recovery in the price of this Australian gold stock.

Therefore, investors may really want to consider buying this stock, but not anytime soon as the economy appears to be about to make further announcements that could lead to lower share prices.

In addition to this, the Fed may raise interest rates again before the end of the year. Interest rate traders are predicting another rate hike for the November 1-2023 session, and according to the CME Group's derivatives market website , there is more than a 30% chance the rate hike will go through.

On the Toronto Stock Exchange, Perseus Mining Limited shares were trading at $1.54 per unit under the symbol ( PRU:CA ) as of this writing, giving it a market capitalization of $2.09 billion.

Shares are trading below the 200-day simple moving average of CA$ 1.82, below the 100-day simple moving average of CA$ 1.63, and almost on par with the 50-day simple moving average of CA$ 1.53.

Shares are 10.7% below the middle point of CA$ 1.725 in the 52-week range of CA$ 1.15 to CA$ 2.30. Additionally, the 14-day RSI trend of 50.18 suggests that shares still have room to move lower and form more attractive prices in a high-interest rate environment.

The same considerations that have already been made for the stock trading on the US over-the-counter market also apply to the stock listed on the Toronto Stock Exchange. The yellow area graph, which is consistently above zero, indicates a strong positive correlation between the stock on the Toronto Stock Exchange and the price of gold.

The Risk of Holding the Stock

The risk of holding the stock is that there will be no bull market in gold, meaning the upside catalyst for recessionary headwinds will not emerge. However, as can be seen, the macroeconomic situation is evolving in a way that points to the downward movement of the cycle. The central bank and the banking system also continue to send signals in this sense.

The most aggressive tightening of interest rate policy since the financial crisis of 2007/2008 to combat the fiercest inflation in the last 40 years and more is hard to believe has not left a mark on consumption which in turn determines almost 70% of US gross domestic product.

The bullish effect on the price of gold and all gold-backed securities will come from a surprise in a market currently awash in expectations of a soft landing. This analysis assumes that those who support the soft-landing scenario thesis have misconceptions about a resilient economy in the midst of high inflation/borrowing costs. Instead, consumption data was significantly influenced by excess savings accumulated by households during the COVID-19 pandemic crisis. When these excess savings are depleted, the damage to the 70 percent portion of US GDP will become much more visible.

Jan Hatzius, chief economist at Goldman Sachs, points out that consumers account for 70% of U.S. GDP, as Yahoo Finance reports here . There is no better indicator than household consumption to reliably inform us about the next trend that may take hold in the economic cycle as the Fed's hawkish stance affects consumer spending.

And because of its role as the government guarantor of home loans to the largest economic class of American consumers (low/moderate income borrowers, as Site homepage indicates here ), who better than Fannie Mae can then provide a reliable forecast of the recession risk for the American economy?

All conditions are in place for a recession in the US economy between the end of 2023 and the first half of 2024, as Fannie Mae - the Federal National Mortgage Association of the United States - has recently signaled through its chief financial officer Chryssa Halley, Yahoo Finance reported here last month.

Another risk of holding shares of Perseus Mining Limited ((PMNXF)) ((PRU:CA)) is that both stocks are characterized by having lower trading volumes on both stock markets despite the huge volume of shares outstanding of 1.37 billion, and of which the float of 1.36 billion is held by institutional investors in the rate of 57.3%, according to Yahoo Finance here and here .

For PMNXF, the average volume over the past 3 months is 12.17k while the average volume over the past 10 days is 22.81k, according to Yahoo Finance here .

For PRU:CA, the average volume over the past 3 months is 24.92k while the average volume over the past 10 days is 45.63k, according to Yahoo Finance here .

Conclusion

There remains a bearish sentiment for gold at the moment, as continued high-interest rates do not favor the metal, nor do gold-backed assets such as Perseus Mining Limited ((PMNXF)) ((PRU:CA)).

However, the outlook for gold prices is bright as the expected recession will create strong headwinds against which investors will use gold as a safe haven to protect the value of their assets. Demand for gold as a hedge against bad consequences for portfolios will be robust.

Due to the strong positive correlation with gold as the mines perform very well, Perseus Mining Limited ((PMNXF)) ((PRU:CA)) shares will follow the commodity market and have a great chance to rise even faster.

After the last three months of general bearish sentiment, shares are now cheap in fundamental and technical terms.

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