SA - Seabridge Gold Could Fall Sharply On Gold Going Bearish

2023-04-27 09:07:27 ET

Summary

• Investors have been bullish on gold over the past month as they seek the precious metal for its safe-haven qualities amid fears of a financial crisis.
• In recent days, gold has trimmed some of its gains on prospects for more monetary rate hikes to curb core inflation, which appears to be quite persistent.
• Prominent members of central bank boards have strongly advocated that their institutions should continue to raise interest rates.
• Analysts expect lower gold prices in 2023 as interest rates could still rise, meaning stocks like Seabridge Gold may not go much beyond current stock price levels, which are high based on specific indicators of past trends. Seabridge Gold tracks gold price movements and has a high beta gold.
• Investors should consider a Sell rating for Seabridge Gold and take advantage of a high share price. Seabridge Gold is a Canadian gold exploration company advancing projects in North America.

This analysis supports a Sell rating on Seabridge Gold Inc. ( SA ) ( SEA:CA ) stock on the possibility of bearish momentum for the precious metal. Gold in a bearish mode will affect how the market views the company's gold exploration projects. A very high gold beta implies the potential for a steep downtrend for Seabridge stock should, gold turn bearish.

Why Gold Rallied in March

During any turmoil that leaves investors with a greater aversion to riskier assets such as US-listed stocks, gold is seen as a safe haven where investors seek some protection for their wealth.

Such has been the scenario lately, as fears that the collapse of US regional banks - Silicon Valley Bank and Signature Bank ( OTC:SBNY ) - could trigger a domino effect involving other financial institutions, prompted many investors to turn to the precious metal to capitalize on its safe-haven stance.

Last month's withdrawal of as much as $100 billion by depositors at First Republic Bank ( FRC ), a San Francisco-based medium-sized regional bank, as first-quarter results yesterday show, is fueling fears that other banks could suffer the same fate in the coming weeks.

These headwinds could potentially add momentum to the gold price rally, but with the metal hitting objectively record highs, there is a risk that it will have to pause before continuing its rally.

The price per ounce rose 12.6% from $1,819.53 on March 8, around the start of US Regional Bank's issuance, and hit an intraday high of $2,048.60 per ounce on April 13, as the following chart from Investing.com shows. The chart also indicates that the gold price negotiated via Gold Futures - Jun 2023 (GCM3) is $2,007.85 per ounce at the time of this writing.

Gold Price Prospects

Factors as to why gold prices could fall to lower levels exist and the pullback may not be insignificant based on the capacity of the triggers.

These factors have so far consisted of relevant rate hikes aimed at combating what objectively still poses a bigger problem than the eventual financial crisis: the galloping inflation.

At the risk of further problems in the financial industry, the interest rate must be increased. Should inflation move undisturbed through the economy, the damage it could do would be far greater than the collapse of a financial institution.

Inflation hurts the purchasing power of the money in the savings and accounts of households and small/medium-sized businesses, and the consequences for many of them could be irreversible unless they are sophisticated investors as well, which is unlikely, and recover value by leveraging the world of investment instruments.

On the other hand, a bank's insolvency should, in theory, not lead to irreversible consequences for account holders and depositors, as the money not recovered with the massive bank run is protected by the U.S. deposit insurance system as long as the system is properly functioning.

So, while First Republic Bank's financial woes could trigger a near-term speculation process in gold to seek higher prices unless the issue was already rated last March when $30 billion came in to help from other banks, downside risks to the precious metals are looming due to further rate hikes.

Usually, raising the interest rate does not encourage the formation of higher gold prices, as it stimulates demand for investments in assets that, unlike gold, generate fixed income that is paid at fixed maturities.

Therefore, holding gold when interest rates are rising carries a higher opportunity cost than bonds, prompting investors to favor the latter.

In 2020, the United States Federal Reserve [Fed] Funds Rate was kept very low at 0-0.25% as the economy needed to be shored up in the face of severe headwinds caused by the Covid-19 virus pandemic. For the same reasons, the ECB followed its US counterpart in deciding that interest rates had to remain at or very close to zero.

Since March 2022, interest rates for the Fed and July 2022 for the ECB have been raised aggressively by multiple rate hike decisions and, as of this writing, US federal fund rates are between 4.75% and 5%, while rates on ECB funds are at 3.5%.

US annual inflation fell to 5% in March 2023 from a 40-year high of 9.1% in June 2022, and Eurozone annual inflation fell to 6.9% in March 2023 from an all-time high of 10.6% in October 2022.

But the core CPI is worrying central bankers as this measure of core inflation, which excludes food and energy, is proving to be quite resilient. As of March 2023, US core CPI is up 5.6% yoy , while Eurozone core inflation rate jumped to a record high of 5.7% from ? 3% in March 2022.

Another macroeconomic factor influencing central bankers' strategy to combat high inflation is the labor force, which will not send the hoped-for signal for a change in monetary policy as long as conditions remain resilient there.

Regarding the US economy, this added 236,000 jobs in March, indicating a strong labor market, according to Trading Economics.

Instead, the seasonally adjusted unemployment rate of 6.6% in February 2023 was a record low in Europe, according to Trading Economics.

Therefore, we can assume that borrowing costs will continue to rise, which does not bode well for gold prices. The following central bankers have pointed to the need for a rate hike as the inflation issue lingers.

Earlier this week, Pierre Wunsch, a member of the ECB's Governing Council, told the Financial Times that rate hikes will not stop until wages and core inflation have not eased.

In an exclusive interview, last week for Yahoo Finance Live, Cleveland, Fed Chair Loretta Mester said that, as long as inflation is stubbornly high and the job market is strong, these two conditions would require interest rates to be raised above 5%.

Higher interest rates could put pressure on gold prices and analysts are anticipating these headwinds as they forecast the troy ounce to trade at $1,779.15 this year, down 11.4% from current levels.

Given this outlook, investors should therefore trim positions in gold stocks that could potentially have a notable impact on lower metal prices, and with the stocks trading at highs, these should offer good profit-taking opportunities.

Why Seabridge Gold Inc. Has a Sell Rating

Seabridge Gold Inc. should be on investors' Sell rating lists.

A positive correlation of 0.36, as seen in the Seeking Alpha chart below, suggests that shares of Seabridge Gold Inc. should follow the expected trend in the gold price, which analysts predict is bearish in 2023.

Additionally, Seabridge Gold Inc. shares have a high beta gold, with the latest metric measuring the gold exploration company's stock returns as a function of changes in the price of gold.

The beta gold of Seabridge is 2.5x as it stems from a linear model in which weekly returns on Seabridge stock are the output (or the dependent variable) while changes in the gold price are the input (or the independent variable). The linear model was run over the last 52 weeks of trading and no further in the past as markets in 2023 are likely to look like 2022 due to the same macroeconomic and geopolitical factors of the war in Ukraine and US-China tensions.

2.5x means that, on average, every 1% drop in gold prices should result in a 2.5% drop in Seabridge's share price. The coefficient of determination R^2 of 54.34% indicates that the forecast model is reliable.

About Seabridge Gold Inc. and Its Gold Projects

Toronto-based Seabridge Gold Inc. is acquiring and exploring gold properties in North America and its mineral portfolio consists of the following projects which are fully owned by the company.

Kerr-Sulphurets-Mitchell Property and Iskut Project in British Columbia, Canada.

The Kerr-Sulphurets-Mitchell [KSM] property is a large undeveloped metals project targeting not only gold but also copper resources. From an environmental point of view, the project is the most advanced in the portfolio, having been certified by local authorities and approved by the federal authorities.

A 2022 Pre-Feasibility Study [PFS] indicates that the property should host proven and probable reserves of approximately 47.3 million ounces of gold associated with 160 million ounces of silver and 7.3 billion pounds of copper as per the company's presentation here .

A Preliminary Economic Assessment [PEA] completed last year, which includes the Kerr or Iron Cap copper deposits in the PFS mine plan, indicates upside potential for an additional 39-year mine life extension.

Returning to the 2022 PFS, this document shows that the initial mine life for this project is estimated to be 33 years of mining activity in the friendly mining jurisdiction of British Columbia and in an area well served by adjacent infrastructure and communications.

The project is expected to yield 1 million ounces of gold, 178 million pounds of copper and 3 million ounces of silver in terms of annual production.

While regarding the 39-year mine life extension of the PEA 2022, mining operations will produce an average of approximately 368,000 ounces of gold, 366 million pounds of copper and 1.8 million ounces of silver annually.

The initial investment is estimated to have a payback of just under 4 years and this should yield a 16% return which compares not favorably to many other projects in the gold industry which have a higher IRR of 25-35%. While the IRR for the 39-year mine life extension project is close to 19% and the investment to finance this mine life extension is expected to be fully amortized in approximately 6 years.

The IRR for the PFS mine plan and PEA mine plan was calculated assuming high gold prices of $1,742 per ounce compared to its 5-year average of $1,650 per ounce. A reduction in the gold price taken as the basis for calculation results in a significantly smaller IRR.

Thus, the market price of gold influences these mining projects in terms of higher/lower IRR and shortening/extending the payback period of the investment, which can have a positive/negative effect on the share price of Seabridge Gold Inc., even if the deposits are not yet in use.

So now it's just speculation as to what value these assets could add to the future operator, and that value will vary depending on the price the ounce of gold fetches in the market.

Seabridge Gold Inc. has announced that it "does not intend to build or operate" the KSM project alone but is seeking a joint venture agreement with a proper partner.

The company will also not prepare a feasibility study for the KSM project, but the task will lie with the partner of the future joint venture. The partner may need to engage in various works, including those not foreseen in the PFS, making it impossible at this point to predict the timeline and cost of further project progression to the feasibility study.

The Iskut project is situated on a 294 km2 property in the north of British Columbia, just 20 air kilometers from the KSM project, and includes a gold deposit called the Johnny Mountain Gold Mine and copper-silver deposits called the Bronson Slope.

Drilling activity in 2023 is aimed at expanding the Bronson deposit and testing a new porphyry gold-copper system in the breccia zone below Bronson. In 2022, exploration activities discovered the mineralized breccia area below Bronson, apart from returning gold and copper with every hole.

Courageous Lake Property in Northwest Territories, Canada

The Courageous Lake property is a large undeveloped project hosting approximately 6.5 million ounces of gold in the form of gold reserves at an average grade of 2.2 grams of metal per tonne of mineral.

The project includes a PFS that was completed a decade ago and is currently being upgraded to demonstrate the viability of operations with the potential for significant leverage on high gold prices.

Snowstorm Project in Nevada

The Snowstorm project is located in Nevada on 103 km2 of land right at the intersection of three major Nevada gold belts and near the Nevada Gold Mine's Barrick Gold Corporation ( GOLD ) ( ABX:CA ) and Newmont Corporation ( NEM ) ( NGT:CA ) JV Twin Creeks mine and JV Turquoise Ridge mine.

At Snowstorm, the company is engaged in exploration activities on parallel structures to determine the potential for mineralization occurrences in faults (rock displacements), while previous exploration activities have identified an environment typical of large mines.

3 Aces Project in the Yukon Territory

The 3 Aces Project in the Yukon Territory sits on a 314 km2 site where 300 holes have previously been drilled, 37% of which have intersected more than 5 grams of metal per ton of mineral.

At the 3 Aces project, the exploration program is aimed at discovering high-grade mineralized deposits.

It seems that the company wants to take into account various ways to raise the necessary capital to advance all of these projects. Mainly these consist of the following:

• selling a royalty or streaming participation in the KSM project.
• financing through a joint venture partner.
• sale of one or more of the other projects in the portfolio.
• issuance of stock or corporate loans.

The Stock Valuation

As seen, Seabridge Gold Inc. does not produce gold or other metals and has no plans to produce any commodities itself but will enter into a joint venture with other operators or sell some of the projects in the portfolio.

However, a stake in Seabridge Gold Inc. provides effective exposure to gold price action anyway. An improvement or deterioration in the prospects for the gold market will affect investors' perceptions of whether this company can achieve its goals and therefore provide an incentive to buy shares of Seabridge or discourage holding a position in the stock of the gold explorer.

The expected bearish sentiment for gold will affect Seabridge Gold Inc.'s outlook and potentially result in a lower market valuation of the stock.

Shares of Seabridge Gold Inc. traded at $13.91 as of this writing for a market cap of $1.15 billion.

Shares are trading above the 175-day simple moving average of $12.29 and above the 75-day simple moving average of $12.54. Shares are slightly below the $14.21 median of the 52-week range of $10.03 to $18.39.

Shares therefore trade at high prices and if you sell them before the price of gold may fall, this could result in a significant profit on the investment.

The 14-day relative strength indicator at 60.02 suggests shares are closer to overbought than oversold levels and nearby the point from which they could pull back significantly based on historical fluctuations in the RSI.

The risk of selling Seabridge Gold Inc. is missing the opportunity for higher stock prices should a gold bull market occur, which is possible as aggressive monetary tightening could lure the economy into recession.

The headwinds of the cycle will renew investors' interest in gold as a safe haven asset.

A recession does not rule out a soft landing for the economy, while Seabridge's share price appears poised to complete a full bear cycle before an economic slowdown occurs.

Seabridge Gold Inc. is also traded on the Toronto Stock Exchange under the symbol ((SEA:CA)) and shares are trading at C$18.96 at the time of this writing. The stock has a market cap of C$1.57 billion and a 52-week range of C$13.83 to C$23.62. The stock price is currently well above the 75-day simple moving average of C$16.94 and the 175-day simple moving average of C$16.57.

Conclusion

Gold experienced a bull market last month as investors sought to capitalize on its safe haven status amid the turmoil caused by fears of a financial crisis.

Gold has been somewhat lower in recent days as prospects of another rate hike to curb stubborn core inflation led analysts to forecast a lower gold price for 2023.

In such a scenario, Seabridge Gold Inc., which tracks gold price movements according to a high gold beta, could decline significantly as investors lower the chance of success for the Canadian gold explorer's projects.

For further details see: