SEA:CC - Seabridge Gold: Relevant Upside Potential As Gold Turns Bullish

2023-12-02 05:18:55 ET

Summary

• This analysis confirms a Buy rating for Seabridge Gold as it is expected to benefit from a rising gold price and strong investment demand for safe-haven assets.
• Seabridge Gold shares are highly correlated with changes in the price of gold, making them a good investment during a bullish gold market.
• The KSM property in British Columbia offers significant growth potential for Seabridge Gold, with the project expected to attract the right partnership for development.

This Analysis Gives Seabridge Gold a Buy Rating

This analysis confirms the Buy rating already given to shares of the Canadian gold properties developer Seabridge Gold ( SA ) ( SEA:CA ) in the previous analysis .

Like the previous analysis, the valuation is based on bullish sentiment, which is expected to gradually gain momentum toward the gold price.

The analysis continues to anticipate strong investment demand for the yellow metal as a safe-haven asset to protect investors' portfolios from the headwinds of an impending recession.

A rising gold price should create strong upward pressure on Seabridge Gold shares, as this stock is highly correlated with changes in the price per ounce of the yellow metal.

The soar in gold prices isn't the only catalyst for the upside: Seabridge Gold stock deserves a "Buy" rating also because the Kerr Sulfurets-Mitchell [KSM] property in British Columbia, one of Seabridge's two key mineral projects in Canada, is seen having a greater chance of entering the construction phase today.

The Upside Potential for Gold Prices from the Economic Recession

As previously mentioned, investing in physical gold, as well as various securities that track the price of gold, acts as an effective safe haven in which the value of investors' portfolios is protected to some extent from negative winds caused by economic or geopolitical factors.

As the Federal Reserve's aggressive rate hikes to combat record inflation have hit consumption and investment so hard that the U.S. economy is headed for recession, gold prices will be one of the few bullish moments in 2024 as investors flock to the safe haven properties of gold amid heightened risk aversion on the financial markets.

Burdened with student loan repayments, exorbitant credit card debt that comes with expensive interest rates, and wages slowly adjusting to price increases, consumption is certainly not at its peak right now.

Consumers are currently pessimistic about the future as the University of Michigan consumer expectations sub-index hit a six-month low in November.

Weaker consumer purchasing power is reflected in the contraction of manufacturing activity, with demand for products declining, meaning that companies generally do not invest in raw material inventories and finished product inventories are also shrinking.

Current consumption trends are impacting the U.S. gross domestic product ((GDP)) growth prospects, with consumption accounting for nearly 70% of GDP.

As for investments, these are currently not having a positive impact on growth prospects either due to high borrowing costs resulting from the Fed's aggressively restrictive decisions on rates. As a highly reliable indicator of corporate investment, Morgan Stanley ( MS ) reported fewer completed mergers and acquisitions (M&A) in the third quarter of 2023 compared to the previous year: companies are making fewer investments to acquire or merge with other companies.

Morgan Stanley's third quarter of 2013 also suggests lower revenue from initial public offering ((IPO)) transactions, and this negative trend signals a greater aversion to investment risks perceived in the stock markets. Companies that want to raise capital by listing new shares on the stock exchange currently assume that their chances of receiving the desired capital are significantly lower, which is why they are putting the plan on hold for the time being.

Since the US economy is receiving no stimulus from either consumption or investment, it will enter a significant downturn as early as 2024. Exports do not benefit the US economy either. As important partners of the US economy, the EU and China are struggling with their internal problems. Due to the European Central Bank's restrictive interest rate policy to combat elevated core inflation, the EU is facing the same problems as the US. This further weighs on growth prospects, apart from the rise in populism worrying global markets. After three years of strict restrictions against the COVID-19 virus, China is struggling to add momentum to the cycle as the real estate sector - a pillar of its economy - is in crisis. Major real estate developers such as China Evergrande Group (EGRNQ) and Country Garden Holdings Company Limited (CTRYF) (CTRYY) are failing to meet their offshore obligations.

Further Recession Signals from the US Treasury Curve and Risk to Portfolios from Overvaluation of US Stocks: Gold Could Be a Good Hedge

Therefore, the analysis assumes that investors will turn to the safe-haven properties of gold to weather the headwinds of the economic recession, which has been signaled by the U.S. Treasury yield spread (inverted) curve and predicted by a significant group of economists.

The spread between 10-year Treasuries and 1-year Treasuries should be positive under normal conditions because 10-year Treasuries have a higher risk of default due to their longer duration and are therefore rewarding with a higher yield than 1-year Treasuries (shorter maturity/lower risk of default of the issuer/smaller yield).

But at the moment, the spread between 10-year US Treasury bonds and 1-year US Treasury bonds is negative (currently the 10-year yield is at 4.332% versus the 1-year yield at 5.118%) signaling that the near term is perceived riskier than usual, and if such a more cautious mood emerges among bondholders, the U.S. economy will fall into recession almost 90% of the time.

The curve remains negative, although slowly exiting negative territory since May 2023, as bondholders sell longer-dated US Treasuries: but not because bondholders are attracted by the prospect of higher interest rates in the short-term, as the Fed appears to have neared the peak with its tightening policy, but because they are more risk-sensitive than before and a longer-term implies a higher risk.

The US Treasury Bond's Inverted Yield Curve Indicator predicted an economic recession for the US cycle in late summer 2021 as the slope of the spread turned from positive to negative compared to the x-axis.

Thereafter, the momentum has been loaded with factors pointing to a worsening of the US economy as the Fed began sending recessionary signals in March 2022 by aggressively raising interest rates to combat soaring record inflation, reinforcing the prediction of the inverted yield curve.

However, markets continued to cling to the idea that a soft landing would have occurred after all, fueling bullish sentiment, likely leading to the overvaluation of the stock market. That is, the power of the propaganda was such that despite so many headwinds such as the COVID-19 pandemic, supply chain problems, the energy crisis, the war in Ukraine, global geopolitical tensions, the summer 2022 energy crisis, and galloping inflation, and the sharp increase of interest rates, the stock market has risen more in recent years than in the previous thirty years.

With their earnings revisions, the analysts had an important role in the formation of the sentiment on the US stock market.

As an indication: ahead of the third quarter of 2023 - one of the worst quarterly earnings sessions in years for US-listed stocks - analysts already started lowering their estimates 90 days before the earnings release, while the soft-landing narrative continued to prevail in the financial markets. Some trends from the world of top US retailers were 'really' insightful last week: DICK's Sporting Goods ( DKS ) -- a specialty retailer focused primarily on sporting goods in the U.S. -- reported same-store sales of 1.7% for Q3 fiscal 2023 versus 6.5% the year before, and Q3 fiscal 2023 non-GAAP EPS at $2.85, but analysts cut their Q3 fiscal 2023 EPS estimates for DKS by 10% in the 90 days leading up to the earnings release (from $2.72 to $2.45).

Kohl's Corporation ( KSS ) -- department store that offers branded apparel, footwear, accessories, beauty, and home products through its stores and websites in the United States -- posted Q3 fiscal 2023 GAAP EPS of $0.53 (down 35.4% YoY) and beat analysts by $0.18, but analysts cut their estimate ahead of the earnings release to $0.35 per share, compared to $0.64 per share 90 days ago.

Nordstrom, Inc. ( JWN ) — fashion retailer of apparel, footwear, beauty, accessories, and home goods for all ages, females and males — had its Q3 fiscal 2023 non-GAAP EPS come in at $0.25, beating analysts by $0.12. However, analysts lowered their estimates ahead of the company's earnings release to $0.12/share compared to $0.32/share 90 days ago.

Lowe's Companies, Inc. ( LOW ) - a home improvement retailer in the United States - posted Q3 fiscal 2023 GAAP EPS of $3.06 (down 6.4% year over year) beat analysts by $0.03, but analysts lowered their estimates in the 90 days before the results were released: They estimated $3.12/share about 90 days ago before the last estimate of $3.03/share. The company also reported a 7.4% decline in same-store sales, driven by a drop in consumer spending.

Even the so-called “mass affluent” customers, whose number has increased significantly in recent years of expansionary policies to support and strengthen economic growth, are not immune to the danger of overvaluation on the stock markets.

But in recent years, major banks have focused heavily on serving the so-called “mass affluent” customers (not as wealthy customers as those previously served by bank giants) with financial planning that includes advice over investments and savings in addition to retirement, estate, taxes, and insurance.

Now, giants such as Goldman Sachs Group, Inc. ( GS ) are dismissing these divisions with hundreds of financial advisors getting in touch with the mass of individual and household clients in the middle-income class through retail banking services. These were part of a broader strategy by the bank giants to develop a more secure stream of income while reducing the risk associated with capital market volatility. Now the bank giants are looking to tap into the premium clientele of ultra-high net-worth customers and focus on business growth strategies ahead of the post-recession recovery.

Even if the cycle turns bearish, the buyer of these assets sees the opportunity to still gain value after Goldman Sachs's profitable capital gain.

With pessimistic sentiment likely to take hold in the markets of US-listed equity as a headwind from the looming recession, there is a real risk to portfolios anchored in the overvaluation of the stocks. Given the potential consequences, gold will provide relief as an effective safe-haven asset. This article mentioned a significant group of economists who argue that the US economy will enter a recession as early as 2024. Analysts at Trading Economics expect physical bullion gold, whose price per ounce was $2,036.45 at the time of this writing, to rise and reach $2,090.27 within 12 months.

Seabridge Gold Stock Could Be Useful as a Hedge

Shares of Seabridge Gold are poised for a strong recovery from current levels as they are positively correlated to the price of the metal – this analysis considers gold futures (GCZ2023 – COMEX) as a gold price benchmark – should the gold price experience a bull market, as it appears from the existence of multiple triggers mentioned so far in this analysis.

Under the symbol of SA on the NYSE and under the symbol of SEA:CA on the Toronto stock exchange, shares of Seabridge Gold compared to the GCZ2023 gold futures over the past 5 years lead to the 2 yellow areas. These areas are a graphical representation of the correlation coefficient, which measures the following relationship: when the price of gold is on the rise, Seabridge stock most likely rises as well. Since these two areas are nearly always in the positive section of the charts, the positive correlation between the assets is a very strong one. This means that in a bullish market for gold price, Seabridge shares are most likely to trade significantly above current levels.

This kind of relationship has already played out in a very strong way in recent months: due to the crisis in the regional US banking system with the failure of Silicon Valley Bank in Santa Clara CA on March 10, 2023, of Signature Bank in New York, NY on March 12, 2023, and First Republic Bank in San Francisco, CA on May 1, 2023, the price of gold skyrocketed. Fearing a broader crisis in the banking system, investors flocked to safe-haven gold and gold prices rose 13.6% from $1,810/ounce in early March 2023 to a peak of $2,055/ounce in early May 2023. As a result, shares of SA gained more than 50%, and shares of SEA:CA gained about 50% in less than 2 months.

It's clear that during a strong gold bull market, Seabridge Gold shares grow much faster than the price of the precious metal. This analysis estimated how much Seabridge Gold's share price could rise on average if the gold price climbed quickly, supported by investors using the hedging properties of the yellow metal against the headwinds of the looming recession. The analysis combined the last 52 weekly gold futures returns as input with the last 52 weekly stock price returns as output in a linear model. The model produced a slope of 2.3 for SA as an output of GCZ2023 gold futures and a slope of 2.1 for SEA:CA as an output of GCZ2023 gold futures, meaning Seabridge Gold's stock price tends to rise more than twice as much as the price of gold.

The model has a coefficient of determination of more than 40%, which is an acceptable representation of the relationship between the assets, meaning that the change in the price of gold futures determines, on average, 40% of the change in the price of the stock.

The model uses weekly returns from the past 52 weeks, and not further back in the past, because this analysis assumes that the upcoming markets will be influenced by roughly the same factors that influenced markets over the last 52 weeks. These are mainly macroeconomic factors such as elevated core inflation coupled with increased interest rates weighing on consumption and corporate investment, as well as geopolitical tensions between Western countries and the Eastern bloc of countries affecting the OPEC+Russia cartel's decision on the delivery of crude oil barrels to the USA market. Pressure on oil prices impacts the share prices of listed U.S. stocks as more expensive energy purchases weigh on companies' growth plans due to what investors typically see as lagging corporate profitability.

About Seabridge Gold and Its Resources: RBC Capital Also Sees Good Upside Potential

Toronto-based Seabridge Gold Inc. has a mineral portfolio consisting primarily of mineral projects on the Kerr-Sulphurets-Mitchell [KSM] property in British Columbia, Canada, and the Courageous Lake property in the Northwest Territories, Canada, where the exploration team has increased resources by almost 1000% since 2003.

KSM is the project that currently offers the most significant growth potential for this stock in the market, as the mineral site in British Columbia's friendly mining jurisdiction accounts for the majority of Seabridge Gold's total owned resources.

RBC Capital also shares this idea and began covering Seabridge Gold in September 2023 with an Outperform rating and a price target of $25 (more than 100% higher than current price levels). The analyst believes that given the difficulty for metal producers to find and develop projects with good profitability potential, it should not be difficult for a project like this from the KSM site to find the right partnership for the ultimate breakthrough. The RBC Capital analyst seems confident in the economic potential of the KSM project, which is already surrounded by significant infrastructure such as highways, power grids, ports and airports, and telecommunications lines.

The goal of the Canadian gold explorer is to develop a large metal project on the KSM site for the production of gold and copper in the future. The yellow metal will account for approximately more than 75% of the total income from KSM.

It should not be difficult for Seabridge's exploration team to proceed with updating KSM's feasibility study as long as the company obtains all permits necessary to develop the resources.

Regarding the necessary mining permits that must be issued by the relevant authorities, from this point of view, KSM is not a newcomer in the sense that the mineral site already has certain certifications from local authorities, approvals from federal authorities, and social licenses that have been established with local communities.

KSM released a feasibility study in 2022 showing the potential to mine more than 1 million ounces of gold, as well as 178 million pounds of copper and 3 million ounces of silver per year over a roughly 33-year period. This estimate of future production of the metals is based on proven and probable reserves of 47.3 million ounces of gold combined with 160 million ounces of silver and 7.3 billion pounds of copper.

The project appears to have good growth potential as production estimates are based on not more than 25% of the total mineral resources estimated to lie at the site.

But KSM offers even more: if the two copper deposits, Kerr and Iron Cap, were to be exploited, as shown in a Preliminary Economic Assessment (PEA) completed in 2022, the upside potential for KSM would increase as follows: Life extension of the mine by 39 years with an additional annual production of 368,000 ounces of gold, 366 million pounds of copper and 1.8 million ounces of silver.

The following economic parameters of the KSM Project are likely to change as the exploration team continues to work on the resources at the mineral site. However, the technical documentation to date shows that the investment in the project (excluding Kerr and Iron Cap) can be paid back in four years, while Kerr and Iron Cap, with an additional 39 years of mine life, will recoup the initial investment in 6.2 years.

The internal rate of return ((IRR)) for the project at KSM is 16.1%, while for the project with an additional 39 years of mining operations is 19%. These IRRs are not high, as there are mineral projects in the mining industry that have an IRR of 25% and above, which is usually considered by investors as the threshold for very profitable mining exploitation.

However, it must also be said that these estimates are based on assumed prices of $1,742/ounce of gold and $3.53/pound of copper, which are reasonable when compared to the last five years' averages for gold and copper: average of $1,748.93/ounce of gold and average of $3.51/lb of copper. But if one considers the growth potential for the price of copper as a crucial element in energy transition programs and for the price of gold as a hedge against increasing market volatility due to growing macroeconomic problems and geopolitical tensions around the world, then the IRR will be higher with higher price assumptions.

In line with RBC's expectations, Seabridge Gold is indeed looking for a suitable partner to build and operate the KSM, and the partner will also share the burden of preparing the feasibility study.

Seabridge Gold's total mineral resources include the Courageous Lake property in the Northwest Territories, Canada. This is a large, 100% owned, undeveloped project hosting approximately 6.5 million ounces of gold in proven and probable gold reserves at an average grade of 2.2 grams of metal per ton of mineral.

According to an outdated 2012 pre-feasibility study, the project aims to build a 15-year open pit mine to produce 385,000 ounces of gold per year with a payback period of 2.9 years and a pre-tax IRR of 28% over the latest metal prices. These economic parameters could improve, and here's another potential catalyst for higher stock prices if: 1) access to hydropower develops, leading to significant energy cost savings. 2) The mine site is connected with more efficient communication and transportation routes. 3) The scope of the project would be reduced somewhat to also make it more profitable in terms of resource usage.

Other smaller projects in Seabridge's portfolio include:

• Drilling operations in northern British Columbia, just 20 air kilometers from the KSM project. These exploration activities are being conducted on the copper-silver property and are testing a new porphyry gold-copper system in the underlying breccia zone. The project is known as the Iskut project and covers a total of 294 km2 of land.
• Exploration activities in Nevada targeting fault mineralization deposits on a property considered to have the potential to host large mines. Known as “ The Snowstorm ” project, the project is located on a 103 km² property directly 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.
• Exploration activities are underway on a 314 km2 site called “ The 3 Aces Project ” in the Yukon Territory in northwestern Canada. These activities are focused on high-quality mineralized deposits.

The Financial Condition

For the third quarter of 2023, Seabridge reported a net loss of CA$5.3 million ($3.9 million), or a net loss of CA$ 6 cents per share ($ 5 cent per share), versus a net positive income of CA$5 million, or a net profit of CA$6 cents per share, in the same period in 2022. During the quarter, Seabridge reported a CA$73.7 million (or $54.3 million) investment in its mineral projects, with such spending increasing about 16.2% year-over-year.

As of Q3 2023, total cash and short-term securities was CA$132.6 million ($97.6 million) against total debt of CA$490.3 million ($361 million).

Its 12-month operating income was a loss of CA$23.9 million ($17.6 million), while debt generated interest expense of CA$2.1 million ($1.5 million) in the trailing 12 months through the third quarter of 2023.

The Stock Valuation

Shares of SA were trading at $12.51 apiece as of this writing, giving it a market cap of $1.05 billion.

Shares have rebounded somewhat since October and are now trading well above the 50-day simple moving average of $11.23, but only slightly above the 200-day simple moving average of $12.21.

The stock price has fluctuated between a floor of $9.72 and a high of $16.18 over the last 52 weeks. The current share price is still slightly below the middle point of $12.95 in the 52-week range.

If driven by the expected next bullish sentiment around gold prices, SA shows a very strong uptrend, as during the March-May 2023 US regional banking crisis, the retail investor should consider adding shares to his position even considering shares that are not as low as a month ago.

But for retail investors, who may already have exposure to the gold price through the upside potential in SA, there is also the option of waiting until early 2024 to see if the chance of another rate hike from the US Fed materializes. First of all, let's say that in light of the positive correlation highlighted earlier in this analysis, shares of SA could pull back somewhat if rates were to rise again as higher rates do not bode well for gold assets but are good for bonds and the US dollar currency. The last two assets are fierce competitors to gold assets because higher interest rates increase the cost of holding gold instead of US bonds and US dollars.

It now remains to be seen whether another rate hike will occur in early 2024: the Fed could tighten policy again if consumption reinforces somewhat during the holiday shopping season in the United States, to the extent that the disinflationary process should be somewhat shaken up.

There is currently little scope for a further rate increase at the beginning of 2024. However, it doesn't look like retailers need to do anything special to attract consumers today. This means that despite consumers becoming more conservative in their purchasing habits, retailers expect to see similar levels of footfall as they have seen in recent years of economic recovery or growth.

Here's the current picture from the perspective of top retail specialists like Tony Spring , the new CEO of Macy's, Inc. ( M ), with more than 35 years of experience in the industry. As he assumes that the current fourth quarter will not differ from previous years in terms of competitiveness and advertising effectiveness, there is a feeling that people will forget about the return of student debt, expensive credit cards, and slow wage increases for a month and engage in shopping sprees, as they traditionally do at this time of year.

Taking into account the above factor, it is not so far off that a final rate hike can be expected to step in at this point.

The same consideration applies to Seabridge's shares traded on the Toronto Stock Exchange:

On the Toronto Stock Exchange, under the ((SEA:CA)) symbol, shares were trading at CA$16.90 per unit as of this writing for a market cap of CA$1.41 billion. Shares are trading slightly above the 200-day simple moving average of CA$ 16.51 and significantly above the 50-day simple moving average of CA$ 15.38.

Shares are below the middle point of CA$ 17.56 in the 52-week range of CA$ 13.34 to CA$ 21.78.

Retail investors have to pay attention to the trading volume of this stock, which is not high. The average volume (3 months) was 340,367 on the NYSE, while the average volume (3 months) was 47,151 on the Toronto Stock Exchange. So, if he has too large a position, it may be difficult to quickly sell the desired number of shares when necessary.

Conclusion

Compared to the previous analysis, Seabridge Gold Inc. shares continue to receive a Buy rating, although shares are no longer as low as they were a month ago. With prominent economists and the likely trajectory of the current macroeconomic situation predicting a recession, gold prices will have a strong upward catalyst as investors will flock to the yellow metal due to its safe-haven properties.

Since Seabridge Gold Inc. shares are positively correlated with the precious metal, they will most likely follow bullish sentiment toward the precious metal once it takes hold, given the need to protect against recession headwinds.

The stock of this Canadian gold explorer is very attractive as mineral resources grow significantly faster than the volume of outstanding shares. There is value and this is also the current opinion of the RBC analyst, who is so convinced of the great potential of the KSM project that it issued a very positive rating.

Plus, if Fed interest rates rise again, stocks could become even more attractive.

For further details see: