SKE - Skeena Resources: Poised To Perform Well With Gold Bull Market

2023-08-03 07:42:42 ET

Summary

• Skeena Resources Limited's buy rating is based on gold's upside potential and the stock's positive strong correlation with the yellow metal.
• The company continues to work to improve growth prospects for the future production of gold at Eskay Creek in British Columbia.
• There are some risks associated with this investment, but to mitigate them, investors should buy shares when prices are much lower than currently.
• There is a significant chance that much lower share prices will occur.

A Buy Rating for Skeena Resources Limited

This analysis reiterates the previous Buy recommendation rating for the stock in Skeena Resources Limited ( SKE ) as the outlook for gold prices offers significant upside and the stock in this Canadian precious metals explorer and developer appears to be above the median among the ways to capitalize.

However, since there is a chance for a significantly lower share price, investors may want to wait a bit before considering a purchase.

About Skeena Resources and Prospects

Based in Vancouver, Skeena Resources Limited is a Canadian mining exploration and development company engaged in revitalizing a project for the future production of gold as well as silver in the Canadian province of Northwest British Columbia. Exactly, the mining project, called Eskay Creek, is located in the Tahltan territory of the Golden Triangle and has an economic feasibility study that was released about a year ago.

This technical document describes a highly profitable mining operation with growth potential continuing to upgrade until production begins. This translates into a very strong positive correlation to the precious metal, giving this stock many opportunities to add significant value during a bull market in gold prices.

The Risk of Investing in Skeena Resources Limited

The risk of investing in Skeena Resources Limited ( SKE ) does not really depend on if and when Eskay Creek starts mining and selling gold. As long as the company continues to advance the project by adding resources and extending the life of future operations, the resulting momentum will keep the stock price up. The risk typically resides in the possibility that the gold price will not rally above current levels and therefore not provide the necessary upside for the shares of Skeena Resources Limited. However, with a looming recession, there is little chance that this scenario will not materialize.

Contrary to the current narrative that there will be a soft-landing for the economy despite a hawkish Fed, aggressive rate hikes and the need to keep borrowing costs at their highest levels since January 2001 for at least the remainder of 2023, will exacerbate the ongoing slowdown in the business cycle. While factory activity continues to shrink due to weak demand and lack of orders, the low rate of job quits in the US signals that the outlook is currently viewed by people as extremely uncertain.

The recession will bring headwinds against which gold is an excellent safe haven for investors' assets, and stronger demand for the metal for hedging purposes will push the price per ounce higher, a powerful growth catalyst for all gold-based assets, including Skeena Resources.

Another risk for individual investors in Skeena Resources Limited shares is that they will have to implement their desired investment strategy with lower trading volumes. It is not easy and can lead to a downsizing or revision of the strategy in the middle of the road with repercussions on the profit margins.

In fact, this stock consists of 88.16 million shares outstanding and most of the float (about 71.76 million shares that can be traded freely on the stock market), let's say 62.7% of it, is held by institutional investors.

This situation means that the daily trading volumes are not very high considering that the average daily turnover in the last 3 months and 10 days was 55,180 shares and 55,680 shares, respectively.

However, Lower Market Valuations Currently Reduce the Investment Risk

This risk should be somewhat mitigated by the current share price of $5.06 per unit. In fact, this is low compared to the trends derived from the 200-, 100- and 50-day simple moving averages of $5.54, $5.65, and $5.04 and hence could be a comfortable entry point ahead of the expected yellow metal bull market. The last could occur between the end of 2023 and the whole of 2024.

The chart below illustrates the attractiveness of current price levels compared to those of up to five years ago, which means a higher degree of probability of being able to make a good deal.

While the Eskay Creek project has made progress, shares of Skeena Resources Limited have gone lower following the hiatus in gold prices from the second quarter of 2022 to the third quarter of 2022 on a temporary boost in risk confidence in equity markets.

The Eskay Creek Project or Skeena Resources Limited’s Crown Jewel

The feasibility study indicates that 10 years or more of open pit gold and silver mining of approximately 5.9 million gold equivalent ounces in Measured and Indicated Resources (integrated with the June 20, 2023, Mineral Resource Update ) has a Net Present Value [NPV] of CAD 1.4 billion or approximately US$1.06 billion (at time of writing).

So, since the stock of Skeena Resources Limited, the full owner of the Eskay Creek project, has a market capitalization on the New York Stock Exchange of $443.7 million, acquiring a share of Skeena Resources means acquiring at a steep discount of almost 60% future growth potential that this project implies for shares of Skeena Resources.

This growth potential is based on solid conditions given that the project should not take more than a year before it has repaid all the initial capital invested and allow an incredibly high return on investment, equal to 50%. A project is considered very profitable usually by 30-35%.

Additionally, the base case scenario is built on metal price assumptions -- $1,700/oz. gold - which is roughly in line with historical averages over the past 5 years. This is good in terms of the reliability of profitability metrics, although the 5% discount rate could be higher to account for the rise in interest rates.

Thus, Skeena Resources Limited's free traded volumes may be tight, but the US stock market is such a mare magnum that it actually provides an endless mouthpiece for the highly flattering properties of the Eskay Creek Project.

So, there is more bite than can be chewed for the stock price to build on its bull markets and continue its story while staying true to the gold price action.

Skeena has continued metallurgical testing at Eskay Creek and has demonstrated significant improvements in flotation concentrate quality at the Eskay Creek processing facility, resulting in a tangible opportunity for significant cost reductions.

Drilling at Eskay Creek is currently evaluating further growth potential as it targets possible higher metal concentrations at depth and along strike, as well as the presence of other deposits beyond those already defined.

Before the end of 2023, Skeena Resources Limited should complete and release a definitive feasibility study for Eskay Creek which may have even better economic metrics than those highlighted above.

About to Take Off but the Eskay Creek Project Could Get Cheaper on the US Stock Market

These price levels already represent an opportunity, but it must be said that there is still plenty of room to make them even more attractive to retail investors, should they be interested in initiating or expanding a position in Skeena Resources Limited ( SKE ).

In fact, the chart below shows that the shares, which are currently neither overbought nor oversold, still have plenty of room to get closer to the lower bound of the 52-week range of $4.10 to $7.65.

We would need the trigger that fuels a bit of bearish sentiment for a lower stock price, and indeed we have it.

Based on recent history, as markets will not differ much from a few months ago due to the continuation of the same conditions (stubborn core inflation and robust labor market conditions), Skeena Resources Limited ( SKE ) shares will continue to be impacted by monetary policy of the Fed as it was after the rate hikes on May 3 and the end of July. The RSI was below 30 or oversold levels after the rate hike in May.

When interest rates rise, investors are attracted more to the income they can receive on bonds based on a predetermined interest rate than to the potential appreciation of gold, which, on the contrary, generates no income.

With the Fed set to hike rates again on over-entrenched core inflation, further rises in bond yields will spell bad weather for gold prices, which could translate into a lower price for Skeena stock due to a positive correlation to the yellow metal. This card is worth playing as it helps mitigate a bit the problem of reduced daily trading volume.

Gold Is Expected to Trade Higher and Its Positive Correlation with Skeena Resources Limited

As another indication of a bull market for gold prices, analysts at Trading Economics predict the price of the yellow metal will rise more than 6% per ounce from where it is now to reach $2,055.38 in 12 months.

With the premise of highly profitable future gold production at the Eskay Creek mine, investors may want to take advantage of the resulting strong correlation between the project's owner and the yellow metal, as a 6% increase in the ounce could reflect a strong appreciation in Skeena Resources shares.

Looking at the Seeking Alpha chart above the yellow area is almost always in the upper section of the correlation coefficient ["CC"] chart, as Skeena Resources shares and Gold Futures (a benchmark for the price of gold) are positively correlated and in a strong way.

Shares also trade on the Toronto Stock Exchange under the symbol ( SKE:CA ). Shares were trading at CA$6.53 per unit on the TSE as of this writing for a market cap of CA$ 589.59 million. Shares are trading below the 200-day simple moving average of CA$ 7.49, below the 100-day simple moving average of CA$ 7.58, and below the 50-day simple moving average of CA$ 6.66.

Shares are also below the middle point of CA$8.01 in the 52 Week Range of CA$5.64 to CA$10.38. Also, the 14-day Relative Strength Indicator of 48.54x suggests there is room for shares to reach lower price levels.

Conclusion

Skeena Resources Limited is a very interesting vehicle to benefit from the expected gold bull market. Mineral activities in British Columbia are progressing to begin gold production at some point in the future, already resulting in a strong positive correlation with the yellow metal. This stock should benefit immensely from a bull market in gold that could occur as a result of a recession expected between late 2023 and the next year of 2024. The economy is showing preliminary signs of a negative cycle. There are some risks associated with investing in Skeena Resources Limited due to the tight trading volumes, but these can still be mitigated.

For further details see: