CA - Snowline Gold: Shares Could Perform Strongly If Gold Rallies (Rating Upgrade)

2023-12-06 07:24:04 ET

Summary

• Snowline Gold stock's rating has been upgraded from "Sell" to "Buy" due to a rising gold price outlook.
• The stock has experienced a significant decline in share price, making it more attractive for retail investors.
• Snowline Gold shares have a positive correlation with the price of gold and are expected to rise as gold prices increase.

A Buy Rating for Snowline Gold

This analysis changes the recommendation rating for shares of Snowline Gold ( OTCQB:SNWGF ) ( SGD:CA ) - a Vancouver, Canada-based gold property exploration company focused on the Selwyn Basin (Canada).

This analysis upgrades the rating from a “Sell” rating to a “Buy” rating, amid a rising gold price outlook.

In the previous analysis , a Sell rating was considered the most appropriate for this stock as its overbought shares would significantly give back previous gains given the strong headwinds from the Federal Reserve (Fed)'s additional interest rate hikes, which typically do not bode well for gold.

It was said that the market would then offer more attractive entry points, allowing retail investors to add to their holdings in anticipation of an expected gold bull market. Since this stock, which is correlated with the price of gold, is trading at a significantly more attractive share price, retail investors may want to buy some shares as they await a gold bull market in 2024, the likelihood of which has gained momentum.

This Has Happened Since the Previous “Sell” Rating

The Fed raised rates by 25 basis points on July 26, 2023, to a range of 5.25% to 5.50% – because core inflation was still falling too slowly despite the hawkish stance: annual core inflation was 4.7% in July 2023, versus 4% in October 2023, but the target is 2%. As interest rates continued to rise, access to credit to finance any type of project or expense became tighter and investors also perceived a higher opportunity cost of investing in gold instead of other securities.

The expectation of higher income at shorter maturities – as a lender would do when the risk of a borrower going bankrupt is perceived to be increased – led to a shift in demand towards money markets and US Treasuries with shorter maturities.

The attitude of those interested in money-saving activities narrowed the negative spread between 10-year US Treasuries and one-year US Treasuries and generated strong positive momentum for money market instruments. At the end of August 2023, US banks, especially the larger ones, were struggling to retain holders of large pocket money accounts as money market fund volumes increased rapidly (inflows reached $769 billion since the beginning of 2023), doubling the pace of deposit outflows from all US banks.

As a result, investment demand for gold cooled and the price per ounce of gold dropped significantly in a matter of weeks: As a gold price benchmark, Gold Futures - February 2024 (GCG4) fell 9% from about $2,010/oz at the end of July 2023 to a low of $1,832/oz. in early October 2023, before Hamas attacked the Israeli people. The latter mention of the tragic course of events in Israel that led to the Gaza conflict is made to prevent the reader from assuming that the crisis in Israel, with its inevitable impact on oil prices, may have played a role in the fall of the price of gold.

Lower gold futures prices sent shares of Snowline Gold to significantly lower levels on both the US over-the-counter market under the symbol SNWGF and on the TSX (Toronto Stock Exchange) Venture Exchange (TSXV) under the symbol SGD:CA.

SNWGF Stock: the current share price of $3.66 represents a significant decline from the all-time high and 52-week high of $4.51 in early August 2023, representing a depreciation of nearly 20%.

SGD:CA stock: the current share price of CA$4.96 represents a significant decline from the all-time high and 52-week high of CA$6.07 in early August 2023, representing a depreciation of more than 18%.

If retail investors had taken profits given the scenario described, that would not have been wrong at all.

Snowline Gold Correlates Positively with the Price of Gold

The fact that Snowline Gold shares have fallen faster than gold prices can be explained by two analytical tools: a positive correlation between the stock and gold prices and high beta gold coefficients.

Take a look at the following chart comparing SNWGF or SGD:CA to Gold Futures - February 2024 (GCG4): The yellow area is a graphical representation of the correlation coefficient. This is positive because the yellow area appears most often in the positive part of the chart (above the zero line) and less often in the negative part of the chart (below the zero line).

A generally positive correlation coefficient implies that, on average, Snowline Gold shares will rise when the price of gold is in an uptrend and, as in the period noted above in this analysis, will fall when the price of gold is in a downtrend.

The correlation coefficient does not measure returns, and assets can perform very differently over time despite being positively correlated.

Instead, this analysis tool is about the sentiment of the securities: That is, whether they tend to be bullish or bearish at the same time, or whether sentiment tends to diverge over time: If one is bullish, the other is most likely bearish, and vice versa, regardless of how much they rise or fall. Different moods cause the correlation coefficient to be negative.

Analysts at Trading Economics expect gold to rise very quickly from current levels: on the London gold bullion market, at the time of this writing, an ounce of the yellow metal was trading at $2,028, while in 12 months analysts expect a price of $2,163.75 for a 6.7% growth from current levels.

Based on the positive correlation described previously, Snowline Gold shares are poised to follow suit and rise as well.

This analysis has also estimated the beta gold coefficient, which is how much, on average, shares of Snowline Gold could rise amid bullish sentiment on the ounce of gold. For this purpose, the last 52 weekly returns of gold futures (input) were combined with the last 52 weekly returns of Snowline Gold stocks (output) in both markets. The model produced the following result: a beta gold coefficient of 1.4x for SNWGF and 1.2x for SGD:CA, meaning that Snowline Gold shares, on average, significantly outperformed any increase in gold prices. This information encourages the purchase of shares of Snowline Gold ahead of the forecasted strong bullish sentiment around the price of gold per ounce.

The Growth Catalyst of Higher Prices for Safe-Haven Gold: The Strong Headwind Expected from the Recession

Gold prices will rise as safe-haven demand is seen as resilient amid headwinds that threaten the value of portfolios. The biggest headwind will come from the economic recession, which economists and analysts at bank giants including Swiss bank giant UBS Group AG ( UBS ) expect as early as 2024.

The US economic cycle is set to enter recession due to weaker consumption and corporate investment as the Fed has made 11 interest rate hikes since March 2022 to combat elevated inflation. The restrictive course has not been this aggressive since the financial crisis of 2007/2008. Inflation has not risen so quickly in more than 40 years.

Under pressure from student loan repayments, expensive credit card loans with historically high-interest rates, and increased core inflation, demand for goods and services reflects a much more conservative attitude among consumers, who are now also concerned about the fallout from the conflicts, along with elevated inflation and high borrowing costs.

Analysts have been cutting profits at these major U.S. retailers well ahead of the third-quarter 2023 earnings season as an indication of weaker consumption, but consumers' more frugal attitudes are also causing these companies to cut their forecasts for sales , which have not performed well in the third quarter of 2023, among other things.

With higher financing costs affecting the affordability of growth projects and slow wage growth juxtaposed with rising living costs, both factors are impacting future demand prospects, and causing companies to scale back investments.

Morgan Stanley's ( MS ) Q3-2023 earnings report suggested that companies are investing less in acquisitions or mergers with other companies. Since these types of transactions between companies require significant capital allocation, the year-on-year decline indicates a lack of momentum in business investments. However, the increased risk aversion currently prevailing in the financial markets is not helping companies to raise capital through initial public offerings ((IPO)) either. For this reason, too, companies are forced to postpone their growth plans for a while. In this sense, Morgan Stanley recorded significantly lower IPO proceeds in the third quarter of 2023 than in the previous year.

In addition to consumption and investment, the trade balance also does not support positive expectations for the US economic cycle, as the US's most important trading partners are also not doing well: The EU must bear the burden on consumption and investment caused by the European Central Bank's interest rate hikes to bring core inflation back on track towards the 2 percent target. The People's Republic of China's economy is still struggling to find its optimal state after three years of strict restrictions imposed to prevent the COVID-19 virus from infecting larger parts of the population. In addition, this economy is now suffering the consequences of its mainstay, the real estate sector, being unable to meet its obligations to foreign investors related to offshore bonds.

About Snowline Gold and Its Mineral Exposure to Canada's Selwyn Basin

Through its drilling specialists and geologists, Snowline Gold is engaged in some gold mineral projects within a land package of more than 330,000 hectares in Canada's Selwyn Basin in the Yukon Territory, with the current focus being on Rogue and Einarson projects.

At its fully owned 94,000 ha Rogue Project, exploration activities using diamond drilling technologies are focused on an area called the "Valley Zone", as the company today sees the opportunity to one day establish large-scale, high-grade mining production of gold here.

This expectation has been fueled by further assay results since the previous article. The most significant of these were the results released on August 3 and on September 11 , which the company continues to derive from the ongoing drill program at the Valley target. Here the drilling focuses on more than 10,000 meters of the 18,000+ meters planned for all drilling and exploration activities in 2023. Approximately 5,000 meters of the drilling activity is targeting additional mineral discoveries within Rogue. The remainder of the exploration program targets an orogenic gold target called Jupiter at the Einarson Project in the Yukon.

At Jupiter, regional stratigraphy would indicate inferred Carlin-style areas of mineralization, which are deposits of microscopic gold particles. The company's November 2023 presentation indicates that the Jupiter discovery has very similar potential to Agnico Eagle Mines Limited's ( AEM ) Fosterville Gold Mine. This is a high-grade, low-cost gold mine expected to produce about 305,000 ounces this year, after mining 228,161 ounces in the first 9 months of 2023 at total cash costs of $437 per ounce of gold produced versus the company's weighted average of $885/oz.

The company funds its mineral projects with a balance sheet that as of September 29, 2023, had $29.3 million in cash and short-term investments and no significant debt. Based on the trend over the last two years, $1.4 million could be absorbed in the next 12 months for CapEx purposes.

Further exploration results provide upside potential for Snowline Gold shares, which could be magnified if the growth catalyst of higher gold prices unfolds as predicted in this analysis.

The Stock Valuation

As of this writing, shares of SNWGF were trading at $3.56 per unit, giving it a market cap of $530.27 million. Although shares are well above the 200-day simple moving average line, they are still more than 25% away from the upper limit of the 52-week range of $1.55 to $4.51.

Additionally, the 14-day relative strength indicator at 57.75 shows that there is still plenty of room before shares reach overbought levels.

If retail investors buy shares of Snowline Gold at these levels, they should be poised to make a robust profit margin provided gold experiences the bull market as forecast. However, since this analysis sees the possibility of lower stock prices if the Fed raises rates again in 2024, retail investors may want to wait for that pullback before buying the shares.

After the Christmas shopping season, consumption could pick up somewhat, forcing the Fed to tighten monetary policy again to restart the disinflationary process.

It must be said that this possibility is far from unlikely as the Fed Chair has hinted at another rate hike if core inflation is still moving too fast compared to the 2% target despite aggressive restrictive measures. This is because the labor market is quite resilient.

The same conclusion could be drawn for shares of SGD:CA, which are trading at C$4.83 per unit, giving it a market capitalization of C$718 million. Shares are above the 200-, and 50-day simple moving averages, but still 25.7% far from the upper limit of the 52-week range of CA$ 2.08 to CA$ 6.07.

The 14-day relative strength indicator of 54.78 implies room before overbought levels.

In terms of price-to-book value ((TTM)), SNWGF compares to its most direct competitors as follows: SNWGF's price-to-book value ((TTM)) is 17.95x versus New Found Gold's ( NFGC ) 18.83x and versus Dakota Gold's ( DC ) 2.41x.

SGD:CA's price-to-book value ((TTM)) is 17.90x .

Retail investors should pay attention to the trading volume, which is low for both stocks. Low stock trading volume can cause problems when sudden circumstances require the position to be softened but there are too many stocks in the portfolio.

The average volume (3 months) was 56,787 for SNWGF (scroll down this page of Seeking Alpha until “Risk” section) and the average volume (3 months) was 90,778 for SGD:CA (scroll down this page of Seeking Alpha until “Risk” section). Plus, the shares outstanding are 144.76 million and the float is 94.2 million, but 12.24% of the float is held by institutions.

Conclusion

Since the price of gold is likely to trade much higher than current levels due to its safe-haven properties amid the headwinds of the looming recession, this thesis proposes to buy shares of Snowline Gold, because they are positively correlated with gold prices.

Stocks are still far from overbought levels as a result of September's sharp pullback, offering the potential for a robust margin of return in conditions of bullish gold.

Snowline Gold is conducting exploration activities on a land package of more than 330,000 hectares of mineral properties in the Selwyn Basin, Canada. Here the company plans to set up large gold production from high-gold grade mines. The exploration results appear to lead to this idea of large-scale of mining operations. However, so far, we are still in the larval stage of these mineral projects.

This analysis suggests buying shares of Snowline Gold to capture the growth potential described above. However, with the Fed potentially raising rates again in 2024, the market could create more attractive entry points in anticipation of a bull market in gold prices expected in 2024.

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