SNWGF - Snowline Gold: Significant Downside Risk On Expected Decline In Gold

2023-03-29 01:59:54 ET

Summary

• Analysts are forecasting lower gold prices as the positive catalyst of fears over the health of the banking system has passed, while elevated inflation calls for further rate hikes.
• Higher interest rates hurt investment demand for gold as investors prefer fixed-income securities over no-yielding gold.
• With the precious metal expected to trade lower, Snowline Gold Corp. shares could take a significant hit as this Canadian prospector is very sensitive to changes in gold price.
• Snowline Gold Corp. holds a portfolio of gold projects that are still in the early stage of exploration activities and no resource estimates have yet been prepared.
• A lack of bite for Snowline Gold Corp's portfolio won't help the stock price weather the headwinds of the expected bearish gold market due to certain macroeconomic factors.

Gold Price Prospects

Investors in equities of US-listed gold producers and exploration companies should pay close attention to the following two factors and take appropriate action as the price of gold, a powerful determinant of gold stocks’ performance, may not trade as well as these individuals expect.

Easing fears over the health of the banking system that have fueled gold's rally over the past two weeks and the end of the negative yield era could prompt a trend reversal in precious metals. This could happen if investors stop asking for gold as a hedge against risk and uncertainty, and they have probably already judged its use as anachronistic in the context of rising interest rates.

In fact, analysts at Trading Economics are predicting the following gold price drop from $1,975.25 per troy ounce as of Gold Futures - June 23 (GCM3) at the time of writing. They predict that the troy ounce will lose 7.1% from current levels to $1,844.68 before the end of the current month and 11% from current levels to $1,779.15 by the end of this year.

Investors Should Consider Reducing Their Allocation to US-Listed Gold Stocks, Including Snowline Gold Corp

If this is the gold price scenario, investors should not hesitate to divest from stocks of gold-producing companies that are highly exposed to gold price volatility as the consequences for their portfolios may be quite uncomfortable, should the yellow metal trade lower.

Investors should ditch some Snowline Gold Corp ( SNWGF ) shares from their portfolios as this Canadian operator seems to be one of those who takes a hit when gold falls, despite not yet being a producer of the precious metal, just an explorer.

Shares ended yesterday, March 27, down 2.93% on a sharp 1.24% drop in the ounce of gold.

Shareholders of Snowline Gold Corp. have high expectations of the impact that exploration activities can have on the market price of their shares, provided the market is inclined to pay attention to the exploration results.

Even irrelevant exploration results could then be seen in a very different light in a bullish gold market and Snowline Gold Cor shareholders would benefit from the positive momentum for the precious metal, but as outlined above, this does not appear to be the scenario for the foreseeable future.

Investors may be interested in reducing their positions in Snowline Gold Corp. to free up financial resources to invest in other assets that currently imply lower opportunity costs than gold and gold-backed securities.

These assets are represented by capital invested in fixed-income securities as holders welcome rate hikes that, as they have done for the past year or so, dampen runaway inflation or the catalyst of various working-class protests against purchasing power wage cuts. Against such assets, gold loses its attractiveness as it does not generate income.

Additionally, as gold prices are on the way to forming lower levels, holding Snowline Gold Corp carries the risk of more severe devaluations as changes in the price of the troy ounce appear to correspond with broader moves in the gold explorer's stock price, as suggested in the chart below.

The chart above shows the comparison between Snowline Gold Corp and Gold Futures - Jun 23 (GCM3) stock, year to date. Gold Futures - June 23 (GCM3) is the benchmark for price changes of the troy ounce of gold.

About Snowline Gold Corp. and Its Explorations

Snowline Gold Corp. based in Vancouver, Canada, conducts exploration activities in search of gold on mineral properties in Canada.

Snowline Gold Corp. has a few mineral projects in its portfolio, but according to information on its website , the Einarson and Rogue projects are currently the main ones catching the company's attention.

Both are located in the Selwyn Basin of the Yukon, a mineralogically fertile region of Canada, and cover a total area of 72,000 acres.

The discovery of gold deposits at Einarson (approximately 85% of total acres) has been driven by exploration activity undertaken by other operators in recent years and these deposits are relatively recent as no exploration took place until 2010.

Some primary targets have been identified at Einarson, but Snowline Gold Corp. has decided to focus its exploration activities on an orogenic gold target named Jupiter, where regional stratigraphy would indicate inferred Carlin-style areas of mineralization that are deposits of microscopic gold particles.

Jupiter does not have an estimate of resources or reserves (for any of the other targets identified by Einarson, to be honest) so the economic feasibility of the gold mine project at Jupiter has yet to be demonstrated and there is still a long way to go as exploration activities only begin to scratch the surface.

At Rogue Property, the company has decided to focus exploration activities on a gold target called Valley, a newly discovered reduced-intrusive gold system characterized by gold-bearing quartz veining and sulfide veining with visible gold.

Ongoing exploration activities could pave the way for commissioning a multi-million-ounce gold-producing deposit in the future, but Valley is still in its early stages and resource estimates are lacking. So, there is still a long way to go before it can be said that the future recovery of gold from this deposit at Valley can be done in a profitable way.

The Financial Position

Snowline Gold Corp. had a total of $19.1 million in cash and short-term investments as of Sept. 30, 2022, which is expected to increase by approximately $14 million as a result of the purchase by B2Gold Corp. ( BTG ) ( BTO:CA ) of 3,941,048 shares of Snowline through unbrokered private equity placement .

The company will use the available cash plus the proceeds from the above transaction to finance exploration activities, but it cannot be excluded that additional capital will have to be raised through the issuance of shares or convertible securities, in which case the ownership percentage of 5% of B2Gold will not be affected.

The Stock Valuation

With the price of gold trading lower, Snowline Gold Corp. stock, which has a market value of $1.98 per share at the time of writing, looks expensive and carries significant downside risk as it tracks the precious metal.

Shares have fluctuated between a low of $0.6051 and a high of $3.1299 over the past 52 weeks and are now about 6% above the midpoint of the range.

Also, they are trading above the 200-day and 50-day simple moving averages of respectively $1.84 and $1.83, while trading only slightly below the 100-day simple moving average of $2.02.

Based on the state of the art of the mineral projects the company is advancing, they do not have mineral resource estimates and eventual production may take a long time. Such a risk is not worth taking, which is real, given the following macroeconomic factors.

The share price may recover from time to time on encouraging mineral exploration results, but the backdrop must be favorable and the following insights do not pave the way for that.

The main trigger for the rapid rise in gold prices over the past two weeks to Friday, March 24, has been fears of contamination of the North American and European banking systems with the same problems that led to the collapse of regional banks Silicon Valley Bank (SIVBQ) and Signature Bank ( SBNY ) and the financial problems of Credit Suisse Group AG (CS).

Now those troubles appear to be over after First Citizens BancShares, Inc. ( FCNCA ) acquired a large chunk of Silicon Valley Bank's total assets, and after Credit Suisse Bank was bailed out through its acquisition by UBS Group AG (UBS).

Representatives from governments and monetary authorities in North America and Europe continue to emphasize the soundness of the banking systems and no risk of financial contagion.

As gold has exhausted its role as a hedge against fears for the stability of the banking system, it should no longer be sought for that purpose, removing the catalysts that have so far exerted their positive impact on the price of the ounce of gold.

Furthermore, with a healthy banking system, there is no reason to halt the policy of increasing interest rates which, on the other hand, have yet to be raised as inflation in North America and Europe is still a long way from the 2% target.

As interest rates continue to rise, investors will flock to fixed-income securities which, unlike gold, will provide returns at the expense of investment demand for gold.

Moreover, even after monetary tightening, a recession is unlikely. The recession would favor gold as a safe haven against the negative impact on wealth of the unfavorable economic cycle.

Not only are economists and policymakers ruling out a recession and saying a slight slowdown in economic activity is more likely, but crude oil, which could offer a reliable indicator of economic growth, is signaling normalcy as the price per barrel of $73.73 is currently above the long-term average.

However, the policy of OPEC+ including Russia to limit supply, possibly with the intention of fomenting illusions in the West about economic growth, is being neutralized by the possibility of strategic resource reserves proposed by the US-led coalition of countries last year.

Conclusion

With the price of gold likely to trade lower, there is no point in holding many Snowline Gold Corp shares that could instead be partially sold, freeing up cash to be used elsewhere in the financial markets.

This company is a Canadian gold prospector but does not yet have a mineral resource estimate, so a prediction of when production of the metal will begin cannot be attempted.

As such, the portfolio which lacks bite is unlikely to be a source of positive catalysts for higher stock prices, particularly in an upcoming period of expected bearish sentiment in gold markets.

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