SSRM - SSR Mining: Recovery Is Possible But Not Soon

2024-01-20 03:28:13 ET

Summary

• My analysis suggests a "Hold" rating on shares of SSR Mining Inc.
• SSR Mining Inc. produces gold equivalent ounces from mines in Turkey, the United States, Canada, and Argentina.
• The stock price of SSR Mining Inc. is positively correlated with the price of gold, making it a potential investment to profit from gold price cycles.

This Analysis Gives SSR Mining Inc a "Hold" Rating

This analysis suggests a “Hold” rating on shares of SSR Mining Inc. ( SSRM ) (SSRM:CA), a precious and base metals mining company based in Denver, Colorado, which also engages in acquisitions, exploration, and development of metals projects located in Turkey and America.

SSR Mining Inc. produces gold equivalent ounces ((GEO)) in the United States, Turkey, Canada, and Argentina, mining more than 700,000 GEOs annually in the past 3 years.

SSR Mining Inc. produces gold equivalent ounces ((GEO)) from:

• its 80% ownership of Çöpler gold/silver/copper open pit mine in Türkiye (20 km N from Kemaliye).
• its 100% ownership of Marigold gold open pit mine in Nevada, United States ( 115 km W from Elko).
• its 100% ownership of the Seabee gold underground mine in Canada (125 km NE from La Ronge, Saskatchewan).
• its 100% ownership of Puna silver/lead/zinc open pit mine in Argentina (205 km NW from San Salvador de Jujuy).

How SSR Mining Inc Performs

The table below provides an overview of the performance of all mines combined, including comparisons to previous periods.

In Çöpler , maintenance work on the production facility has been completed and no new ones are planned until at least the end of 2024, while the Çakmaktepe Extension deposit was expected to start metal production in the third quarter of 2023, which it eventually did. Therefore, the Turkish asset sold 58,694 GEOs in Q3 2023 (approximately 30% of the company’s total sales volume), reflecting strong growth from 2,591 GEOs in Q3 2022, with AISC normalizing at $1,378/ounce in the third quarter of 2023 compared to $14,972/ounce in the third quarter of 2022. In terms of AISC, the Turkish asset has performed worse than the company’s average, but it must be said that the entire gold mining industry worldwide is experiencing a continued upward trend due to the ever-increasing production costs that began well before 2020. Metals Focus Gold Mine Cost Service indicates that AISC for the entire industry worldwide was $1,358 per ounce as of early 2023, rising sharply from $1,232/oz. in early 2022 and from $900/oz. in 2012. The above operating metrics are expected to improve through 2024 as Çöpler benefits from having no maintenance planned for several months, while the Çakmaktepe extension continues to contribute with its ore metal after the first one delivered just before the end of the third quarter in 2023.

Marigold achieved a record gold sales volume of 83,103 ounces in the third quarter of 2023 compared to 49,744 ounces in the third quarter of 2022, driven by the deployment of additional trucks for ore mining activities as the company focuses on achieving its 2023 production targets. AISC also benefited hugely from the operational decision, coming in at $1,106/oz. in Q3 2023 compared to $1,444/oz. during the third quarter of 2022. These significant improvements may be temporary and ultimately only because SSR Mining achieves its 2023 GEO target, and the operational decision could even result in production levels and costs in 2024 no longer being as attractive as in 2023.

A return to record production levels at significantly lower costs would only be delayed until 2025 when Marigold operation will benefit from the start of production activities in the second half of 2024 of another deposit called Red Dot. This deposit is the result of the successful completion of a mining project that the company is putting in place to ensure sustainable production for many years with guidance expected to be released in the first quarter of 2024.

The Seabee operation produced 19,823 ounces at an AISC of $1,382/ounce in the third quarter of 2023. This is slightly worse than 20,493 ounces at an AISC of $1,304/ounce in the year-ago quarter, but these numbers are on track to improve in the future with higher grams of gold per ton of mineral, recovery rates, and higher throughput.

SSR Mining is conducting exploration activities at Seabee to extend the life of operations beyond 2028. Since the drilling activities are aimed at some targets called Porky West and Petunia, where there is already evidence of additional mineral resources, the task should not be difficult to open up new opportunities for metal extraction using underground techniques.

Puna 's silver production was 2.6 million ounces at AISC of $13.04/ounce in the third quarter of 2023 (versus 2.7 million ounces at AISC of $15.91/oz in the year-ago quarter) and 6.9 million ounces at AISC of $15.31/oz. in 9M-2023 (up from 6 million ounces and in line with the AISC of $15.32/ounce in the prior year period).

The positive trend in the metal grade of material supplied to the mill facility has resulted in higher production at lower costs. The team's exploration activities, which aim to extend the life of the Puna operation beyond 2025, show great potential to achieve the target, while the high mineralization results support expectations of the asset's continued good performance in terms of high production and low costs.

Growth Targets with a Moderately Robust Financial Condition

For the full year 2023, the company aims to mine 700,000 ounces of gold equivalent and will maintain this level of production and further exploration and development activities with a moderately robust balance sheet. As of September 30, 2023, the balance sheet of SSR Mining had total cash and short-term investments of $466.9 million and the ability to utilize financing from credit institutions, resulting in an interest expense of $20.1 million for the twelve months ending the third quarter of 2023.

In the same 12-month period ended in the third quarter of 2023, the company managed to generate an operating profit of $205.6 million, which exceeded interest expenses by 10.2 times, meaning SSR Mining has no problems bearing the financial costs arising because of the outstanding amounts of debt. Thus, SSR Mining's balance sheet has an interest coverage ratio of 10.2 compared to the generally accepted minimum level of 1.5.

Thanks to higher sales volumes and metal prices, free cash inflow in the third quarter of 2023 was $87.8 million compared to free cash outflow of $92.051 million in the third quarter of 2022, while free cash inflow in the first nine months of 2023 was $53.933 million vs. free cash outflow of $48.518 million for the first nine months of 2022.

In addition, the Altman Z-Score of 2.28 signals gray areas (on this Seeking Alpha page , scroll down to the “Risk” section to read the value of the ratio), but the likelihood that the company will face solvency problems in the next few years is not significant anyway.

SSR Mining on the Stock Market

In general, it is not advisable to hold the same position in this stock over medium/long-term periods. As shown in the chart below, SSR Mining shares have lost significantly compared to the following assets. Over the last five years, SSR Mining shares lost 14.62% in the US market and 13.16% in the Canadian market, while the other assets, which are very meaningful in the current comparison, all achieved a huge margin of return.

The SPY, the benchmark for the US stock market, gained 78.82%, the Materials Select Sector SPDR® Fund ETF (XLB), the benchmark for the materials sector, gained 53.52% and the VanEck Gold Miners ETF (GDX), the gold/silver stock industry benchmark, rose 35.84%.

In addition, SSR Mining has been paying a dividend since 2021, but this is a small quarterly dividend of 5 US$ cents/share from March 31, 2021, to December 13, 2021, and another small quarterly dividend of 7 US$ cents/share from April 4, 2022, until December 11, 2023.

As can be seen from the first of the two charts shown above, SSR Mining shares appear to be trading at attractive levels, with current market prices well below the 20-day, 50-day, 100-day, and 200-day simple moving averages but now is not the right time to buy shares anyway.

Retail investors are suggested to stick to a “Hold” rating for the time being.

Given the positive correlation between SSR Mining and gold, investors could use this gold stock to take advantage of the cyclical nature of the metal's price.

SSR Mining to Profit from the Gold Price Cycle

The following graph instead illustrates a very interesting aspect, namely that SSR Mining's share price is positively correlated with gold (this is because the company's revenue is 80% dependent on the yellow metal), so cycles that occur in the price of gold could be easily leveraged through SSR Mining shares without investing directly in the physical bar.

The price of SSR Mining shares and the price of an ounce of gold are positively correlated. The price movement of gold is represented by gold futures (GCM 2024). As can be seen from the graphical representation of the statistical relationship (i.e. the yellow areas in the lower part of the two diagrams), this is a curve that has almost always developed above zero over the last 5 years. A positive correlation between the two securities means that if bullish sentiment affects SSR Mining shares, the same positive sentiment will most likely also affect gold prices, regardless of the returns, which can even be very different. A positive correlation also means that if sentiment is bearish on SSR Mining stocks, there is most likely bearish sentiment on the gold market as well.

At the moment the correlation is exceptionally negative: while the gold price as a safe haven is benefiting from the risk of an escalation of the crisis in the Middle East following the Hamas attack on Israel in early October, the shares of SSR Mining, as well as the precious metal mining stocks sector, are instead feeling the pressure of a possible extension of the Federal Reserve's restrictive policy. The probability that the US Federal Reserve will begin cutting interest rates at the March 20 meeting is in free fall from 77% a week ago to 54% at the time of writing.

Expected Development of SSR Mining's Share Price

By giving the Fed's “higher-for-longer” stance time and opportunity to also fend off the threat of a final blow to inflation after the Christmas shopping season, the current negative momentum in stocks will gradually fade as the specter of a peak yet to come with interest rates will finally sweep away.

The situation seems to be moving towards the postponement of the first interest rate cut, while the market has already digested the change in the US Federal Reserve's monetary policy.

The stock may continue to suffer losses in both markets, although this is unlikely to last a long time as the 14-day relative strength indicator of 26-26.5 has fallen well below the oversold level, suggesting that there is very little room for further declines. After this period, during which shares are expected to be under additional downward pressure, SSR Mining shares are likely to move sideways in line with a neutral stance, amid uncertainty over the Fed's next interest rate move and before a recession occurs in the US economy.

Under the symbol of SSRM, shares of SSR Mining Inc. traded at $9.81 per unit as of this writing giving it a market cap of $2.01 billion and fluctuating between a lower bound of $9.79 and an upper bound of $17.74 in the past 52 weeks.

Under the symbol of SSRM:CA, shares of SSR Mining Inc. traded at CA$13.20 per unit as of this writing giving it a market cap of CA$2.72 billion and fluctuating between a lower bound of CA$13.19 and an upper bound of CA$23.71 in the past 52 weeks.

Positive Correlation Disrupt as a Harbinger of an Economic Recession

As is the case now, the positive correlation between SSR Mining stocks and the price of gold has rarely been disrupted in the past 5 years, but when it happened, listed stocks often fell on hard times shortly thereafter. The negative correlation was at or before the following developments: a) Market tensions stemming from U.S.-China trade disputes and weak global growth which slowed the U.S. economy so much that the Fed had to cut interest rates in fall 2019 for the third time that year to stimulate the economic cycle. b) the major sell-off in US-listed stocks due to the COVID-19 virus outbreak in March 2020. c) existence of headwinds for U.S.-listed stocks due to concerns expressed in fall 2020 about the impact of COVID-19 virus restrictions and lockdowns on the U.S. economy. d) the severe instability in financial markets caused by the collapse of the Silicon Valley Bank of Santa Clara on March 10, 2023, and of Signature Bank ( SBNY ) ( SBNYL ) of New York on March 12, 2023.

Now, the temporary loss of positive correlation could foreshadow an economic recession, which, according to the following indicator of Duke professor and Canadian economist Campbell Harvey , will enter the US cycle well into 2024. This recession indicator consists of the negative territory for the spread between the 10-year US Treasury bond yield and the 3-month US Treasury bond yield. Currently, the 10-year US Treasury bond yield is 4.163%, while the 3-month US Treasury bond yield is 5.364%. Currently, the 10-year US Treasury bond yield is 4.163%, while the 3-month US Treasury bond yield is 5.364%. Under normal conditions, the 10-year yield should exceed the 3-month yield, as a longer-term entails a higher risk of borrower bankruptcy; then the risk requires a higher remuneration than for lower risk/shorter-term bonds. When short-term returns outperform longer-term returns, the unusual situation is due to investors perceiving the near future as riskier and more uncertain.

The following is what is still required to have an economic recession: In addition to the ongoing slowdown in consumption (see chart below on “U.S. Personal Consumption Expenditure”) and a sharp fall in corporate investment reflected in IPO metrics well below 2021 levels, the labor market has to get worse. The third pillar of the stubborn labor market has so far prevented the Fed from moving forward with its first-rate cut but is now showing clear signs of deterioration.

In 2023, companies announced plans to cut more than 720,000 jobs, doubling the 2022 level. Andrew Challenger, a labor expert and senior vice president of Challenger, Gray & Christmas, Inc., predicted at the beginning of December last year that the layoffs were far from over.

The layoffs among the “Magnificent 7” in the S&P500 index are very telling in this regard: Amazon.com , Inc. (AMZN), Alphabet Inc. ( GOOG ) (GOOGL), Meta Platforms, Inc. ( META ) (META: CA) and Microsoft Corporation ( MSFT ) ( MSFT:CA ) have announced plans to cut more than 75,000 jobs since the third quarter of 2022. Although not a component of the S&P 500, but no less relevant in terms of its potential impact on U.S. workforce development, video game developer Unity Software ( U ) announced last week that it is going to fire approximately 1,800 employees or 25% of its total workforce.

Gold and Gold-backed Assets as a Hedge Against Recessionary Headwinds

Against the headwinds of the economic recession, hedging demand for gold will increase and a higher price per ounce should also trigger a recovery in SSR Mining Inc.'s share price in line with the positive correlation with the yellow metal. Gold is trading at $2,025/ounce, but analysts at Trading Economics predict a higher price of nearly $2,160/ounce to be reached within 12 months.

However, before there is a recovery in gold and gold-backed assets, including SSR Mining, the shock of a recession will result in strong downward pressure on US stocks including gold stocks as the panic initially does not distinguish between gold stocks and all other stocks.

Therefore, it may also be possible to take advantage of a significantly lower price than the current one to create a position in SSR Mining Inc. before the expected bullish sentiment around gold prices. But, as already mentioned, the stock will continue to trade in line with a neutral stance for some time and thus retail investors should remain on the safe side for now. This is the meaning of the "Hold" rating assigned to the stock in this analysis.

Conclusion

SSR Mining Inc. is engaged in the exploration, development, and mining of precious and base metals in Turkey and the Americas, with gold accounting for more than 80% of its revenue.

The company is improving its operating performance, which, combined with a robust gold price, has resulted in positive free cash flow, enabling a fairly solid financial position to continue setting the stage for targeted mine life extension in Canada and Argentina.

To date, the company has successfully completed certain mine developments in Turkey and Nevada, which should ensure a sustainable supply of ounces of precious metal for several years.

The market for SSR Mining Inc. does not reward a “Buy-and-Hold” strategy in either the US or Canada. Buying a position in this stock with the intention of keeping it for many years therefore involves high investment risk based on past performance. However, the stock is positively correlated with gold, as the company derives 80% of its income from this precious metal, meaning that in line with this kind of relationship, this stock could be used to take advantage of cycles in the gold price.

Now the stock is under some negative pressure, but its shares don't have much room for further decline. Instead, it's more likely that shares will maintain a "neutral" stance for some time amid uncertainty over the Fed's next interest rate move. In 2024, the US economy will enter a recession due to the Fed's restrictive interest rate policy to combat inflation. As a safe haven against recession headwinds, gold prices should trend upward, and given the positive correlation, SSR Mining Inc. shares are likely to follow suit and rebound.

But retail investors are better off with a 'Hold' rating as the recession will occur but only well into 2024 and until then shares are expected to move sideways.

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