CA - Vizsla Silver Has Upside Potential If The Metal Turns Bullish

2023-09-27 17:59:58 ET

Summary

• Buy recommendation for Vizsla Silver Corp. due to increased recession risk (upside catalyst for safe haven silver/gold) and progress in exploration activities.
• The positive correlation between Vizsla Silver Corp. stocks and gold/silver prices makes it an attractive investment for retail investors.
• Vizsla aims to become a major silver producer in Mexico with its Panuco silver-gold project. The next steps are a resource estimate and a preliminary economic assessment.

A Buy Rating for the Stock of Vizsla Silver Corp.

This analysis reinforces the Buy recommendation for shares of Canadian multi-metal explorer Vizsla Silver Corp. ( VZLA ) (VZLA:CA), which was already pronounced in the previous analysis.

Compared to the previous article , the reasons for the Buy recommendation are now even more robust due to increased recession risk and further progress in the portfolio of exploration activities.

A recession is an economic event that typically works as a powerful stimulus to the demand for gold and silver. These metals are viewed by investors as safe-haven assets to protect the value of their portfolios from the negative effects of the recession. Because of this dynamic gold and silver prices tend to be under strong upward pressure, as does the price of Vizsla Silver Corp’s stock, whose shares have a strong positive correlation with the metals.

In the long journey towards the company's goal of becoming a major producer of precious metals while abandoning the role of pure explorer, recent exploration activities have been useful in this sense.

Any further progress in the portfolio will be seen as a milestone and the positive impact this could have on the share price will be greatly amplified as the hunt for gold and silver takes place in light of the expected recession.

Why not invest directly in silver or gold as these assets stand to benefit from a bull market, rather than in publicly traded stocks tied to the precious metal like Vizsla Silver Corp? The retail investor chooses the stock because it is the easiest way for him to participate in the gold/silver markets, especially given the available resources, which he has at his disposal to a significantly lesser extent than would be possible for an institutional investor or a bank.

Furthermore, through Vizsla Silver Corp, retail investors would have a great opportunity to capture significant value in the next cycle of rising commodity prices by taking advantage of the higher volatility in Vizsla's share price compared to the gold/silver markets.

The Positive Correlation Between Vizsla Silver Corp and the Precious Metals

The following two charts illustrate the strong positive correlation between the share price of Vizsla Silver Corp. stock and gold or silver futures prices.

The positive correlation between the securities means that when gold or silver futures prices rise (fall), stock prices also rise (fall).

The positive correlation with gold futures prices is illustrated by the yellow area chart, which has been above zero for most of the past three years.

The positive correlation with silver futures prices is illustrated by the gray zone chart, which has been above zero for almost all of the past three years.

This applies to shares of the stock traded on the New York Stock Exchange (NYSE), as the chart below from Investing.com shows.

The positive correlation is also the prevailing trend for the shares of the stock traded on the Toronto Stock Exchange (TSVX), as shown in the chart below from Investing.com.

This analysis also estimated how much a change in the price of gold or silver during an expected bull market in precious metals affects the change in Vizsla Silver Corp.'s stock price in both markets.

For this purpose, a linear model was used in which the last 52 weekly returns of gold futures or silver futures were the input and the last 52 weekly returns of VZLA or VZLA:CA stocks were the output.

The model found that a 1% increase in gold prices would be amplified by 1.9x by VZLA shares and 2.03x by VZLA:CA shares. The model also found that a 1% increase in the price of silver would correspond to a 0.7% increase in the share price of VZLA stock and a 0.6% increase in the share price of VZLA:CA stock.

The Risk of Investing in Vizsla Silver Corp.

Of course, owning shares of Vizsla Silver Corp. also includes the risk that the stock will not perform as expected, as well as the risk that if the retail investor has too many shares in his portfolio, it might be difficult to get rid of them quickly if the precious metals prices tumble.

The latter risk factor is due to low trading volumes on both the NYSE market and the TSX Venture Exchange market. The average volume (3 months) was 144,102 shares traded on the NYSE (scroll down to the Trading Data section of this Seeking Alpha page ). The average volume (3 months) was 108,835 shares traded on the TSX Venture (scroll down to the “Trading Data” section of this Seeking Alpha page ).

As mentioned just a few lines earlier, the stock could not perform as expected and this could happen if the following two main factors come into play:

First scenario: There will be no bull market for the precious metal in the near term, meaning that the expected major upside catalyst of the economic recession will not materialize. However, based on some considerations presented later, this analysis assigns a very low probability to this risk factor.

The second scenario: In the event of a recession, market headwinds will outweigh the positive tailwinds of the precious metals markets due to a 24-month market beta of 1.79 (scroll down to the Risk section of this Seeking Alpha page). This index, derived from a linear relationship between Vizsla Silver Corp's stock price and the stock market, suggests that despite expected gains in gold and silver, Vizsla Silver Corp's stock may instead mimic the stock market in the event of a recession, with a strong chance of even lagging behind most U.S.- listed equities.

However, there are two main aspects that will ensure that Vizsla Silver Corp follows the rise of the precious metal and not the market during times of recession in my opinion:

First of all, the name of the stock, 'Vizsla Silver Corp', which, because it refers to the precious metal, recalls its buffering properties against risks to the value of portfolios that could arise, for example, from a recession.

Second, the company's ongoing operations, which, through the exploration of mineral properties in Sinaloa, Mexico, are intended to build significant silver production there and, once they reach salable metal output, supply the market with ounces of silver equivalent.

These two aspects should make it much easier for the gold and silver markets to exert influence on Vizsla Silver stocks and reduce the scope for equity market headwinds that could impact the share price.

As for the economic recession that would result from the Federal Reserve's most aggressive rate hike since the financial crisis of 2007-2008 to stem the worst inflation in 42 years, the risk today is more alive than ever and gathering momentum as time goes on.

The indicator, developed by Duke professor and Canadian economist Campbell Harvey and consisting of comparing the yield on three-month U.S. Treasury bonds with the yield on 10-year U.S. Treasury bonds, has been pointing to a recession for several months by now.

In fact, as of this writing, the 3-month yield of 5.498% far exceeds the 10-year yield of 4.558% shown in the GuruFocus chart below, which is a strong indication of a poor and very uncertain long-term outlook. This is because bonds with longer maturities under normal conditions involve more risk than bonds with shorter maturities and should therefore offer higher yields.

What appears to be playing out in the economic cycle is very different from the soft-landing scenario that some stories still portray. So, the recession will be the upward catalyst for silver and gold prices, and analysts are already predicting higher prices for the two commodities in the coming months.

In fact, analysts at Trading Economics predict that gold, whose price per ounce was $1,901 at the time of writing, will trade at $1,947.51/oz before the end of the current quarter and then rise to $2,016.05/oz within a year.

Analysts also forecast silver to trade at $24.11/oz before the end of this quarter and even higher at $25.84/oz in 12 months, while the ounce is currently at $22.860.

Vizsla Silver Corp. Wants to Make It Big in Mexico

Vizsla aims to become a major silver producer in the global mining industry if its team, with several years of research and development experience, manages to complete the construction of a mine in the Panuco district of Mexico.

The Panuco Silver-Gold Project is a consolidated mineral project believed to be a high-grade precious metal deposit in the world, with silver being the major metal on which future mining is likely to focus. The project is wholly owned by Vizsla and is located in Sinaloa, a province in western Mexico that hosts a prolific silver trend.

As the map from the company's September 2023 presentation shows , Panuco's silver-gold project consists of seven gold/silver discoveries. Of these, Copala – a shallow high-grade silver-gold mineral structure – hosts approximately half of Panuco's indicated resources, while Cristiano, a shallow high-grade silver-gold mineral structure, currently hosts Panuco's richest silver-gold vein while is open along strike and at depth.

Drilling activity continues to target further expansion of Copala's mineralized footprint to the southeast and north of the discovery as it remains open in both directions while highlighting a robust precious metal structure.

Drilling activities are also underway between the Tajitos deposit and the Copala deposit as a high-grade vein (the Copala 2 vein) and a new near-surface structure (the El Habal structure) have also been identified in this area and these two additional discoveries require further exploration.

Drilling operations are currently encountering high-grade silver and gold from the Napoleon vein, which the company sees as the key target for future growth and resource development. These holes also identify several collateral lode veins that branch off from Napoleon's main structure and remain open for future expansion. In addition, another discovery was made approximately 700 meters west of the resource in the Napoleon area, the so-called La Luisa Vein, where drilling continued to produce high-grade occurrences of precious metals over increasing widths. Here the local high-grade footprint extends to the south and also to the north, where results appear to confirm surface vein mineralization along strike. La Luisa Vein remains open in all directions.

Initial metallurgical tests to determine how much gold and silver can be extracted from the ore using traditional processing techniques such as milling, flotation, and leaching have shown that enough metal can be extracted for a cost-effective operation.

Although these metallurgical tests are preliminary in nature, they are important as they de-risk the project and allow the team to maintain positive expectations for the further development of the Panuco district. This is because they were carried out in areas associated with Copala, Napoleon, and Tajitos, which are the three resource areas that together make up the majority of the project's current resource base.

Vizsla currently has an Indicated Mineral Resource of 7.5 million tons grading 243 grams per ton [g/t] of silver and 2.12 g/t gold or 437 g/t silver equivalent. These resources include 58.3 million ounces of silver and 508,000 ounces of gold, or 104.8 million silver equivalent ounces.

Vizsla is laying the groundwork for establishing significant silver production in the future, but resources currently do not allow estimates of how much precious metal can be produced, for how long, and at what cost. These must first be expanded and upgraded to a more reliable category of mineral resources. To this end, the corporate team is involved in the following other activities.

The company is currently conducting extra exploration activities focused on the Copala, Napoleon and Tajitos discoveries and is conducting further metallurgical testing to confirm the initial precious metal recovery rates.

The company has drilled more than 250,000 meters in the project area and plans to complete a total of 90,000 meters of additional drilling before providing a resource update in the fourth quarter of 2023, which will be followed by a preliminary economic assessment.

Since these events are expected to roughly coincide with the period during which there could be a significant increase in the price of precious metals, this combination is likely to exert strong upward pressure on the share price.

In this scenario, the share price currently appears to offer very attractive entry opportunities.

Vizsla has committed its balance sheet for Panuco's consolidated silver-gold project and the financial position shows cash and short-term investment of approximately CA$42 million, compared to no outstanding debt as of July 31, 2023.

Given that the company allocated C$31 million for capital expenditures in the trailing twelve months ended July 31, 2023, the balance sheet should have sufficient financial resources to support activities beyond the resource estimate and preliminary economic assessment of the metal project in Mexico. This means that, for the time being, it can avoid resorting to expensive debt capital or increasing the total number of outstanding shares from the current 208 million.

The Stock Looks Attractive Relative to the Upside Potential

At the time of this writing, Vizsla Silver Corp. shares are trading at $1.06 per unit, giving it a market cap of approximately $216.95 million.

Vizsla Silver Corp is almost in line with its 50-day simple moving average, below its 200-day simple moving average of $1.24 and below its 100-day simple moving average of $1.15.

The 14-day relative strength indicator suggests the company's shares could become cheaper amid headwinds from the Federal Reserve's intention to keep interest rates in restrictive territory for longer. Higher interest rates are not good for the safe haven silver/gold.

Gold and silver tend to trade lower when interest rates remain higher or there is a possibility of another rate hike, as demand for these metals weakens when they are considered for investment purposes. In this case, the opportunity cost of owning the metal instead of bonds is perceived as a disadvantage.

Vizsla shares will also face downward pressure due to the positive correlation with metals.

Therefore, shares may offer more attractive entry opportunities before the upside catalyst of the recession coupled with the company's resource estimate/preliminary economic assessment intervenes.

On the Toronto Stock Exchange, at the time of this writing, Vizsla Silver Corp. shares are trading at CA$1.40 per unit, giving it a market cap of approximately CA$293.27 million.

On the Canadian stock exchange, Vizsla Silver Corp stock price is below its 200-day simple moving average of CA$1.6679, below its 100-day simple moving average of CA$1.5510, and below its 50-day simple moving average of CA$1.4539.

The 14-day relative strength indicator suggests that the company's shares are not yet oversold despite the recent sharp decline but are cheap given the expected upside potential.

Under the influence of higher interest rates, these shares could soon form even more attractive entry points. There is still enough scope for this.

Conclusion

Vizsla Silver Corp. is a good candidate to benefit from the next bull market in precious metals, which is expected to take place as early as 2024.

The stock price is positively correlated with silver and gold prices and these metals are expected to rise sharply. I believe higher prices are expected as demand for silver and gold will likely become robust since investors will need to offset the headwinds of the potential recession forecasted for 2024.

The indicator developed by Duke professor and Canadian economist Campbell Harvey (the yield on three-month U.S. Treasury bonds compared to the yield on 10-year U.S. Treasury bonds) continues to point to an economic recession as early as 2024.

Vizsla Silver Corp. is exploring the Panuco district in Sinaloa, a province in western Mexico, and activities are progressing well to produce a resource estimate later this year and a preliminary economic assessment for 2024. Should the events combine with the expected upside catalyst for silver and gold as a safe haven during the economic downturn, this combination could potentially drive shares to higher levels quickly.

Beta coefficients point to shares that can rebound very well when the precious metal is characterized by bullish sentiment. Given the upside potential, shares are not expensive right now in my view, but could become even more attractively priced as interest rates are kept tight.

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