OBNNF - Why Osisko Mining Could Rebound If Gold Turns Bullish

2023-10-06 06:37:20 ET

Summary

• Osisko Mining receives a Buy rating as it is well-positioned to benefit from an expected recovery in the gold market.
• Gold is expected to rally as a safe haven against economic downturns, and Osisko Mining is strongly linked to the metal's growth prospects.
• The stock price may become cheaper ahead of the expected gold price recovery, providing an opportunity for investors to buy at lower prices.

A Buy Rating for Osisko Mining Inc.

This analysis suggests a Buy rating for Osisko Mining Inc. ( OBNNF ) as shares of this Toronto, Canada-based explorer, and developer of gold properties in Canada appear to be well-positioned to benefit from an expected recovery in the yellow metal in the coming months.

As a safe haven against the resulting negative impact on economic growth and investor portfolios of an expected economic recession, gold demand will be robust and drive up the price per ounce. Based on the current macroeconomic situation and its likely development, experts expect a significant deterioration in the business cycle as early as 2024.

Due to a clear positive correlation between the price of the precious metal and the stock, as well as the promising gold exploration activity that closely links this stock to the metal's growth prospects, this analysis believes that investing in Osisko Mining stock is likely to yield very good profit margins in the hunt for rising gold.

Compared to this positive outlook, shares do not appear to be expensive, but as the Federal Reserve raising interest rates to combat elevated core inflation does not bode well for gold, there is a possibility that OBNNF stock could become cheaper ahead of the expected gold price recovery.

The recommended rating is, therefore, a "Buy" rating, although with a high chance of taking advantage of significantly lower stock prices than current ones if the investor wants to invest in gold through Osisko Mining Inc.

The investor may therefore want to wait for lower stock prices to form.

The Outlook for the Gold Price: Chance of a Strong Recovery for the Safe Haven Gold in the Face of the Expected Economic Recession

Under pressure from a strong U.S. dollar coupled with rising yields on U.S. Treasury bonds, the ounce of gold, trading at $1,837.40 at the time of writing, is struggling to recover from its recent slump and is now trading at around its weakest level in seven months.

These headwinds for the yellow metal will continue at a time when the Federal Reserve plans to keep interest rates high for an extended period of time. The Fed will not ease its stance until policymakers receive a signal that the US PCE price index - the measure of the effectiveness of monetary policy decisions - is on track to reach the medium-term target of 2%, compared with the current annual rate of 3.9% .

Very high borrowing costs, combined with core inflation remaining far from the 2% target, are putting a strain on people's consumption in a way that sent the US manufacturing to its fifth straight month of contraction in September. Also, as people finance nearly 70% of US GDP growth through consumption expenditures, the impact is likely to have unpleasant consequences for the business cycle.

And then there are the following factors weighing on the purchasing power of American families: skyrocketing credit card interest rates, a huge student debt burden that must be paid off after three years of forbearance due to the Covid-19 pandemic, and the running out of excess savings put aside during the Covid-19 crisis.

There are signs that U.S. household finances are in trouble, including a quite pessimistic view of consumers' short-term prospects, the decline in non-durable goods inventories, and the normalization of delinquency rates .

Let's see what consequences economists expect from all these negative trends that affect 70% of US GDP.

Michael Pearce, the lead U.S. economist at Oxford Economics, predicted

"a sharper slowdown in consumption and the broader economy", in a research note on Thursday, September 26, 2023.

This prediction follows the previous three:

The recession was suggested by the U.S. Federal National Mortgage Association (Fannie Mae) Chryssa Halley's reliable opinion in her role as chief financial officer of a state guarantor of mortgage loans to low- and middle-income borrowers, who are by far the economic class of US households that make up the largest percentage of US consumption .

The recession is coming according to economist David Rosenberg , who predicted a worsening of the cycle as early as 2024, and Duke professor and Canadian economist Campbell Harvey , whose strong indicator that the yield on three-month US Treasuries is currently higher than the yield on 10-year US Treasuries, signals an economic slowdown in the coming months.

As a safe haven against the headwinds of the expected recession, the price of gold per ounce will rise as investors will sometimes snap up gold to protect the value of their portfolio.

It is no coincidence that, from current prices, Trading Economics analysts predict a gradually higher price per ounce of the precious metal of $1,869.26 by the end of this quarter, and $1,933.95/oz in twelve months.

Osisko Mining Inc. Shares Are Pegged to Gold Prices Due to a Strong Positive Relationship

To benefit from the rise in gold prices, investors could resort directly to physical gold bars. However, this type of investment is not easy to implement for a retail investor and is also not the most efficient way for him to increase his exposure to the yellow metal.

The retail investor does not have the opportunity to use financial resources and bear the risk, as can be the case with larger investors such as institutional investors or banks.

Then the retail investor can take advantage of the gold price through the stock of Osisko Mining, as this stock has a strong positive correlation with the price of the precious metal. This can be seen in the below chart from Seeking Alpha.

The yellow area of the chart represents the positive strong correlation mentioned above and indicates that the OBNNF stock price tends to move in the same direction as gold prices. In fact, over the last five years, the yellow area is almost always above zero and is very often close to +1, which is the upper limit of the +1-1 range of the correlation coefficient. For the recommendation suggested by this analysis, several years of positive correlation coefficient imply the following relationship: when the price of the yellow metal rises, the share price also rises.

The reader may be confused by the fact that the stock price has lost 7.62% in the last 5 years, while gold has gained almost 31%. These performances are the result of the difference between prices five years ago and current prices, but they do not explain anything in between. They are not a measure of the relationship that exists between the price of gold and stock prices.

The correlation between the securities is undoubtedly positive, although Osisko Mining's share price has a different slope to the x-axis than the precious metal to the x-axis. This trend is due to Osisko Mining falling much faster when the commodity falls than the stock's ability to recover when the commodity rises again but on average the stock price moves in lockstep with the commodity.

In the chart above from Seeking Alpha, gold futures (GCZ2023) are the benchmark for gold.

What Impact a Gold Rally Can Have on Osisko Mining Shares

This analysis also estimated the extent to which a strong upside in the gold price would correspond to an increase in Osisko Mining Inc.'s stock price.

For this purpose, the last 52 weekly stock price returns are the output, while the 52 weekly gold futures returns are the input to a linear model that produced the following results.

Over the past 52 weeks, a 1% increase in gold prices has on average caused Osisko Mining Inc.'s stock price to rise 2.15%. The model has a coefficient of determination of 30%, which is not high but still provides an acceptable approximation of the hypothesized relationship between the gold price and Osisko Mining's stock price.

The model considers returns over the past 52 weeks rather than a longer period, which would likely result in a higher coefficient of determination. The decision to only base the analysis on the past 52 weeks is because markets going forward are going to look more like they have done over the past 52 weeks than in previous years, as some macroeconomic and geopolitical factors will continue to be in place.

Based on the model, the price of Osisko Mining Inc. stock appeared to be more volatile than gold, with a gold beta of 2.15. So if the yellow metal recovers, as this analysis predicts, OBNNF stock is likely to follow suit and rise, while exploration results in Canada could add plenty of fuel to the potential upside.

What Osisko Mining Inc. Is Doing in Quebec

Osisko Mining Inc., based in Toronto, Canada, is an acquirer of gold properties in Canada, which its team of experts then explore to identify growth potential to develop.

Currently, its portfolio includes the following assets:

50% interest in the company's flagship Windfall Lake property. This mineral project consists of 286 mining claims covering approximately 12,523 hectares and geologically, this mineral property is located in the Abitibi Greenstone Belt, Urban Township, Eeyou Istchee James Bay territory of the Canadian province of Quebec.

As the small red pin on the map from Home , the Windfall Lake project is located 700 kilometers north-northwest of Montréal, approximately 200 kilometers northeast of Val-d'Or, and approximately 115 kilometers east of Lebel-sur-Quévillon.

It is a future production of gold but also of silver which will be carried out by exploiting an underground precious metal deposit and which is in the process of obtaining the necessary permits from the local authorities. Bureaucratic times should not be excessively long.

According to a recent study by Italian mining experts, obtaining a mining permit in Canada takes an average of two years. The estimate is the result of a very recent mapping of not only domestic but also international mineral resources. The country wants to gain a stronger position in the mineral resource exploitation industry and increase the competitiveness of its economy on the global market.

Once Osisko Mining receives permits for the Windfall Lake property gold/silver project, the underground deposit will enable the exploitation of higher-grade precious metal resources for 10 years.

During the entire life of the mining operation, the operator will produce 2.94 million ounces of payable gold or an average annual production of 294,000 ounces of payable gold along with 1.37 million ounces of payable silver or an average annual production of 137,000 ounces of payable silver.

Through a 50/50 joint venture agreement signed in May 2023, the Windfall Lake project and the surrounding exploration assets of the Quévillon Osborne-Bell and Urban-Barry properties will be developed jointly with the team of South African global gold mining company Gold Fields Limited (GFI). The exploration of surrounding mineral resources includes:

a) 50% interest in the Quévillon Osborne-Bell property, which includes the Osborne-Bell gold deposit. This potential mineral resource basin, open for exploration activities, comprises 2,621 claims covering approximately 140,207 hectares and is located in the Lebel-sur-Quévillon area of Quebec.

b) The third mineral asset in the company's portfolio is a 50 percent stake in the Urban-Barry property. This asset consists of 1,372 individual claims covering approximately 74,135 hectares and is located in the Abitibi Greenstone Belt, Eeyou Istchee James Bay, Quebec.

According to the project's technical feasibility report on an after-tax basis, gold production at the Windfall Project will generate an internal rate of return ((IRR)) of 33.8% and a net present value of US$1.17 billion, calculated at a discount rate of 5%. As for the 33.8% IRR that measures Windfall Lake's profitability, investors should greet this with favor as they typically start with a threshold of 30-35% when looking for promising mineral projects.

The Windfall Project is funded until the start of production activities and is expected to recover the initial capital in not more than two years.

Production of the precious metal implies an all-in sustain cost of US$757.5 per ounce of payable precious metal and if future operations remain in this range, the Windfall Project will be well ahead of many operators in the global mining industry.

According to the benchmark provided by S&P Global Market Intelligence , the AISC/ounce for the mining industry is currently trading at approximately $1,289 based on the first quarter 2023 earnings report of a select group of mining companies with annual production of not less than 500,000 ounces of gold in 2022. Additionally, S&P Global Market Intelligence finds that AISC/ounce is increasing significantly in nearly three out of four competitors analyzed, and this helps create an inevitably bright future for the Windfall Project.

Due to mounting geopolitical tensions between countries and a macroeconomic future that is more and more difficult to predict, gold will be increasingly in demand as a hedge against devaluation threats, so price per ounce will have a steeper positive trend in the future, although with fluctuations.

But even in such a very favorable price scenario, the opportunity to benefit from a below-average AISC will make the Windfall project one of the most profitable mining projects in the world, and Osisko Mining's shares will receive much more recognition, with a positive impact on the share price.

Osisko Mining's stock has 376.7 million shares outstanding, resulting in a net present value for the Windfall project of about $3.11 per share, which could serve as a benchmark for value investors who may be interested in exposure to the positive gold price trend through a long position in Osisko Mining Inc.

However, this stock can be used to take advantage of strong recoveries in the gold price, and as this analysis shows, there could be one in the coming months driven by strong bullish sentiment for safe-haven gold.

The Stock Valuation

As of this writing, shares of Osisko Mining were trading on the US over-the-counter market at $1.85 apiece, with a market capitalization of $690.88 million.

Shares are significantly below the middle point of $2.54 in the 52-week range of $1.72 to $3.36.

Shares were trading below the 200-day simple moving average of $2.40 and below the 50-day simple moving average of $2.03.

With the expected recovery in the prices of safe-haven gold assets, driven by the upward catalyst of the coming economic downturn, the positive correlation between Osisko Mining stock prices and yellow metal prices will gain momentum due to the following:

When the time comes to counteract the expected recession by raising the hurdles by investing in gold and gold-backed securities, Osisko Mining will certainly not go unnoticed by investors. Investors will note that this stock contains the Windfall gold/silver project, which could theoretically be worth much more than the stock's market price, which has moderated due to the gold price cycle. Convinced that they are getting a bargain under the value investing paradigm, investors will literally rush into this stock, and the impact on the share price is therefore expected to be astounding.

The very low trading volume, as only an average of 202,151 shares of Osisko Mining were exchanged over the past three months will put additional pressure and potentially drive the share price to significantly higher levels than the current ones.

However, low trading volume means investors need to be careful when building their positions, as too many shares in their portfolios can make it very difficult to sell the stock quickly when needed. This is the only risk in Osisko Mining, as neither the development of the project, which is financed until the start of production, nor the country, which has favorable legislation for mineral exploration and mining operations, poses any real risk.

The Possibility of a Lower Share Price

For investors who may be interested in the Buy rating for Osisko Mining Inc, this analysis suggests that the potential for upside in the value of the investment is very high.

However, the investor must be patient before jumping into Osisko Mining Inc. stock as there is still a possibility of a lower stock price, which would increase the success rate of the proposed Buy recommendation.

With the Fed rate expected to peak at 5.6% this year, higher than the current range of 5.25% to 5.5%, equity markets as well as the prices of gold and gold-backed securities remain under downward pressure. Gold in particular does not like higher interest rates.

This is because higher interest rates will continue to support rising US Treasury yields and will also put upward pressure on the US dollar as demand for the US currency remains robust against other currencies. US Treasury yields and the US dollar are fierce competitors for the price of gold.

The headwind on the stock markets due to rising interest rates will also contribute to a pessimistic mood for this stock for the time being. Due to the stock market's 24-month beta of 1.64 (scroll down to the 'Risk' section of this Seeking Alpha page ), market headwinds will result in lower share prices for Osisko Mining, which could be a more attractive entry point into this stock.

OBNNF has a 14-day Relative Strength Indicator (14-day RSI) of 39.07. This suggests shares have plenty of room to move lower if they want, as this high-yield environment, with its continued downward pressure, fuels expectations for more attractive prices.

The same considerations apply to shares of the stock traded on the Canadian market.

On the Toronto Stock Exchange, under the (OSK:CA) symbol, shares were trading at CA$2.51 per unit as of this writing for a market cap of CA$949.42 million. Shares are trading below the 200-day simple moving average of CA$ 3.24 and slightly below the 50-day simple moving average of CA$ 2.73.

Shares are significantly below the middle point of CA$ 3.445 in the 52-week range of CA$ 2.36 to CA$ 4.53. Additionally, the 14-day RSI's trend of 42.86 suggests that shares have plenty of room for downside in a high-interest rate environment, forming more attractive prices.

Conclusion

Osisko Mining shares receive a Buy rating.

Due to the stock's strong positive correlation with gold futures, the stock price is expected to benefit strongly from the expected recovery in the gold price. The yellow metal will be in high demand due to its safe haven properties against the economic recession that seems to be looming due to the current macroeconomic situation.

The stock holds the Windfall project for future gold mining in Quebec and appears to be worth more than the value the stock market assigns to Osisko Mining shares.

This factor, together with the low trading volume, could significantly increase the upside of the expected economic recession.

The stock is a Buy, but since the share price could go lower in a high-yield environment, and there is actually room for that, investors may want to wait a little bit before diving into the stock.

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