2023-07-22 06:03:50 ET
Summary
- Equinox Gold Corp has been given a Buy rating due to the potential for gold to form a bull market amid an expected recession.
- Analysts predict that gold and silver will rise in the coming months, which could lead to a strong bull market in US-listed gold and silver stocks once the recession hits.
- Equinox Gold Corp's stock price is expected to rise significantly faster than the precious metal, making it an attractive investment for those looking to benefit from a potential rise in the commodity.
This analysis assigns Equinox Gold Corp. (EQX) (EQX.TO) a Buy rating as the analyst believes the stock has the potential to rise significantly as gold forms a bull market amid the expected recession.
Gold Higher as Economy Slips into Recession
This analysis assumes that gold and silver have the possibility of a grand finale in 2023 and a glorious 2024.
After the period when the dominant narrative focused on artificial intelligence and its impact on companies that choose to use it, today's discussion is mostly about recession or no recession but rather a soft landing.
But perhaps not everyone knows that gold and silver are among the few assets that will thrive ahead of a looming economic downturn. In these very difficult times when almost everything is collapsing, gold and silver can protect the real value of asset portfolios. And this kind of information is enough to send the prices of these two metals - dubbed "safe haven assets" on this occasion - skyrocketing.
But when it comes to the threat of a recession, gold and silver should have exhausted their safe-haven role by now. That is, with a potential recession looming from early 2022, approximately when the US Federal Reserve started raising interest rates (March 17, 2022), current gold and silver prices should now bear much of the impact of a potentially deteriorating business cycle.
However, since economists have put on the pitch the opposite scenario of a soft landing for the economy, which they see as even more likely, a recession could still take the market by surprise, even if it has been heralding the recession for a year and a half. If this is why the soft-landing scenario was launched, it means that a recession is imminent.
Should the economy slip into recession, gold and silver are likely to see very significant gains in their markets, which would also create bullish sentiment for other assets tracking the price action of the two precious metals.
Trading Economics Expect Better Prices for Gold and Silver
As of this writing, analysts at Trading Economics expect gold and silver prices to rise in the coming months, to about $2,052.73 an ounce of gold and about $27.50 an ounce of silver at this point next year, respectively 4.3% and 10.5% higher than current levels.
These estimates of rate hikes could represent a kind of middle ground between a soft landing and a recession. Possibly these expected gains in gold and silver are already priced into stocks that produce the metals due to the speed at which the market is processing everything. However, with many no longer anticipating an economic recession today due to the possibility of a soft landing, there may still be room for a strong bull market in US-listed gold and silver stocks once the recession hits.
So, to benefit from a sharp rise in the commodity, more than analysts estimate today, investors should reassess their positions in US-listed gold and silver stocks given the risk of a recession. Not across the board, but rather identifying the stocks that have the greatest potential to amplify the precious metal's price appreciation.
Equinox Gold Corp. is Strongly and Positively Correlated to the Precious Metal
With this in mind, Equinox Gold Corp. (EQX) (EQX.TO), a Canadian gold and silver explorer and producer with operations in California, Mexico and Brazil, should be attracting the attention of investors.
In addition to the strong positive correlation that exists between the shares of these two stocks and the price of the precious metal (see chart below from Investing.com), shares of Equinox Gold Corp tend to appreciate significantly faster than the precious metal as the price per ounce rises.
The following chart from Investing.com highlights the very strong positive correlation that exists between EQX and Gold Futures - August 2023 (GCQ3) and between EQX and Silver Futures - September 2023 (SIU3).
In fact, the yellow area that describes the trend of the "CC" correlation index between the stock and gold over the past three years is completely above zero. The gray area describing the trend of the "CC" correlation index between the stock and silver has been almost always above zero for the past 3 years. In the first quarter of 2021 alone, the stock and silver experienced a brief period of opposing performance.
The chart below from Investing.com shows a situation between EQX.TO stock and gold, and between EQX.TO and silver, which are very similar to the one above.
This analysis also quantified the increase that EQX and EQX.TO would show if the price of the precious metal increased, with the following relationship: if the weekly change in gold price consists of a 1% increase, then EQX and EQX.TO shares are up, posting positive weekly returns of 3.6% and 3.3%, respectively.
If the weekly change in silver prices consists of a 1% increase, then EQX and EQX.TO stocks are up, with positive weekly returns of 1.2% and 1.05% respectively.
These indicators are obtained assuming that gold and silver are the independent variables that influence the price of the stock in a linear relationship. The latter had as input data the last 52 weekly returns of gold and silver and as output the last 52 weekly returns of the shares on the New York Stock Exchange and the Toronto Stock Exchange.
This analysis assumes that the last 52 weeks is a reasonable period of time to generate parameters that can support forecasts for the coming months with a good degree of confidence. After all, the macroeconomic factors that have affected the financial markets over the past 52 weeks will more or less continue to have an impact in the coming months.
In addition, the analysis also shows that the weekly return of the gold price explains 53-55% of the weekly return of EQX.TO or EQX. While the weekly return of the silver price explains 31-33% of the weekly return of EQX.TO or EQX.
Equinox Gold Corp. Shows the Great Influence of the Precious Metal
This is an estimate of how much Equinox Gold Corp's stock price can rise during a gold price rally. Slide #21 of the June 2023 Company Presentation entitled "Creating the Premier Americas Gold Producer" reports on the relationship and explains it with the existence of an operating margin that is heavily dependent on the price of gold. Indeed, 5% in the price of gold usually translates to a 33% increase in Equinox Gold Corp.'s operating margin. As a result, the stock outperformed other assets as the Gold Futures price posted 9.3% growth in the year to June 1, 2023. The presentation was released on June 6, 2023.
The first 5 months of 2023, EQX.TO grew 49.4%, EQX grew 49.7% while VanEck Gold Miners ETF (GDX) rose 11.7%. GDX is the benchmark index for all US-listed stocks operating in the mining industry, and as indicated by the above chart the most direct peers of Equinox Gold Corp did not add more than 15% while S&P Global Gold underperformed the stock even more.
Equinox Gold Corp's highest operating margin to the gold price has been determined by using $1,900 per ounce of gold as the baseline scenario, which is the one that should likely occur in the upcoming period through 2024 based on earlier information of this analysis, and assuming Equinox Gold achieves the mid-point of ~$1,600 per ounce AISC of its cost guidance of $1,575 to $1,695.
AISC [All-In Sustaining Cost] is an expanded measure of the cash cost metric as the item includes other costs required to keep the mine operating in addition to those most directly associated with mining gold. Therefore, the item may also include non-cash costs such as depreciation, taxes, exploration expenses, or investments in new equipment to support increased production. AISC is a comprehensive measure of how much it costs to produce and sell an ounce of gold and therefore, in the context of gold prices, provides an estimate of Equinox Gold Corp.'s operating margin.
So, we need to understand whether Equinox Gold Corp can deliver on its promises going forward and actually keep the AISC around a maximum of $1,600 per ounce of gold.
How Equinox Gold is Performing
The company produced 532,319 ounces of gold and sold 532,137 ounces of gold at an average gold price of $1,784 per ounce and claimed a 2022 AISC of $1,622 per ounce.
Equinox Gold Corp. didn't start 2023 off very well as the company produced 122,746 ounces of gold and sold 123,295 ounces of gold in the first quarter of 2023 at an average gold price of $1,895 an ounce while operating at an AISC of $1,658 an ounce.
However, as the mining season progresses, production and cost trends should improve significantly and these coupled with what is also expected to be a very benign gold price environment, should be very positive for Equinox Gold Corp's operating margin.
Equinox Gold Corp. based in Vancouver, Canada, has a 100% mineral interest in metal projects that are expected to perform as follows:
- The worst appears to be behind California's Mesquite gold mine as that facility is still expected to continue to meet annual targets of production of 80,000 to 90,000 ounces of gold and AISC of $1,415 to $1,480 per ounce. These represent the following improvements compared to the first quarter of 2023: a) a 35% increase in production thanks to the contribution of gold ore from the Stripping Brownie and Vista East pits; b) -17% in AISC/ounce, putting it through a normalization process from the first quarter of 2023 where the item was impacted by an exceptional amount of sustaining capital expenditures.
- As for the other California mine, referred to as the Castle Mountain Gold Mine , operating results will be mixed compared to the mine's performance in early 2023 as Equinox Gold Corp believes it can increase production through backfill mining activities at JSLA, albeit at a likely higher cost. Gold production now involves extracting 14,000 tons per day of mined/unprocessed ore material that previous miners placed 20 years ago at JSLA, the name of an open-pit mining area at the Castle Mountain gold project currently in Phase 1 of development. There is another phase in the development of the mining project that aims to take annual gold production from the current range of 25,000-30,000 to ~218,000 ounces over 14 years of mining activity. Phase 2 is underway and waiting for the necessary permits to be obtained. It should not be a success for the company to get the permits as the US generally has favorable laws for mining activities. Returning to mine operation stage 1, the percentage of processed ore that has passed through the crushing and agglomeration stage is 60%, leaving plenty of room for improvement that can positively impact higher gold production targets. Thus, the rate of production would need to increase by 40.3 - 68.4% to move from an annualized production of 17,820 ounces based on 4,455 ounces mined in Q1 2023 to an expected annual production of 25,000 to 30,000 ounces. As for costs, this is likely to worsen over time and potentially impact the operating margin. The AISC/oz. is expected to reach $1,865-$1,950 from $1,567 in the first quarter of 2023, due to a mining technique that is not among the easiest for a miner. To support the facility's operations, the company expects capital expenditures of $2 million in 2023 compared to $0.3 million in the first quarter of 2023, thus with the trend rearing up 67% compared to the beginning of the year. However, since the open pit uses conventional diesel trucks and shovel equipment, there should be some cost savings amid the easing of inflationary pressures on fossil fuels as the US Fed's monetary policy continues to lower the prices of goods and services. The easing of pressure from fossil fuel prices should become more visible in the last quarter of 2023 and the first quarter of 2024, right when this analysis anticipates the gold bull market. California's Mediterranean-like climate will have a positive impact on energy prices locally, as fossil fuel use for power generation should decrease as the seasons transition from warm, dry summers to mild, wet winters.
- The Los Filos mining complex in Guerrero State, Mexico, is expected to incur capital expenditures of $37 million in 2023. It seems that the majority of this could potentially be concentrated in the second half of the year. Currently, metal recovery support activities are aimed at open pit stripping improvement, underground deposit development, truck fleet improvement and infrastructure maintenance, and exploration activities. Los Filos mining complex expects to reach annual production of 160,000 to 180,000 ounces of gold, leading to a quarterly volume that is 1.4% to 18.3% higher than Q1 2023. Based on the above mine maintenance and improvement activities, the production increase is expected to gain momentum over the period in which a gold bull market could occur. The AISC was $1,696/oz in Q1 2023 versus the annual trend of $1,680-1,865/oz.
- However, the negative impact of higher costs in Mexico is offset by the following improvements the company is making in Brazil. Specifically, the RDM gold mine in the Brazilian state of Mina Gerais restarted the mill facility in January after receiving the permit, with AISC/ounce expected to decline heavily to approximately $1.685-$1.870 from $2.368 in Q1 2023. Production should also improve: Q1 2023 gold production was 6,342 ounces (=annualized 25,368 ounces) versus 2023 production guidance of 50,000 to 60,000 ounces. Equinox Gold Corp will add approximately 60,000 to 70,000 ounces of gold production at an AISC of $1,775 to $1,950 thanks to the contribution of the Santa Luz Gold Mine in Bahia State, which reached commercial production in Q3 2022. The stabilization of the ore mix will result in a 4-21% increase in quarterly production from 14,485 ounces in the first quarter of 2023. Factors keeping the AISC in check will also come from Aurizona in Maranhão due to the plant's higher grades and throughput. Aurizona mine's positive contribution to the company's operating margin will be dramatic as the metal will be sold at an AISC of $1,410 to $1,500 per ounce (a significant improvement from $1,634 in Q1 2023) while annual production will be 120,000 to 130,000 ounces, representing a 16% to 26% increase in quarterly gold production vs. Q1 2023. Fazenda Mine , Bahia instead targets annual production of 60,000-65,000 ounces of gold, therefore in line with 15,685 ounces in Q1 2023, but at significantly lower costs than those that would guarantee a 33% increase in operating margin given a 5% increase in gold prices. Fazenda is now targeting an AISC of $1,390 to $1,430 per ounce versus Q1 2023 $1,279 per ounce as higher capital expenditures are being sustained for ongoing subsurface development, open pit stripping improvements, fleet and infrastructure improvements, and an increase in tailings storage.
Ultimately, the AISC for the 555,000-625,000 ounces of gold Equinox Gold Corp. aims to produce in 2023 should improve from about $1,755 an ounce expected in the first half of 2023 to about $1,530 an ounce expected in the second quarter of 2023 (see slide from page 19 of the June 2023 company presentation ) ahead of the gold bull market that this analysis predicts for late 2023.
With this potential for significant operating margin leverage on the price of gold, Equinox Gold stock is a vehicle to outperform the stock market over the long term while taking advantage of gold price cycles. This opportunity will remain available to investors for many years to come as the company is on track to increase production to one million ounces once the Greenstone Project comes online. This facility is one of Canada's largest gold mines (the company said in its presentation) and is capable of producing approximately 360,000 ounces of gold per year over a production life of more than 14 years, with initial production scheduled to begin in the first half of 2024.
The Stock Valuation
Basically, this analysis gives a Buy recommendation rating for Equinox Gold Corp. ( EQX ) (EQX.TO) but it is advisable to wait for the stock to break below the 50-day and 100-day simple moving averages.
The lower the stock price, the greater the benefit that could derive from the fact that this stock is heavily dependent on the price of gold.
However, the likelihood that the stock price would fall below the 200-day simple moving average if the Fed raises rates is remote, as the market has had ample time to discount the 99.8% chance of another rate hike.
Shares of EQX traded at $5.18 apiece as of this writing for a market cap of $1.68 billion and a 52-week range of $2.35 to $5.85.
Shares are trading above the 200-day simple moving average value of $4.264, above the 100-day simple moving average value of $4.838, and above the 50-day simple moving average value of $4.844.
As the 14-day relative strength indicator [RSI] of 58.162 suggests, shares have plenty of room to hope for lower levels than the 50-day and 100-day simple moving averages following the Fed's scheduled July 26th decision. Therefore, before buying, the stock's price should fall 6.6% from current levels, and that target is within reach.
The same conclusions can be drawn for shares of EQX.TO. These were trading at CA$6.80 apiece at the time of this writing, giving a market cap of CA$2.11 billion and a 52-week range of CA$3.23 to CA$7.89.
The shares are trading above the 200-day simple moving average of CA$5.74, the 100-day simple moving average of CA$5.75, and above the 50-day simple moving average of CA$6.44. The RSI is 55.87.
The risk of having this stock in your portfolio is that it's a company that doesn't have a very healthy financial position, which can be deduced from the ratio of available cash to total debt. As of March 30, 2023, cash on hand was $418.82 million, of which 35% were equity investments, while total debt was $854.32 million.
All of this boils down to an Altman Z-Score of 1.03 (scroll down this webpage to the "Risk" section), which indicates trouble spots with a likelihood of bankruptcy within a few years.
The Altman Z-Score measures the likelihood that a company will face bankruptcy problems, depending on the value it takes on. If the value is less than or equal to 1.8, the balance sheet is in distress zones, which means a high probability of bankruptcy within a few years. When the ratio is between 1.8 and 3, the balance sheet is in a gray area, which still implies a risk of bankruptcy, albeit moderate. While a score of 3 or higher means that the risk of financial insolvency is extremely low or non-existent.
Conclusion
Equinox Gold Corp. is in the process of ramping up production at an AISC/ounce, which should allow for strong operational leverage and should be reflected in a significant increase in the share price.
But for the relationship to work very well, the precious metal must provide its support. The price environment for precious metals could develop very positively in the wake of a recession.
Equinox Gold Corp. is therefore on the Buy recommendation list; however, it is better to wait a little longer before buying shares as the stock may become cheaper.
For further details see:
Equinox Gold Is Poised For A Bullish Rendezvous With Gold