2023-11-24 05:09:07 ET
Summary
- The shares of Osisko Development are rated "Hold" due to the potential upside of a gold bull market, while the company cultivates its project to become a mid-tier gold miner.
- The economic climate, with the risk of a recession, is favorable for gold as a safe haven investment.
- The stock price of Osisko Development Corp. has a strong positive correlation with the price of gold, indicating potential growth as the yellow metal has its bull market.
This Analysis Now Suggests a "Hold" Rating for Shares of Osisko Development
In the previous analysis , Osisko Development Corp. stock was rated Buy based on expectations of a gold bull market, as this stock would most likely have benefited from it. The stock price appeared to have a strong positive correlation with the change in the price of the yellow metal.
As the company's portfolio of mineral projects makes some progress toward one day becoming a mid-sized producer, a position in its publicly traded stocks provides an opportunity to participate in gold price cycles.
The scenario now looks like this: The economy is slipping into recession and the new cycle will create headwinds that will strengthen gold as a safe haven. This is an ideal environment for the gold price to flourish and the market value of Osisko Development stocks should grow as well. Plus, there is a greater risk of further interest rate hikes by the Federal Reserve compared to when the previous rating was given to this stock.
Before gold prices reach the predicted bull market, the market may suggest lower price levels for Osisko Development Corp. shares going forward given the temporary negative pressure from the interest rate hike.
Therefore, today it is better to wait and see whether the Fed will raise rates again in 2024.
It may very well be that the loans will not become more expensive from this point. However, the current macroeconomic situation and the company's portfolio of mining activities seem not to provide reasons to believe that the share price should now represent the last chance for lower prices before the price of gold begins its bull market as forecast.
The Short-Term Outlook for Gold Prices: Something Exciting Around the Corner
The gold price was trading at $1,999.10 an ounce as of this writing on the London bullion market. The ounce is expected to increase in value in the future, with analysts at Trading Economics predicting a value of $2,067.72 within 12 months.
The environment influenced by the current interest rate policy of the Federal Reserve ('FED') is not suitable to actually support a recovery in the price per ounce. The US monetary authority's current "higher for longer" policy means interest rates must remain high for weeks or even months before policymakers can reasonably expect core inflation , currently at 4%, to return to the 2% target. Increased interest rates put upward pressure on the cost opportunity of investing in the yellow metal, rather than long-term U.S. Treasury bonds, which pay a fixed interest rate.
But if, on the one hand, increased interest rates can cause the appetite for gold investment to wane, on the other hand, combined with increased core inflation, they certainly impact 70% of the US gross domestic product ('GDP'). This chart from Y Charts shows that US personal consumption expenditure (a measure of US consumption) determines GDP by about the percentage just mentioned. In fact, the high cost of money combined with high core inflation is causing U.S. households, which are also weighed down by sluggish wage growth amid rising living costs and the end of nearly $1 trillion in student debt relief, to significantly withdraw from shopping across many categories of non-essential goods and services.
So, if 70% of the American economy has to pay the price of reducing inflation through the record increase in interest rates (such an increase has not been seen since the 2007 financial crisis), consumers and producers must prepare for the next downturn in the business cycle:
This is the recession for the US economy, whose headwinds are ultimately good for safe-haven gold.
Extra trends Suggest the Economy Is Headed for a Significant Downturn
In recent weeks, these articles ( here , here , and here ) on other metal mining stocks have cited data that provided clearly negative trends in consumption and investment that point to a continued weakening in U.S. economic conditions.
As of Tuesday, November 21, 2023, we have more irons in the fire as a slew of retail sales data provides another strong signal that U.S. households view the near-term outlook as too uncertain for their finances. According to the following top U.S. retailers, US households are reducing discretionary spending, meaning their budgets are being strained by expensive borrowing and shopping, and focusing more on basic needs, the essentials.
Best Buy Co., Inc. ( BBY ), a specialty retailer of technology products such as computers and cell phone products in the United States and Canada, reported revenue that fell $140 million short of expectations in the third quarter of fiscal 2024 (ended October 28, 2023). Revenue fell 7.8% year-over-year to $9.8 billion.
Burlington Stores, Inc. ( BURL ) - the fashion-focused branded clothing retailer known as off-price stores in the U.S. issued a quite gloomy outlook for the final quarter of fiscal year 2023 (ending January 30, 2024): Management expects total revenue to grow 5% to 7% to $2.88 billion to $2.93 billion in Q4 FY 2023, disappointing the consensus, which instead forecasts $3.03 billion (a significantly higher increase of 10.6% compared to the previous year).
DICK'S Sporting Goods ( DKS ) - a specialty retailer primarily focused on sporting goods in the United States - reported that comparable store sales increased 1.7% for the three-month period ended October 28, 2023, compared to growth of 6.5% for the same period in 2022.
Kohl's Corporation ( KSS ) - department store that offers branded apparel, footwear, accessories, beauty, and home products through its stores and websites in the United States -- posted an 11.2% sales decline in the Q3 of the fiscal year 2023 that ended Oct. 28, 2023, to $3.8 billion. KSS has less confidence in near-term demand as its inventory of $4.2 billion shrank 13% year-on-year in the third quarter of fiscal 2023.
Nordstrom, Inc. ( JWN ) - fashion retailer of apparel, footwear, beauty, accessories, and home goods for all ages, females and males - had a 6.5% year-over-year decline in revenue to $3.32 billion in its fiscal third quarter 2023 (ended October 28, 2023) short of expectations by $100 million. JWN's full fiscal 2023 outlook includes a 4% to 6% revenue decline from $15.53 billion in fiscal 2022 to $14.6 billion to $14.91 billion versus a consensus of $14.75 billion.
Lowe's Companies, Inc. ( LOW ) - a home improvement retailer in the United States - posted a 12.8% decline in sales to $20.47 billion in the third quarter of fiscal 2023 (ended November 3, 2023), falling $390 million short of expectations. The company reported a 7.4% decline in same-store sales, driven by a drop in consumer discretionary spending. The full-year 2023 outlook includes that same-store sales are expected to be 5% lower year-over-year, compared to the previous forecast of -2% to -4%.
The Next Growth Potential for Safe-Haven Gold: the Economic Recession
This article mentioned a group of economists who had already predicted a recession in 2024 in recent months. The group recently welcomed economists from Oxford Economics , who also believe in a significant slowdown in the business cycle.
The spread between 1-year and 10-year Treasury yields is currently signaling that conditions are currently setting the stage for an economic recession. This spread is a very strong predictor of an economic recession when it is negative, i.e., the "inverted curve", because in normal situations the yield on a longer maturity/higher default risk of a bond issuer is greater than the yield on a shorter maturity/lower default risk of a bond issuer.
When the spread reverses - as is currently the case with the 10-year yield of 4.429% being below the 1-year yield of 5.286% - it means that lenders (bondholders) are shortening the time they can lend their money as the future is perceived as significantly riskier than before.
Investors are now selling longer-maturity U.S. Treasuries to turn instead to shorter-maturity U.S. Treasuries or money market instruments.
The U.S. Treasury's inverted curve has correctly predicted an economic recession seven out of eight times over the past 60 years.
The economic recession will bring negative winds to the portfolio of investors who will flock to safe havens like gold in search of protection. Gold is the ultimate safe haven place for investors.
There is no asset in the financial markets more effective than gold in protecting against the risk of asset devaluation in stormy times.
The safe haven purpose will bolster the demand for gold and the price of an ounce will rise rather than fall or move sideways due to the Market law of demand and supply.
This is a scenario consistent with Trading Economics analysts' forecasts of gold prices described earlier in this article.
Osisko Development Corp. and Not Gold Bullion Itself to Capture the Upside Potential
The reader is wondering why not invest directly in physical gold since it has such great upside potential, rather than in Osisko Development Corp. ( ODV ) ( ODV:CA ), which would like to one day produce the metal.
The answer is straightforward: investing in gold bullion requires a massive use of funds that retail investors usually do not have, but which only a bank or institutional investor can raise. Shares in Osisko Development Corp. can provide effective exposure to price changes in gold bullion, even though the company is not yet mining the yellow metal.
Osisko Development Corp. is a Montreal, Canada-based developer of its 100% owned Cariboo Gold Project, which consists of 415 mineral claims in British Columbia, Canada. The mineral plant will produce approximately 164,000 ounces of gold per year for twelve years.
As Osisko develops its flagship project into an active gold mine, the simple expectation that it will become a gold producer is enough to justify a strong positive correlation between the ODV share price or the ODV:CA share price and the price of gold.
The Strong Positive Correlation of Osisko Development with Gold Price
In the charts below, the strong positive correlation between the assets is represented by the yellow area in the bottom section of each chart: ODV stock price vs. GCZ2023 in the chart on the left side and ODV:CA stock price vs. GCZ2023 in the chart on the right side. The analysis takes gold futures (GCZ2023) into account as a benchmark for the price of gold.
The correlation is positive and strong as the yellow area has been above zero for almost all of the past 12 months, except for a few times when the correlation was broken by external factors that shocked the financial markets. One of these shocks came recently with the outbreak of the Hamas attack on Israel, which led to a conflict with Israel in the Gaza Strip. The new situation in the Middle East raised fears that the crisis could worsen involving Iran - a major producer of crude oil and natural gas, which is a member of the OPEC-plus-Russian cartel of the largest fossil fuel exporters in the world. Iran is currently supporting Russia in the conflict in Ukraine by supplying military drones and other equipment.
Investors therefore had every reason to fear a new crisis in energy prices after the spring-summer 2022 energy crisis, and these fears were enough to create headwinds that caused opposite reactions in the gold bullion market and North American stock markets, including the shares of Osisko Development Corp.
In the stock market, the possibility of higher energy costs was seen as a strong headwind for US-listed stocks, with earnings - the main driver of share prices - hit by higher operating costs. This was particularly true for Osisko and the gold operators, as their capital-intensive industries also finance the extensive use of fossil fuels in the mineral operation.
Instead, the gold bullion market experienced the opposite impact of the Gaza conflict, as investing in safe-haven gold was seen as an effective hedge against the valuation threat posed by a resurgence in energy bills for US-listed stocks.
For about a month since October 7, when the Gaza conflict actually began, Osisko's shares fell along with U.S. listed stocks while the price of gold rose, eroding the positive correlation between the gold price and Osisko's stock price.
When the price of crude oil per barrel peaked at $86.5 on October 19, 2023, the yellow area of both charts was well in negative territory. Thereafter, the price per barrel gradually retreated to a significantly lower level, until it reached the current annual average of $76.5 per barrel. This move helped to quell concerns about an energy crisis, but also to restore the positive correlation between gold prices and Osisko's share price.
Based on the relationship outlined, Osisko Development shares are also on track to be in an uptrend as the price per ounce rises on fears of recession headwinds.
Before capitalizing on safe-haven gold's strong momentum amid recession headwinds, the economic shock of the recession could cause an initial decline in Osisko shares as the negative cycle does not bode well for U.S.-listed stocks, including Osisko. This expectation is based on a high 24-month beta market of 1.23 (scroll down this page of Seeking Alpha and this one to get the data).
However, looking at the curve in the charts below, where a very low price has settled, it is unlikely that the share price could fall sharply from these levels, even in the event of an initial shock to the US equity markets.
Instead, the upside potential fueled by the strong risk of an economic recession will provide the right impetus to push Osisko's share price higher on both exchanges.
Like in the early spring of 2023 when during the US regional banking crisis investors sought gold to protect their assets from negative headwinds, a similar dynamic could also play out in 2024 if, as appears, a recession settles into the cycle.
About Osisko Development Corp. and Its Mineral Commitment
Osisko Development Corp. seeks to become a mid-sized gold producer once it successfully advances its 100%-owned Cariboo Gold Project in central British Columbia, Canada (the company's flagship mineral project), to the gold production phase.
Osisko Development Corp. is also involved in mineral activities at the Tintic Project in the historic East Tintic mining district of Utah, and the San Antonio Gold Project in Sonora, Mexico.
During the development of these three projects, Osisko sold a volume of ounces of gold in the third quarter of 2023: The company sold a total of 3,867 ounces of gold, recovered primarily through operations and through stockpile processing at heap leach pad and at third-party processing facility.
In the gold market, an ounce of the yellow metal averaged $1,935.42 in the third quarter of 2023, but sales performed significantly better than expected on the market. The company had sales of $7.7 million (CA$10.4 million), but its operations also entailed $7.5 million in selling costs.
Additionally, in connection with Osisko's acquisition of 100% of the Tintic project, the company made the first of five deferred payments to the seller of $2,500,000 in early July: 10% in cash and the remainder through the issuance of 454,026 shares of common stock for approximately $4.96 each.
Including the changes from these production activities and the financing of the acquisition of the additional mining project in Utah, Osisko Development sees its financial position as follows: The balance sheet had a total of $52.6 million in cash and short-term investments, while the balance sheet was also weighed down by total debt of $14.5 million . Approximately 63% of the total debt consisted of loans that had to be repaid in the short term and were therefore related to the repayment plan agreed for the acquisition of Tintic.
Should the price of gold remain stable in the coming months, the sale of ounces from inventory processing will fund Tintic's repayment, allowing cash on hand to cover 70-80% approximately of capital expenditure needs over the next 12 months to advance the portfolio of activities.
For information on the portfolio of mineral activities, retail investors can also refer to this previous article and this previous article .
These are the further developments of the projects:
In the third quarter of 2023, the Trixie mine - part of Osisko's Tintic project in the central part of Utah - completed a portal and underground descent ramp, critical to making underground deposits easier to exploit and higher yields at mining rates. The aim is to process up to 500 short tons of mining material per day.
Source: Corporate Presentation
The Trixie Mine has a maiden mineral resource estimate of 213,000 ounces of gold in measure and indicated mineral resources grading 28.1 grams of gold per tonne of mineral.
Trixie has significant growth potential as exploration activities continue, with only 10% of the property tested to date. Plus, most of the infrastructure required for future mining activities and transportation is already on site.
Drilling is currently focused on testing surface porphyry and will commence in the coming months as high-grade copper-gold-molybdenum mineralization is suspected in the area.
The Cariboo Gold Project in British Columbia, Canada - 100% owned by Osisko Development Corp. - now has an Environmental Impact Certificate issued by the Province of British Columbia. The company is awaiting further mining and environmental approvals from the Province of British Columbia before the second half of 2024.
According to the feasibility study for the asset, the Cariboo Gold Project has a net present value of approximately $367 million and an internal rate of return of 21% based on a gold price of $1,700/oz. The asset has mineable reserves of 2 million ounces of gold grading 3.78 grams of gold per ton of mineral. The company budgeted around $100 million to bring the site to its first gold output as early as 2024. The mine can then produce gold at a production rate of 164,000 ounces per year for 12 years. The activity has significant upside potential as gold prices remain robust, while the exploration potential of the district, coupled with the existence of most of the necessary infrastructure already in place, provides good conditions for limited risk. The higher interest rate environment is currently not helping to bring the project into the production phase.
Source: Corporate Presentation
The San Antonio Gold Project is 100% owned by Osisko Development and is located in the Mexican state of Sonora. The asset has completed producing ounces of gold from the processing of stockpiles and sold 13,591 ounces of gold from the heap leach facility since early 2022.
Source: Corporate Presentation
The facility is now awaiting additional mining approval from Mexican authorities to continue the development of the asset, which is estimated to contain 576,000 ounces of gold, grading 1.20 grams of gold per tonne of mineral in terms of indicated resources.
Before any gold mining begins, this stock already offers exposure to gold price fluctuations, albeit as a gold resource exploration and development company with the aim of becoming a mid-sized mining company in the future.
The Stock Valuation: More Attractive Entry Points Are Ahead
As of this writing shares of ODV traded at $2.86 apiece on the New York Stock Exchange, giving it a market cap of $249.03 million.
As Seeking Alpha's chart shows, the shares are trading below the 200-day simple moving average of $4.12, and below the 50-day simple moving average of $3.08.
ODV is currently trading at a premium of 15.3% to the lower bound of the 52-week range and at a discount of 54.2% to the upper bound of the 52-week range.
The stock has a 14-day Relative Strength Index ('RSI') of 41.52, suggesting that the stock is not oversold despite the downtrend since spring 2023, but is also far from overbought levels. For this analysis, this information must be processed in this way. The current share prices are below the previous Buy recommendation level, while the growth catalysts for gold have not changed and this could trigger a rise in ODV shares due to the strong positive correlation with the precious metal. There is more than enough scope for the stock price to rally as the overbought levels are somewhere near an RSI of 80.
However, the market may also offer additional entry points than the current ones for this stock: more attractive entry points and, given the very low trading volumes, able to provide the retail investor with more room for maneuver on his position. ODV has an average trading volume of 80,410 over the past 3 months. More attractive entry points are possible if the Fed raises rates again in early 2024 after consumption picks up somewhat during the holiday shopping season in December 2023. This analysis now suggests holding the shares and waiting for the hike in 2024.
As of this writing Shares of ODV:CA traded at CA$3.89 apiece on the Toronto Stock Exchange, giving it a market cap of CA$341.13 million.
As Seeking Alpha's chart shows, the shares are trading below the 200-day simple moving average of CA$5.55, and below the 50-day simple moving average of CA$4.16.
ODV is currently trading at a premium of 18.2% to the lower bound of the 52-week range and at a discount of 53.3% to the upper bound of the 52-week range.
The stock has a 14-day Relative Strength Index ('RSI') of 41.57, suggesting that the stock is not oversold despite the downtrend since spring 2023, but is also far from overbought levels.
The same consideration given to the stock on the US stock exchange can be applied to the stock ODV:CA traded on the Toronto Stock Exchange, but with extra attention to seek more convenient entry points as trading volumes here are even lower. In the last three months, an average volume of around 13,671 shares were exchanged. This statistic is crucial because if the retail investor has too large a position, it may be difficult to reduce it to the desired volume of shares when needed.
Conclusion
The financial position of Osisko Development Corp. should be more solid compared to the effort to become a mid-tier gold producer, and high borrowing costs are not helping matters at the moment.
In the meantime, this stock certainly offers exposure to changes in the gold price, but as a gold resource exploration and development company.
Given a strong positive correlation with changes in the gold price, the upside potential could be amazing if the precious metal were to be sought as a safe haven amid the predicted 2024 recession.
The share price is low, but the market could still offer interesting entry opportunities given another Fed rate hike in 2024. Rising interest rates do not bode well for gold and the downward pressure is particularly felt by gold stocks, including Osisko Development.
When the Fed raised rates in late July 2023 (the eleventh increase since it began its aggressive stance to combat rapid inflation in March 2022), rates were considered to have peaked. In fact, since the 11th hike, the US Central Bank has not been raising the rates anymore.
Today the scenario is different as the labor market has proven to be more resilient than initially thought, and now there are also fears of a recovery in consumption due to the Christmas shopping season. A new interest rate increase is now possible in early 2024, which could put pressure on ODV shares.
So, wait with a "Hold" rating and see what happens in 2024. But this stock certainly has a chance to join the projected gold rally.
For further details see:
Osisko Development: Upside Potential Intact, But Stocks Could Drop (Rating Downgrade)