2024-01-13 05:27:54 ET
Summary
- Perpetua Resources Corp. receives a "Hold" rating compared to a previous "Buy" rating.
- The company's gold production in Idaho and positive gold price outlook contribute to its growth prospects.
- Demand for silver and antimony is expected to increase, benefiting Perpetua Resources' mining project.
A “Hold” Rating For Perpetua Resources Corp.
This analysis recommends a “Hold” rating on the stock of Perpetua Resources Corp. ( PPTA ) ( PPTA:CA ) compared to the previous rating of “Buy”.
Perpetua Resources' stock was rated "Buy" in the previous article due to the increased potential for profitable gold production in Idaho and the positive gold price outlook. The latter was predicted to be triggered by the growth catalyst that an economic recession or an uncertain macro-environment could represent for safe-haven gold.
The Outlook for Perpetua Resources Corp.
The future as the current macroeconomic environment unfolds will be one where the company will not regret reaching its mineral target.
Perpetua Resources is a Boise, Idaho-based company that develops gold in primis , as well as silver and antimony. The shares are not trading expensive compared to the promising outlook for these metals but could become even more attractively valued in the coming months. However, it will be a while before that happens, and in the meantime, shares are likely to continue to perform in line with a neutral stance.
Growth prospects include the start of gold production in Idaho, a mining district traditionally associated with highly profitable gold mining activities. This outlook for Perpetua Resources' metals project portfolio has improved recently, despite the current macroeconomic and geopolitical environment, where uncertainty has increased significantly.
This may seem surprising to most, but in reality, it is not when you consider the importance of the other two metals in Perpetua Resources' mining project amid this uncertain global scenario. These two metals are silver and antimony.
The demand for silver and antimony has a bright future, but cannot be addressed satisfactorily by the supply, which faces problems of depletion of natural resources and limited volume that the state of the art currently allows to be mined at profit. The contrast inevitably leads to pressure on prices, whose fluctuations are exploited in the financial markets.
The Growth Catalysts for Perpetua Resources Corp.
As for the strong demand for silver, this precious metal is expected to be used extensively in electrification: An important process that humanity will use to eliminate its most polluting activities and transform them into a sustainable economy with a lower impact on the environment.
Copper demand growth forecasts from Nornickel, a major Russian nickel and palladium mining and smelting company, also bode well for silver, as the main reason for the massive increase in global red metal consumption will be a huge increase in battery and electric vehicle technologies as well as charging infrastructure and renewable energy production. Silver is massively used in all these devices and especially in solar panels as a source of renewable energy. China, the world's second-largest economy, is poised to significantly boost demand for silver by introducing solar panels to sustain photovoltaic technology. The Asian country appears to be leading the way as the International Energy Agency (IEA) says China has tripled the capacity of its solar panel infrastructure in just two years. Silver demand driven by the electrification of transportation will benefit from US President Joe Biden's administration's goal of electric vehicles (EVs) to account for at least 50% of all new vehicles sold nationwide in the US by 2030 and to build and reinforce the nationwide infrastructure with 500,000 chargers to make EVs more affordable to a growing number of US citizens.
Although gold is the ultimate “safe haven”, investments in silver are also made for its hedging properties against the various risks and uncertainties that can threaten portfolios. In this sense, the demand for silver is robust as the global scenario is increasingly fraught with pitfalls for the value of investments: the consequences of aggressive interest rate policies by central banks to combat rampant inflation; the risk of economic recession; aging populations in Western economies; the impact of conflicts in Eastern Europe, Africa and the Middle East; trade and technology rivalries between the US and China and geopolitical tensions between them over Taiwan; and regional instability caused by North Korea's defense development program; etc...
As for antimony, this metal has a wide range of applications, from paint production to the industrial sector and medicine. However, the current focus is on use in defense construction, particularly for ammunition production. In a global scenario with increasing conflicts and geopolitical tensions, the arms race emerges as a means to strengthen the sense of security of nations or to support others in the pursuit of freedom and independence goals. The future of antimony for making ammunition is very promising. As a measure of the continued proliferation of weapons, a sharp increase in U.S. military budgets in recent years and near-record sales of U.S. weapons have been reported in the United States, home to the world's largest producers of weapons technology.
The agreement signed in 2023 through the Defense Department's Munitions Technology Consortium to demonstrate the viability of the project to supply the U.S. and its allies - from ground to round - with the key ammunition component antimony is a shot in the arm for Perpetua Resources, which wants to establish metallic production in Idaho. Since the US Department of Defense is covering all costs, it's not just about antimony, but the project to extract the precious metals is also getting a boost in Idaho. Judging from recent developments in international relations, it now seems clear that the agreement, which previously seemed limited to just strengthening the domestic arms sector, could instead be part of the US government's much broader strategy , highlighted in early 2023, to increase domestic access to critical commodities and thus reduce dependence on foreign suppliers, especially on Chinese exports.
Amid Growth Catalysts: Perpetua's Gold Project in Idaho
Perpetua Resources owns a 100% interest in the Stibnite Project, which consists of a world-class gold deposit utilizing conventional open pit mining techniques in three primary deposits (Yellow Pine, Hangar Flats, West End) to mine precious metals and antimony as follows.
This is the project:
The mineral mined through blasting/excavation from Yellow Pine, Hangar Flats, and West End will be sent for crushing at the rate of 22,050 short tons per day in addition to approx. 2.7 million tons of historic waste found in a nearby facility that will be made suitable for the grinding phase. But the activities will be run in such a way that duplication of costs will not occur or only to a lesser extent. The raw material will then be sent to the subsequent stage of flotation and hydro-metallurgical operations to recover antimony and produce gold and silver bullion.
Over its 14- to 15-year lifespan, the site will produce a total of 4.2 million ounces of payable gold (297,000 ounces per year), approximately 968,000 ounces of payable silver (approximately 68,000 ounces per year), and 78.44 million pounds of payable antimony (approximately 5.5 million pounds per year).
The site holds the following mineral resources: in terms of proven and probable mineral resources, Stibnite Gold Project has 4.82 million ounces of gold at an average grade of 1.43 grams of gold per tonne of ore; about. 6.43 million ounces of silver at an average grade of 1.91 grams of silver per tonne of ore; and 148.69 million pounds of antimony at a grade of 0.064%. In terms of measured and indicated mineral resources, the Stibnite Gold Project has 6.04 million ounces of gold at 1.42 grams of gold per tonne of ore; about 8.82 million ounces of silver at 2.07 grams of silver per tonne of ore; and 205.9 million pounds of antimony at a grade of 0.07%.
The Stibnite gold project feasibility study economic analysis indicates that production of the yellow metal, net of byproduct credits, will result in total cash costs of $571 per ounce and all-in sustaining costs [AISC] of $636 per ounce. Of course, it's one thing to say how much metal production will cost in Idaho, but it's another to prove with facts that the operation is actually that cheap compared to an industry sector that, by contrast, continues to report an upward trend worldwide. Measured by AISC/ounce of gold, a comprehensive cost metric that goes beyond mining and processing costs, the value rose from $300 per ounce in 2000 to $900 in 2012 and then rose sharply to reach a record $1,232 in the first quarter of 2022 and another record high of $1,358 per ounce in the first quarter of 2023. The cost explosion was due to ever-increasing mining costs that started well before 2020, says Metals Focus Gold Mine Cost Service. However, there is no doubt that the Stibnite project would be, at least on paper, one of the most cost-effective productions in the world industry, with a very positive impact on the profitability of the entire project and the rapid recovery of the initially invested capital.
The key measure of profitability suggests an after-tax net present value [NPV] of $20.86 per share versus the current $3.27 per share of PPTA stock and versus CA$ 4.38 (or about $3.27) per share of PPTA:CA stock. These estimates are based on a 5% discount rate (now the norm for mining projects in the global precious metals industry) and a gold price assumption of $1,600/ounce. As for the gold price assumption, this is quite conservative compared to an average price of $1,750.69/ounce in the futures market over the last 5 years.
In addition, the cost of proving the feasibility of Stibnite should be within the financial coverage provided by the U.S. Department of Defense's Munitions Technology Consortium agreement with an additional grant of $15.5 million in the third quarter of 2023, which also helps to develop a more optimistic view of the mining project on the stock market.
Furthermore, the after-tax internal rate of return ((IRR)) is 22.3% compared to an industry range of 15 to over 30%, and versus accumulation of IRRs at around 20-25% based on our past findings for gold projects.
Instead, the time it will take for the Stibnite Gold Project to recoup its capital costs once production is operational and metals are delivered is estimated at 2.5 to 3 years, excluding the funding the company will receive under the agreement through the Ministry of Defense.
Meanwhile, the stock will remain under the influence of stock market sentiment and the price of gold in the market.
The Shares on The North American Stock Markets: The Opportunity of a Rising Gold Price
PPTA shares are trading at $3.27 apiece, giving it a market cap of $206.90 million as of this writing. Shares traded below the 200-day simple moving average of $3.81 and in line with the 50-day SMA of $3.27. The 52-week range was $2.64 to $5.01, and currently the share price is below the middle point of $3.825/share.
The 14-day Relative Strength Indicator of 49.12 means there is plenty of room for shares to move up should the gold price have strong bullish sentiment in the coming months, but under the influence of uncertainty about whether or not the Federal Reserve will start cutting interest rates in March 20, shares are seen moving sideways for a while.
A continuation of the policy of higher interest rates for a longer period increases the likelihood of an economic recession as expensive loans affect consumption and investment. The negative cycle of the economic recession creates headwinds against which gold acts as a hedge, and an increase in demand for gold puts upward pressure on the price per ounce.
The Upside Catalyst for Gold Price: Looming Recession
The economic recession is expected to occur well into 2024, according to the infallible predictor of inverted US Treasury spread yield curve (correctly predicted each of the eight recessions of the last six decades): the yield on the 10-year US Treasury bond is 3.958%, while the yield on the 3-month US Treasury bond is 5.371% at the time of writing this article.
The factors driving the negative cycle for the US economy are amplifying their momentum: a) the core component of the US economy, consumption (which accounts for almost 70% of US GDP ), is affected by “weakening consumer trends” (in line with the views of Lakos-Bujas Dubravko , JPMorgan Chase & Co. ( JPM ) strategist, and Torsten Slok Apollo Global Management, Inc. (APO), chief economist); b) The darker outlook for consumption is discouraging companies from investing in growth plans, with the number and value of IPO deals well below 2021 levels, sending a strong signal that companies are also not raising money through loans, as this activity would become even more expensive with interest rates at record highs.
The stubbornness of the labor market was the rallying point for the soft-landing advocates, as the Fed chairman repeated to boredom that the impetus for interest rate cuts must come from the weakening of labor conditions.
Well, the U.S. labor force is now showing signs of cooling with a significant drop in job creation from 4.8 million in 2022 to 2.7 million jobs created in 2023, along with a 98 percent year-over-year increase in the number of announced job cuts by companies to 721,677 cuts in 2023. Business continuity is at stake. Companies need to protect their profit margins and therefore reduce labor costs (which is sovereign in the calculation of the company's total operating costs), since operating capacity must be adapted to reduced consumption and the decline in price growth among end users.
Andrew Challenger, a labor expert and senior vice president of Challenger, Gray & Christmas, Inc., said in early December last year that layoffs would continue into 2024. In fact, the layoff ax is falling on some of the “magnificent-7” in the S&P500 index. The day after Amazon.com , Inc. ( AMZN ) announced it would send hundreds of termination letters to media employees, Alphabet Inc. ( GOOG ) ( GOOGL ) informed the markets about its plan to lay off workers in the voice assistance and hardware and engineering departments.
Rate Cuts Are Good for Gold, but the Stance Is “Hold” Until the Recession
If the US Fed cuts rates instead means that the opportunity cost to hold gold and gold-backed securities in the place of US bonds moves down and the scenario bodes well for a rising gold price. Interest rate traders say the Fed will cut interest rates by 25 basis points from the March 20 meeting. But as inflation turns out to be much more skewed than previously assumed, it is possible that the first interest rate cut will be postponed until the next meeting. The setback in the disinflationary process with trend reversal will keep the gold price in check and in this context, Perpetua Resources shares are likely to continue moving sideways. This is roughly what this analysis thinks will happen until the market says “enough” with the soft-landing story and declares an economic recession. US listed stocks will be adversely affected by the resulting headwinds and depending on a 24-month market beta of 1.60 (high volatility compared to market swings), PPTA shares will be trading lower, and tactically there is plenty of room to fill below the 14-day RSI of 49. The market will therefore offer the opportunity to buy PPTA shares at a price that provides significantly more protection against the risk of delays in the PPTA pipeline. So, till that moment the retail investor should remain anchored to the “Hold” rating. Since the market likes staged procedures, i.e. as a “roadmap”, to take advantage of any kind of event, it is very likely that the bearish sentiment of an economic recession will not set in until well into H1-2024 after the start of interest rate cuts by the Fed.
The same consideration applies to shares of Perpetua Resources Corp. under the symbol PPTA:CA. These are trading at CA$4.38 apiece, giving it a market cap of CA$277.21 million as of this writing. Shares traded below the 200-day simple moving average of CA$5.13 and near the 50-day SMA of CA$4.41. The 52-week range was CA$3.39 to CA$7.32, and currently the share price is below the middle point of CA$5.355/share.
The corridor in which share prices move narrows towards the 14-day relative strength indicator of 49.62, signaling neither overbought nor oversold. Additionally, shares are likely to trade sideways for a while amid uncertainty over whether the Federal Reserve will or will not begin cutting interest rates on March 20.
Note the low trading volumes, which can hinder position adjustment maneuvers when it is necessary to react quickly to market changes: Average volume (3 months): 131,481 for PPTA stock and 7,908 for PPTA:CA stock. The stock has 63.27 million shares outstanding. The float is 33.51 million shares outstanding. 72.62% of the float is held by institutions.
Conclusion
Perpetua Resources Corp.'s metals development project in Idaho has several growth catalysts: robust demand for gold in an uncertain macroeconomic environment, robust demand for silver as a key element in the electrification of transportation and the energy transition, and robust demand for antimony for US ammunition production.
As the company continues its project, the stock could see a strong recovery, driven by robust demand for gold as an antidote to the recession headaches.
Initially, however, the recession headwinds will hit the shares of Perpetua Resources as well as the entire US stock market, as there will be no distinction between gold stocks and the remainder of US-listed stocks. This will result in a lower price that the retail investor will want to take advantage of ahead of the expected gold bull market or gain a better position in light of the company's metals project.
This analysis assumes that the recession begins in 2024 and then demand for gold flourishes as a safe haven to protect U.S. portfolio assets from the ensuing headwinds, leading to bullish sentiment for gold prices. Gold prices are forecast to rise quickly to $2,200 per ounce within the next 12 months, reflecting strong growth from the current $2,053 per ounce in the London bullion market.
The shares of Perpetua Resources Corp. are poised to make a jump from current levels but will continue to move sideways for a while amid uncertainty about the Fed's next interest rate decision.
For further details see:
Perpetua Resources: Still Sideways For Shares Despite Antimony Key (Rating Downgrade)