A Buy Recommendation for Artemis Gold
This article initiates a Buy recommendation for Artemis Gold Inc. (OTCPK:ARGTF, TSXV:ARTG:CA) stock. Shares of this Canadian gold property developer appear well positioned to benefit from the gold price rally that is expected in late 2023 and early 2024 due to some economic factors.
However, keep in mind that this recommendation is not to be implemented immediately, but only after another rate hike by the U.S. Federal Reserve. After the rise in rates, the gold price should fall, pushing the Artemis Gold Inc. stock price to lower levels due to a positive correlation between gold and ARGTF stock.
A price drop is likely to occur as a result of the Fed’s maneuver on interest rates because investors will face a higher opportunity cost if choosing to invest in gold over fixed-income securities such as bonds. As the higher interest rate environment favors fixed-income assets, investor demand will likely shift from precious metals to fixed income for a while.
Gold Price Outlook
The first thing a reader needs to know about gold is that investing in physical gold, or other securities that follow the price of the precious metal, acts as an effective hedge against market or economic headwinds, as these usually increase the uncertainty that can affect the value of assets in investors’ portfolios.
For about a week now, as the Chinese housing crisis posed the risk of a dangerous halt to the weak expansion of the Chinese business cycle, generating headwinds, gold on the London bullion market – $1,950.60 at the time of writing – is in recovery mode. If nothing else, the ounce managed to recoup some of the losses it suffered up to last week from the peak of more than $2,050/ounce in early May, or from the end of a gold bull market. Gold’s upward trend from early March 2023 to early May 2023 was fueled by fears of a major crisis in the U.S. banking system following the failures of Silicon Valley Bank on March 10, Signature Bank on March 12, and First Republic Bank (OTCPK:FRCB) on May 1.
There have been no major bankruptcies since then, but problems reported by the regional banking system have been enough to tighten lending to households and businesses. As the banking system strengthened, fears of a major crisis spreading among U.S. banks receded, and the ounce of gold gave back some of the gains made during the bull market.
Returning to the last week of trading, gold is in a recovery phase, gaining 1% as of this writing. In the short term, however, the current recovery in the gold price is likely to weaken, or at least not gain much momentum, as it will face strong resistance from the prospect of high borrowing costs, which Federal Reserve policymakers intend to keep elevated for a long time to come, as long as they are not convinced that annual inflation is moving towards the medium-term target of 2%.
That is the trend emerging from Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium in Wyoming last Friday. He stressed the potential need for more rate hikes, according to Trading Economics, as it appears that inflation – 3.2% in July 2023 – despite the impressive pullback from the all-time peak of 9.1% in June 2022 – requires more intervention for the treatment to be efficient.
The Federal Reserve’s monetary policy is not expected to have a positive impact on gold prices and assets that track the precious metal’s price movements, including Artemis Gold. Instead, it means the emergence of negative pressure on prices, leading to more attractive levels.
Therefore, should investors decide to open or increase their position in Artemis Gold stock, they may have a great opportunity to take advantage of a cheaper entry point ahead of strong upside potential for gold and Artemis.
But for a very aggressive gold price rally to occur, which could also act as a catalyst for a higher Artemis share price, there would need to be strong headwinds against which gold is in demand as a hedging tool.
The headwind will most likely be a recession in the business cycle, and the factor that will help shape the next negative cycle of the U.S. economy will be the Fed’s monetary policy to keep interest rates high for longer than initially thought to restore price stability.
Higher interest rates that last longer than expected have more time to further strengthen the alliance with inflation and affect consumption and investment, forcing households and businesses to cut spending and postpone projects to the most promising times.
A notable signal of a deterioration in consumption conditions may be the following. Referring to the recent trend in consumer sentiment, Joanne Hsu – research associate professor and director of consumer surveys at the University of Michigan – said last week:
“Consumers perceive that the rapid improvements in the economy from the past three months have moderated, particularly with inflation, and they are tentative about the outlook ahead”, reports Trading Economics.
With consumption currently accounting for about 70% of US GDP (as of the second quarter of 2023, TheGlobalEconomy.com reports), keeping interest rates in restrictive zones will have a significant impact on the U.S. economy. But the Fed has no choice if inflation remains a problem.
And it’s not just this analysis that predicts a recession; The downturn in the U.S. economy is also being predicted by: a) Fannie Mae, the U.S. Federal National Mortgage Association, through its chief financial officer Chryssa Halley, during the company’s Q2-2023 earnings call, as reported by Yahoo Finance earlier this month; and b) Duke professor and Canadian economist Campbell Harvey, whose inverted yield curve indicator (3-month Treasury yields are currently higher than 10-year Treasury yields) points to a recession as early as 2024, as reported by Yahoo Finance on Aug. 23, 2023.
Statistically, Campbell Harvey’s inverted yield curve indicator appears to be on track to predict the next economic downturn. Fannie Mae’s opinion is highly regarded by major investors, as the organization is the guarantor of mortgage loans to the largest consumer group in the United States. Fannie Mae focuses primarily on low- and middle-income borrowers, who represent by far the largest economic consumer class in the United States, according to this article on OECD iLibrary.
After the current phase, where the majority no longer expect a recession but a soft landing, which Professor Harvey calls the “lull before the storm” reports Yahoo Finance, the recession should surprise many of these individual investors and traders and create strong headwinds for U.S.-listed stocks that will be very good for the demand for gold for hedging purposes.
Trading Economics analysts predict that gold prices will be around $2,007.76 by this time in 2024. Since this forecast represents a significant price improvement from current levels, it could indicate several upward moves in the gold price in the coming months, and perhaps one of them could extend to the point where there could be a bull market for gold prices.
The Strong Positive Correlation Between Artemis Gold Inc. and Gold
Thanks to the strong positive correlation between Artemis Gold Inc. and the price of gold, a position in Artemis allows retail investors to benefit from the expected increase in the price of gold, rather than investing directly in the bullion, which would require large capital that is not always available.
Seeking Alpha’s chart below illustrates that between the price of U.S.-listed shares of Artemis Gold and the price of gold represented by gold futures (GCQ2023), the correlation is generally positive. It has been above zero for most of the past 52 weeks.
Furthermore, this positive correlation is also very strong, as the yellow curve representing the CC line has been in the +0.50 to +1.00 range for most of the past 52 weeks.
The above conclusions also apply to Artemis Gold Inc. stock, which trades on the Toronto Stock Exchange under the symbol ARTG:CA.
This analysis also estimated the effect of gold price changes on Artemis Gold Inc. stock returns using a linear equation that assumes gold futures returns over the past 52 weeks as the cause of Artemis Gold Inc. stock returns over the past 52 weeks. Artemis Gold stock typically outperforms the rise in the gold price, on the order of 1.15x to 1.40x the positive variation in the price of gold futures, although the coefficient of determination, which measures how much of the share price is explained by gold, is low, indicating that these outcomes should only be considered as a rough indication during forecasting activities.
Artemis Gold Is About to Take on the Role of Gold Producer
Artemis Gold Inc. is a Canada-based gold development company interested in exploring gold properties in mining-friendly jurisdictions and is based in Vancouver.
The company is focused on the development of the Blackwater Gold Project in central British Columbia. and more specifically, from a geolocation perspective, about 100 miles southwest of Prince George and 270 miles northeast of Vancouver. The project is well connected to the main roads and highways.
Artemis Gold holds the Blackwater Gold Project indirectly through its subsidiary BW Gold Ltd.
The Blackwater Project consists of the construction of a gold/silver open pit mine, the operation of gold mining activities and gold ore processing and gold selling activities, and the closure of the precious metals mine.
The ore processing facilities will go through several phases. They are beginning at a nominal milling rate of approximately 16,500 tonnes per day [t/d] or 6 million tonnes per year [tpa], and this is Phase 1 which will last for the first 5 years, but will increase throughput in the second part of the year 5 as it approaches the Phase 2 of the project.
Phase 2 will process approximately 12 million tonnes of ore per year. This phase will last five years, from Year 6 to Year 10, and throughput will accelerate in the second half of Year 10 as operations near Phase 3 of the project.
Phases 3 and 4 will process approximately 20 million tonnes of ore per year. These phases will last twelve years, from Year 11 to Year 22.
The Blackwater Gold Project has approximately 12.41 million gold-equivalent ounces of measured and indicated resources at an average head grade of 0.65 g/t and has an Environmental Impact Assessment.
According to a technical study released in 2021, the Blackwater Gold Project will produce no less than 339,000 ounces of gold per year — in line with mid-level producers — over the 22 years of mining operations expected to begin production of commercial gold sometime in the second half of 2024. As of the second quarter of 2023, the Blackwater project was only 27% complete. However, Artemis indicates in its financial performance and construction report for the second quarter of 2023 that mine construction is fully on schedule with the first gold pour planned to be inaugurated by 2024.
As the company continues earthworks, this can now be intensified in priority infrastructure areas and supported by the expansion of the truck fleet that can be deployed on 85% of the road to access the operating site. Construction of the worker housing and tailings storage facility is progressing as planned, while the mill building is expected to be completed before the end of the current year. Engineering and design as well as the procurement of key ore processing equipment are almost complete.
The company believes this project could become a mine producing precious metals at a rate similar to the largest existing deposits in Canada at a cost that appears low compared to the gold mining industry.
In fact, the 2021 study estimates indicate a total cash cost of CA$720/ounce (or US$530/oz) and a total all-in sustaining cost [AISC] of CA$850/ounce (or US$625/oz), while AISC averaged $1,276/ounce among gold miners in 2022, according to this article on Gold.org.
With gold prices remaining elevated due to uncertain global economic conditions, the Blackwater Gold Project appears to have all the hallmarks of highly profitable gold production, and this will certainly have a very positive impact on the share price in the medium/long term.
After-tax and based on a 5% discount rate and assumed gold price of $1,600/oz (vs. 5-year average of $1,706 and vs. 10-year average of $1,474.79), the project has a net present value of CA$2.151 billion (or approximately CA$10.88 per ARTG:CA share or US$8.00 per ARGTF share), a payback period of 2.3 years and an internal rate of return [IRR] of 32%. The IRR defines a high probability of a profitable gold production project as investors typically use a 30% IRR threshold to screen for the most promising mines.
The company estimates that it will require initial capital of approximately CA$ 730 million (US$537.1 million) to CA$ 750 million (US$551.8 million) to achieve the first gold pour milestone before the end of 2024.
Artemis Gold has already spent 25% of the estimated initial capital expenditure and plans to continue funding it with the following resources. According to the company, there is financial support to continue the project until gold production begins. In fact, the company claims that as of the second quarter of 2023, it had more than CA$63 million in cash and cash equivalents, CA$180 million in unused payments from its streamers, CA$385 million in project loan facilities, and CA$40 million in cost overrun facilities.
As a result, available resources exceed the upper bound of the initial capital expenditures range by 14% and if this was not sufficient, the company could potentially raise an additional CA$28 million if all 26.3 million warrants currently outstanding were exercised before August 27, 2024, at a price of CA$ 1.08 per warrant.
So, it seems that the Blackwater Gold Project is certainly on track to begin production in about a year from now at a mine that should support a reasonably profitable business for the next 20 years.
Aside from reasonable gold price assumptions, the project appears to be well funded, although as also noted here, given the increased cost of capital, the discount rate could have been higher.
The Stock Valuation
Since mid-August 2023, the Artemis Gold stock price has increased significantly on the U.S. over-the-counter market. The upgrade roughly coincides with the release of the company’s Q2 2023 financial results and construction report, as the company states in this press release that it is on track to enter the gold production industry in about a year.
This stock has the potential to reach even higher share prices over time, especially after the Blackwater Gold Project begins producing gold. However, there is no doubt that the share price has risen sharply recently, perhaps too fast, and there does not seem to be much room left for further growth from this level. At least not enough to benefit from the expected gold price rally, fueled by hedging purposes amid the likely economic recession.
In fact, as shown by Seeking Alpha’s two charts below, at $4.48 per unit at the time of writing, shares are trading well above the 200-, 100-, and 50-day simple moving averages of $3.51, $3.63, and $3.81.
Additionally, shares are just a touch away from the top of the 52-week range of $2.50-$4.53, and as the 14-day Relative Strength Indicator of 70.68x suggests they trade close to the overbought level.
The ARGTF stock has a market capitalization of $868.13 million.
On the Toronto Stock Exchange, shares were trading at CA$6.09 per unit on the TSX-V as of this writing for a market cap of CA$1.21 billion. Shares are trading above the 200-, 100-, and 50-day simple moving average of CA$ 4.72, CA$ 4.87, and of CA$ 5.08, respectively.
Shares are close to the upper limit of the 52-week range of CA$ 3.48 to CA$ 6.20. Also, the trend in the 14-day relative strength indicator of 67.39 suggests that shares are near overbought levels.
The stock consists of 197.64 million shares outstanding, and institutions own 37.96% of the float (approximately 132.52 million shares outstanding).
Hence, from these levels, the positions are unlikely to benefit from the next upside in gold price, which is expected to occur between 2023 and 2024. It is better to wait for a significant drop in the stock price. A lower price also reduces the effect of the bearish sentiment in the gold price on the value of the asset, as the gold price though characterized by a long-term positive trend, does not develop steadily, but rather in a cyclical manner.
The opportunity to take advantage of a lower share price to initiate or further build a position in Artemis Gold could arise following the next Federal Reserve interest rate hike, which, as highlighted above, does not bode well for gold. Based on the strong positive correlation between Artemis Gold and gold futures, the shares of the potential gold producer could indeed deviate significantly from current high levels in the wake of monetary tightening.
Additionally, Artemis Gold would also face downward pressure due to a market beta of 1.11 (scroll down to the “Risk” section of this webpage of Seeking Alpha), suggesting that the shares are moving in the same direction as the stock market does, and interest rate hikes are generally not welcomed by investors in U.S.-listed equities.
Higher rates correspond to a lower present value which increases the chances of market overvaluation and, therefore, investors become less tolerant of riskier investments, and U.S.-listed shares are among these.
Another rate hike is more likely when Federal Reserve policymakers meet on November 1 than on September 20, interest rate traders indicate, although a tightening at the September meeting cannot be completely ruled out.
This analysis predicts a recession between late 2023 and early 2024. As gold continues to fulfill its function as a safe haven for equity investors amid emerging headwinds, the market price of the yellow metal is expected to rise significantly as a result of the projected recession.
Trying to profit from an increase in the price of gold is a must, but not directly from bullion, as this is almost always out of reach for a retail investor. It is better to invest in stocks of companies that follow the gold price because they produce the yellow metal, or like Artemis Gold Inc., wants to do so within a year.
With its strong correlation to the commodity, backed by a gold equivalent production project that looks profitable and has promising expansion prospects, Artemis Gold offers an intriguing opportunity to benefit from the next gold price uptrend.
However, the stock does not currently offer the best price to increase exposure to the commodity. It is better to wait for a significant pullback, which should come in a few weeks, as the Fed looks to tighten monetary policy further.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.