Artemis Gold: A Little Higher Possible Before The Recession Hits (OTCMKTS:ARGTF)

This Analysis Recommend a “Hold” Rating For Artemis Gold Inc.

This analysis changes the recommendation rating for Artemis Gold Inc. (OTCPK:ARGTF) (TSXV:ARTG:CA), a gold developer in British Columbia, to “Hold” from the previous rating of “Buy” as gold prices remain robust following a rate pause, but no ‘significant’ upside potential is seen from current levels.

The previous analysis suggested a “Buy” rating for Artemis Gold: this stock offers retail investors a viable solution to benefit from gold price cycles, even if they do not invest directly in physical gold, as this is typically out of their reach as an investment. Direct investment in physical gold involves the allocation of funds that retail investors do not normally have, but only larger investors such as institutional investors or banks can. Artemis Gold was seen reaping the benefit from rising gold prices as its strong positive correlation with the yellow metal came from progress in open pit construction in the mining district and the friendly jurisdiction of British Columbia. It also suggested buying shares after the Fed raised interest rates, which would have weighed on gold prices for a while and created more attractive entry points in Artemis Gold stocks. Tight interest rate conditions remained in place, and although the Fed has not raised interest rates since July 26, 2023 (by 25 basis points to 5.25% to 5.50%), the “higher for longer” monetary policy stance was more than enough to dump gold between September and November and create more accessible valuations for Artemis Gold stocks.

Reasons for the “Hold” Rating on Artemis Gold Shares

Current share prices are attractively high based on past performance, but retail investors may want to wait a little longer before taking profits. While the share price is not expected to rise enough today to warrant a new buy rating, holding the stock still offers the opportunity to benefit from further gains ahead of the expected 2024 recession. Until the negative sentiment enters the cycle, Artemis Gold will benefit from the positive influences on gold from the interest rate pause, as well as the expectation of interest rate cuts in 2024 and the general renewed optimism in the markets as a result of the Christmas trading season. Some of these macroeconomic factors are already impacting the market value of the US dollar, which neared a five-month low in early trading on Tuesday, December 26, putting upward pressure on the price of its counterpart gold. Gold prices rose above $2,060 an ounce on Tuesday, extending gains by about 0.4% from the previous week. The yellow metal appears to be largely benefiting from a weaker dollar and falling bond yields. The dollar and interest rates are being hurt by easing inflation in the US as the latter increases speculation that the Federal Reserve will start cutting interest rates next year.

The Impact of a Recession on Artemis Gold

It’s also true that the economic recession, given the impact of the resulting headwinds on investors’ portfolios, will likely increase the bias toward gold as a safe-haven asset, which ultimately bodes well for Artemis Gold stock. However, investor dissatisfaction will initially mean that Artemis shares, like other gold stocks, will have to pay the price of the pessimistic mood on the US stock market for a while. The latter dynamic is supported by a 24-month beta market of 1.02x (scroll down the Seeking Alpha pages here and here for the information) for both symbols of ARGTF and ARTG:CA. Aside from the initial dissonance that may occur shortly after the onset of the recession, Artemis’ stock price generally follows gold price movements, as evidenced by the strong positive correlation between the stock price and the gold price. This analysis looks at gold futures prices (GCM2024) as a benchmark for gold prices.

In the lower part of the chart, the strong positive correlation between the ARGTF stock price and GCM2024 gold futures is represented by a yellow area, which has been in positive territory for almost all of the last 5 years.

In the lower part of the chart, the strong positive correlation between the ARTG:CA stock price and GCM2024 gold futures is represented by a yellow area, which has been in positive territory for almost all of the last 5 years.

The reader should be aware that a positive correlation does not imply the same or similar performance (return) between the securities. Although assets are positively correlated, performance between these assets can vary significantly. Rather, positively correlated means that Artemis stock is most likely to behave bullishly when gold is bullish, while Artemis stock is most likely to behave bearishly when gold is bearish.

The appointment of another “buy” rating for Artemis will instead be delayed until the recession has adversely affected US stocks, including Artemis. The headwinds should result in a more attractive valuation for this stock and prepare for the expected safe-haven gold bull market.

Economists Predict a Recession: Signs of Pain for Consumption and Investment. The Workforce will be Next

These economists expect the economy to be gripped by a recession next year:

Michael Pearce, Chief US Economist at Oxford Economics, Chryssa Halley, Chief Financial Officer of the US Federal National Mortgage Association (Fannie Mae), and David Rosenberg, Economist at Rosenberg Research. Former US Treasury Secretary Larry Summers also predicted that the next economic cycle will be a recession as early as 2024, and Luke Tilley, Chief Economist at Wilmington Trust, says that the US economy is not recovering but weakening, which will soon be clear to everyone, implicitly indicating an economic recession.

Duke professor and Canadian economist Campbell Harvey also predicted a recession in 2024 due to the inverted yield curve for the 10-year, 3-month U.S. Treasury bond spread. The latter is still in negative territory: 3.882% for 10-year Treasury bonds versus 5.449% for Treasury bonds with a term of 3 months.

The Federal Reserve’s recession signals since March 2022, together with increased inflation, have weighed on consumption and investment, which are the pillars of the economy. In terms of negative trends in consumption (nearly 70% of US gross domestic product), these well-known US retailers are sending a very telling message as their sales and same-store sales have declined. Also, these retailers have lowered their forecasts for future sales in the face of dismal demand.

These top retailers reported lower sales and generally gave a gloomy sales outlook: Best Buy Co., Inc. (BBY), a specialty retailer of computer and mobile phone products in North America, and Burlington Stores, Inc. (BURL) – the fashion-focused retailer for branded clothing known as off-price stores in the USA. Also, DICK’S Sporting Goods (DKS) – a specialty retailer focused primarily on sporting goods in the United States, and Kohl’s Corporation (KSS) – a department store that offers branded clothing, footwear, accessories, beauty and home goods through its stores and websites in the United States. Also, Nordstrom, Inc. (JWN) – a fashion retailer of clothing, footwear, beauty, accessories and home goods for all ages, women and men, and Lowe’s Companies, Inc. (LOW) – a home improvement retailer in the United States.

Most recently, Nike (NKE) – the athletic footwear and apparel giant – spooked investors in the week before Christmas 2023 when management warned of near-term sales growth, sending ripples across consumer discretionary stocks.

Additionally, Walmart (WMT) will integrate Affirm’s (AFRM) “buy now, pay later” technology into its self-checkout lines to minimize the risk of customers changing their minds before completing the order and to increase their loyalty despite current economic woes.

The darker outlook for future demand is not only reflected in cooling actual sales and lower sales forecasts, but it also discourages companies from investing in growth plans. A strong sign in this sense is the fact that companies are now less willing to raise funds through IPOs on the US stock market, with the number and value of deals still well below 2021 levels.

As soon as these negative consumption and investment trends are accompanied by a rise in unemployment, a recession will officially occur. To protect their margins from declining consumer spending, companies will undertake cost-cutting initiatives. Since labor costs account for the majority of operating costs, cost reduction initiatives must necessarily include workforce reductions.

There have been layoffs at several companies this year, particularly in the tech sector, but more are expected in the coming months.

Andrew Challenger, a labor expert and senior vice president of Challenger, Gray & Christmas, Inc., said two weeks ago that they “expect to continue to see layoffs going into the New Year”.

To benefit from the gold bull market amid recessionary headwinds, investors may want to consider shares of Artemis Gold Inc. However, they should not increase their holding now, as this analysis, as already explained, assumes that the market will offer more attractive entry points as things move forward a little.

Stock Valuation: Stocks are Trading High Before the First Gold is Poured

Shares of ARGTF traded at $4.70 per unit giving it a market cap of $900.43 million as of this writing. Shares are significantly above the 200-day simple moving average of $3.89 and above the 50-SMA of $4.31.

Shares have a 52-week range of $2.91 to $5.07 implying that they are much closer to the upper bound of the interval than the lower bound.

The chart below illustrates the 14-day relative strength indicator of 53.96x which signals that shares are not overbought yet despite trading significantly above the averages seen before, but with the looming recession, there is a higher risk they pull back much more than what they can still gain from current levels amid weaker US dollar and expectations of Fed’s rate cuts in 2024.

The same conclusions can be drawn for the stock traded on the Canadian market under the symbol ARTG:CA. Shares traded at CA$6.30 per unit giving it a market cap of CA$ 1.25 billion as of this writing. Shares were significantly above the 200-SMA of CA$5.26 and above the 50-SMA of CA$5.88. Currently, shares are not far from the upper limit of the 52-week range of CA$4.10 to CA$6.90.

The 14-day relative strength indicator of 53.35x signals that shares are neither overbought nor oversold, but as explained, still not enough to move beyond a “Hold” rating from these levels.

Due to the robust gold price, these estimates may be unjustified until the company begins gold production. Now Artemis Gold is called upon to factually support what is promised in the corporate presentations and technical documentation. The risk is that the bullish sentiment in the price of gold leads to an overvaluation of this security compared to what it can actually deliver in terms of earnings and cash flow and growth prospects. But whether the shares are really worth what the stock market currently indicates can only be found out when production begins, and the Blackwater gold mine is actually in operation. This is the risk of a Hold rating on Artemis stock today. This risk can be mitigated as follows: 1) For now, it is better to stick with the Hold rating as the stocks still have room to benefit from the bullish sentiment for gold due to cooling inflation. The latter factor increases expectations of interest rate cuts in 2024 and leads to a low US dollar. When interest rates or the US dollar are either projected to be lower or actually fall, gold prices are boosted by the subsequent bullish sentiment. 2) Take some profits as soon as headwinds from the recession, expected well into 2024, threaten to hurt the stock market and thus Artemis stock. 3) buy Artemis stock once the stock has factored in the bearish sentiment of the expected recession. Stocks will most likely be much cheaper ahead of the bull market in safe-haven gold and they will represent a good margin of safety ahead of the uncertainty of the first financials from the open pit operations at Blackwater.

About Artemis Gold Inc. and its Goal of Pouring the First Gold Equivalent in the Second Half of 2024

Artemis Gold Inc. is a Canada-based gold development company and is currently exploring gold properties in mining-friendly jurisdictions such as central British Columbia.

In central British Columbia, Artemis Gold is developing the Blackwater Gold Project, which is held through its 100% owned subsidiary “BW Gold Ltd.”, and is located approximately 110 km southwest of Vanderhoof and appears to be well connected to major roads and highways.

With the Blackwater project, the company aims to establish an open pit mine for the extraction of gold and silver as well as the installation of facilities for the processing of gold/silver ore, but also to conduct silver/gold trading activities. The project also includes the operating and financial activities in connection with the closure of the mine.

Gold/Silver production activities are expected to last approximately 22 years. The commissioning of the mineral processing facilities will follow the start of mining operations with a few months lag and will go through different phases.

In Phase 1, which will last five years, processing activities will be carried out at a nominal milling rate of approximately 16,500 tonnes per day [t/d] or 6 million tonnes per year [tpa], although throughput will increase as the phase advances to the Phase 2 of the project. The company estimates that it will need initial capital of approximately CA$ 840 million (US$633 million) to fund the first phase of activities. Since mine construction began, the company has spent 33.4% of the estimated total capital. The remainder will be funded with CA$73 million in cash as of September 30, 2023, along with C$62 million in gold/silver streams, plus C$385 million in project credit facilities (including capitalized interest) and C$40 million in cost overrun facilities. Under the project credit facility, the first fund draw of CA$ 150 million was completed a few days ago and will be used to complete the construction of the open pit mine. There is an opportunity to receive an additional $28 million from 26.3 million warrants with an exercise price of $1.08 expiring in August 2024.

In Phase 2, which will also run for five years, the facility will process around 12 million tonnes of gold/silver ore per year, with throughput accelerating a few months before Phase 3 of the project starts.

Phases 3 and 4 will process approximately 20 million tons of ore per year and these phases will each last approximately 6 years.

Mine construction started in the first quarter of 2023, and activities appear to be progressing in line with the development project, while open pit construction as of September 2023 was nearly 50% complete.

According to a 2021 technical study, the Blackwater gold project is expected to begin producing the salable precious metal sometime in the second half of 2024 at a rate of 339,000 ounces of gold per year (or 7.453 million for the entire mine of life) – in line with mid-sized producers – from an estimated 12.41 million gold equivalent ounces of measured and indicated resources which are characterized by average gold grade of 0.65 grams of metal per ton of ore.

The company sees the potential for Blackwater to become a significant precious metals producer at a lower cost compared to many other players in the industry. Blackwater’s total all-in sustaining costs [AISC] item is estimated at CA$850/oz (or US$625/oz) in the 2021 technical report, while miners currently incur the following AISCs: an AISC of $1,315/oz averaged across all global miners in Q2-2023 and an AISC of $1,523/ounce averaged across North American miners in Q2-2023.

Underpinned by a scenario of robust gold prices as the highly uncertain outlook calls for increased reliance on gold’s hedging properties, Blackwater bodes well for Artemis’s share price in the medium/long term.

This expectation is based on the fact that the Blackwater project has a significantly lower assumed gold price of $1,600 versus current levels which are instead in line with the global macro situation and geopolitics. After taxes and based on a 5% discount rate the project has a present value of C$2.151 billion, or approximately C$10.88 per share of ARTG:CA or $8.18 per ARGTF share. Assuming that the share price will be exposed to the fluctuations in gold prices, the growth prospects for the Artemis Gold stock are very interesting, provided Blackwater meets the study’s economic estimates and the gold price remains robust.

The project has a payback period of 2.3 years, and the internal rate of return (IRR) of 32% is high, making Blackwater a highly profitable project for future gold production in British Columbia.

Conclusion

This stock promises large production of gold-equivalent ounces at a low cost in British Columbia, home to well-known precious metal ore deposits and a traditionally friendly mining region. The open-pit mine is expected to produce its first gold in the second half of 2024 and the construction appears to be receiving financial support in line with the plan.

Gold production is expected to roughly coincide with a gold bull market as the precious metal will have strong demand for hedging strategies against the looming recession in 2024. The impact on Artemis’ share price on both stock markets will be very positive due to a strong positive correlation between each of the two stocks and the gold prices.

The US economy will enter a recession, as forecast by economists, and predicted by the inverted yield curve of the 3-month to 10-year US Treasury spread, while there are signs of weaker consumption and a slowdown in investment that are paving the way to the negative cycle. The framework will be complete when the labor market also begins to pay the price for the Fed’s recession signals.

The headwinds from the recession will initially lead to a pessimistic mood for Artemis, as with all other US-listed stocks. Therefore, this analysis does not recommend buying the stock now, but rather sticking to the recommendation to hold for a while and benefit from rising gold prices given the weakening US dollar and the prospect of interest rate cuts in 2024.

Then in the future, due to the headwinds of the recession, it may be possible to buy shares of Artemis Gold at a more attractive price.

On paper, Blackwater should do very well and be accretive for the value of the stock, but the mine is not yet operational, and it will be a different matter when the metal has to be extracted and processed and production inputs have to be at least offset with cash inflows. Today, stocks are at a very high level from a technical perspective and there is a risk that these are not justified as gold production has not yet started. As part of a strategy to lower the risk, the retail investor may want to take some profits as soon as the recession begins to spook the equity markets.

But for now, retail investors may want to continue holding shares of Artemis Gold.

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.