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A Buy Rating for Seabridge Gold

In this analysis, I decided to change my rating on the stock of the Canadian gold property developer Seabridge Gold (NYSE:SA) and raise it to a Buy rating from the Sell rating assigned in the previous analysis.

The rating upgrade is based on a changing perception of future gold prices: they are expected to recover significantly in the coming months, implying strong upside potential for Seabridge Gold's share price, which is highly correlated with the positive performance of the metal.

Why Seabridge Gold Attracts Gold Stock Investors

Led by competent management, this company has been able to grow gold resources much faster than shares outstanding (997% increase in mineral resources compared to 191% increase in shares outstanding since 2003, according to the company's September presentation 2023).

As a result, this stock has managed to attract more and more attention in the market while staying on track with the yellow metal by copying the underlying positive trend, despite being just an explorer throughout the entire period. Therefore, the stock price has been up about 400% since January 2003 (or up 20% annually) on a 455% increase in the gold futures price, compared to a 410% increase in the US stock market as measured by the S&P 500 (SPX) over the same span.

So, for an investor who bought shares of Seabridge Gold Inc. 20 years ago with a long-term perspective, in terms of growth opportunities, this investment offered optionality roughly in line with other investments, even though Seabridge, unlike many good quality U.S.-listed stocks, did not pay any dividend.

A position that has exposure to management's ability to keep Seabridge Gold Inc.'s growth potential up to date and to make the most of gold's uptrend can have a satisfying yield effect on the retail investor's portfolio over the very long term in my view.

However, by taking a position in Seabridge Gold Inc., you can also benefit from the sharp increases in the price of gold that occur from time to time. The price of gold bullion shows an upward trend over time, like many economic variables, but also not steadily, as it evolves due to fluctuations that are sometimes much more pronounced than at other times. This behavior is illustrated by the following chart from Trading Economics for gold bullion over the past 25 years.

Source: Trading Economics

This means that with Seabridge Gold Inc. you can also take a huge step forward if you want, and against an average stock price gain of 20% per year, you can potentially achieve much higher returns in a significantly shorter time frame.

As was the case, for example, due to the 2007/2008 financial crisis, when investors eagerly sought gold as a safe haven to hedge against the associated headwinds: At that time, the sharp rise in the price of an ounce of gold caused Seabridge Gold Inc. shares to reach an all-time intraday high of $39.50 per share on October 16, 2007. Compared to a 20-year moving average of currently $14 for SA's share price, the intraday high represented a strong 182% upside potential, achieved in a matter of months versus a decade of patiently holding the position.

Source: Seeking Alpha

The Catalyst for Gold's Recovery: The Anticipated Recession

Aside from some short-term upside for gold prices due to the Fed's mid-June pause in interest rate hikes and signs of a robust economy despite elevated inflation/higher cost of money, gold prices have been in a general downward trend since the previous analysis in late April.

Since then, gold prices have fallen 4% from $1,987.5 an ounce on April 27 to the current price of $1,909 an ounce, pushing shares of Seabridge Gold Inc. down more than 20% as a result of the strong positive correlation with the gold price and the high beta gold coefficient.

Looking ahead, it can be very useful for the retail investor – who may be interested in the upside potential of gold prices through Seabridge Gold Inc. – to know that the yellow metal is likely on the verge of a major leap forward due to macro headwinds that will further strengthen gold's safe haven properties as they approach.

These headwinds can be traced back to a single matrix consisting of recession risk for the US economy. This risk is becoming increasingly apparent as economic data is brought in and investors may be concerned after some leading economists released opinions that could serve as confirmation of the next economic situation ahead.

A second consecutive month of US annual inflation accelerating from 3.2% in July to 3.7% in August, according to Trading Economics, could prompt further monetary tightening by the US Federal Reserve [Fed], or a restrictive policy maintained for longer than previously planned.

The CME FedWatch Tool website notes that the Fed is likely to keep rates on hold at its next meeting on September 20, 2023, but the probability of another rate hike rises to nearly 41% from the November 1, 2023 meeting. Higher interest rates lead to an increase in the cost of raising loan capital, which does not bode well for production and services as consumption and business investment are discouraged.

The manufacturing sector has contracted since November 2022 apart from a small interruption in April, while services activity is showing worrying signs of a slowdown, according to the latest reading of the S&P Global US Manufacturing PMI and the S&P Global US Services PMI, reported by Trading Economics, here and here, respectively.

Labor market conditions are beginning to deteriorate as the unemployment rate rose 30 basis points to 3.8% in August 2023, and this could herald the start of a new wave of layoffs following those decided by tech companies in previous months.

That the economy could falter was to be expected after interest rates rose so sharply (never so sharply since the 2007-2008 financial crisis) that inflation fell from a 40-year high of 9.1% in June 2022.

Among the economists who are convinced that the next step in the business cycle will be a recession is Duke professor and Canadian economist Campbell Harvey because the indicator he designed (3-month Treasury yields vs. 10-year Treasury yields) inverted months ago (3-month yield higher than 10-year yield) pointing to a recession as early as 2024, as reported by Yahoo Finance on August 23, 2023.

Recently, the recession thesis has also been embraced by economist David Rosenberg of Rosenberg Research (see this Business Insider article here) according to whom a recession will almost certainly happen.

Why Seabridge Gold Could Rise Sharply if Gold Prices Turn Bullish

As a safe haven against the headwinds expected from the recession, gold prices will recover and eventually experience a bull market in my opinion. Analysts at Trading Economics are actually forecasting a higher price per ounce of $2,011.97 in 12 months, compared to the price of $1,909 at the time of writing.

Based on a strong positive correlation, as shown in the chart below from Seeking Alpha, Seabridge Gold Inc. should follow the yellow metal and also trade higher by recovering from current levels.

In fact, the yellow area below the graph depicting the correlation between SA stock price and gold futures (GCV2023) over the past year has been mostly above zero and near the upper limit of the -1 to +1 interval.

Source: Seeking Alpha

About Seabridge Gold and Its Resources

Toronto-based Seabridge Gold Inc. has increased mineral resources by 997% over the past 20 years and today consists primarily of two projects that the exploration team oversees at the Kerr-Sulphurets-Mitchell [KSM] property in British Columbia, Canada, and Courageous Lake Property in the Northwest Territories, Canada.

KSM is a large metal project that will be developed into a gold/copper mine in the future. The yellow metal will be the main source of revenue as at least 75% of revenue will come from the sale of payable ounces, according to the estimate of available reserves and current metal prices.

As is always the case for mining projects involving the depletion of the territory, the necessary permits are required and must be granted by the relevant authorities. From this point of view, KSM is currently in an advanced stage of work, as the mineral site already has some certifications from local authorities and approvals from federal authorities. Future activities to further increase mineral resources, which, as previously mentioned, represent a strong growth catalyst for this stock, should therefore be facilitated.

KSM is the largest project representing the stock's growth potential in the market and accounts for a large portion of the total resources 100% owned by Seabridge Gold Inc.

In 2022, a feasibility study was completed for KSM, showing the potential for annual recovery of over 1 million ounces of gold, as well as production of 178 million pounds of copper and 3 million ounces of silver, based on an estimate of proven and probable reserves of 47.3 million ounces of gold combined with 160 million ounces of silver and 7.3 billion pounds of copper, according to the company's presentation here.

In addition, for the future production of metals over 33 years of mining activity, this project does not cover even 20% of the total resources, while 63% of the total reserves belong to the highest category of proven reserves. Thus, the latter has the highest degree of reliability, which bodes well for the feasibility of the financial project.

Net of byproducts, the PFS for KSM implies gold cash operating costs of $275/oz and all-in total gold costs of $601/oz.

A Preliminary Economic Assessment (PEA) for KSM was also completed in 2022, including the scenario in which two additional deposits of Kerr or Iron Cap copper deposits would be exploited. The study indicates upside potential for an additional 39 years of mine life extension, with mining operations expected to produce 368,000 ounces of gold annually, along with 366 million pounds of copper and 1.8 million ounces of silver.

In the base case, the PFS suggests that the initial investment could be fully recovered in about 4 years and that the internal rate of return [IRR] for the project is 16.1%, which is not very attractive it must be said, as investors consider a project profitable when it has an IRR of at least 25-35%. In contrast, the 39-year mine expansion project has an IRR of almost 19%, and the investment to finance this mine expansion will be paid back in about 6.2 years.

The two projects have estimates based on assumption prices of $1,742/oz gold and $3.53/lb copper, which is not at all overly optimistic compared to the averages of the past five years. However, if these price assumptions are brought into line with current prices, the IRR and payback ratios would increase significantly, and the idea that these ratios could be much better than the base case also acts as a powerful catalyst for higher stock prices.

The construction and operation of the KSM will take place in a joint venture with a suitable partner that Seabridge is looking for and who will also be given the burden of preparing the feasibility study.

Seabridge's total mineral resources currently include the Courageous Lake property in the Northwest Territories, Canada, as this large undeveloped project hosts approximately 6.5 million ounces of gold in gold reserves at an average grade of 2.2 grams of metal per ton of mineral.

Other smaller projects in Seabridge's portfolio include:

• Drilling activities in northern British Columbia, just 20 air kilometers from the KSM project, on the copper-silver property and testing a new porphyry gold-copper system in the underlying breccia zone. The project is known as the Iskut Project and covers a total of 294 km2 of land.
• Exploration activities in Nevada are targeting fault mineralization deposits on a property that has the potential to host large mines. The project is known as “The Snowstorm” project and is located on a 103 km² property directly at the intersection of three major gold belts in Nevada and close to the Nevada Gold Mine's Barrick Gold Corporation (GOLD) (ABX:CA) and Newmont Corporation (NEM) (NGT:CA) JV Twin Creeks mine and JV Turquoise Ridge mine.
• Exploration activities are targeting high-grade mineralized deposits in the Yukon Territory in northwest Canada on a 314 km2 site called “The 3 Aces Project”.

The Financial Condition

For the second quarter of 2023, Seabridge reported net income of $9 million, or 11 cents per share, below net income of $19.1 million, or 24 cents per share, in the same period in 2022. During the quarter, Seabridge reported a $47.7 million investment in its mineral projects, with such spending increasing 76.5% year-over-year.

As of Q2 2023, total cash was $206.2 million against total debt of $458.2 million. Its 12-month operating income was a loss of $17.6 million, while debt generated interest expense of $1.5 million in the trailing 12 months through the second quarter of 2023.

The Stock Valuation

Shares of Seabridge Gold Inc. were trading at $10.89 apiece as of this writing, giving it a market cap of $911.65 million.

Source: Seeking Alpha

Shares have declined significantly since late July, trading below the 200-day simple moving average of $12.63, below the 100-day simple moving average of $12.83, and below the 50-day simple moving average of $12.02.

The stock price has fluctuated between a floor of $10.03 and a high of $16.18 over the last 52 weeks. The current share price is also compelling as it is near the floor of the range.

As we have seen, shares are very positively correlated with the price of gold, and after hitting very low levels, they now offer very good upside potential for strong returns if the price of gold rises. As we have seen, the economic recession that the cycle seems to be heading towards should trigger a bull market for the yellow metal.

Additionally, the 14-day relative strength indicator of 36.42 suggests that the stock price is not so far from the oversold level.

Source: Seeking Alpha

However, there is still room for Seabridge shares to reach a lower price level than the current one, under pressure from the restrictive monetary policy that the Fed plans to maintain in the coming months.

If interest rates are high, this cannot stimulate demand for gold and therefore the recovery of SA shares, because the opportunity cost of forgoing bonds for the metal exceeds acceptable levels.

However, interest rates will push the economy into recession in my opinion and to protect against the resulting headwinds, I think investors will return to gold, which offers a safe haven that many other assets do not provide or provide to a much lesser extent.

The current price levels for SA shares are very interesting. However, given the possibility that they could become even more attractive in the coming weeks before the expected recession hits, it is worth waiting a bit before buying SA shares.

While there is a risk that there won't be a recession and therefore an upside catalyst for Seabridge's share price, this is probably not high based on the assessments of the economists mentioned and the information in this analysis.

And even if it turns out to be a soft landing instead of a recession, current (or lower than current) price levels do not pose a significant risk of loss in my view.

On the Toronto Stock Exchange, under the (TSX:SEA:CA) symbol, shares were trading at CA$14.77 per unit as of this writing for a market cap of CA$1.24 billion. Shares are trading below the 200-day simple moving average of CA$ 17.02 and below the 50-day simple moving average of CA$ 16.13.

Shares are significantly below the middle point of the 52-week range of CA$ 13.83 to CA$ 21.78. Additionally, the 14-day RSI trend of 36.22 suggests that shares still have room to move lower and form more attractive prices in a high-interest rate environment.

Conclusion

Compared to the previous analysis, Seabridge Gold Inc. shares now receive a Buy rating due to the improved gold price outlook. With prominent economists and the likely trajectory of the current macroeconomic situation predicting a recession, the potential downturn in the business cycle will provide a huge upside catalyst for the safe haven gold in my view.

The shares of Seabridge Gold Inc. are positively correlated with the precious metal and will most likely follow bullish price movements of the precious metal.

The shares of the Canadian explorer, whose ability to increase resources significantly faster than the outstanding shares makes the shares very attractive on the market, have very interesting price levels that could become even more attractive under the influence of a restrictive monetary policy.