Aris Mining Is Well-Positioned To Take Off With Bullish Gold (TSX:ARIS:CA)
Aris Mining expects gold production in Colombia to increase by over 70% in 3 years and has potential for further growth with Soto. Find out why ARMN stock is a Buy. Aris Mining Corporation (TSX:ARIS:CA) is a gold mining operator in Colombia and its stock price has increased 18.5% over the past five years. This is due to the addition of the Segovia gold mine and the company's portfolio of mineral development projects, including the large undeveloped Soto Norte gold project, and the development of the Marmato Lower Mine. Aris Mining believes that gold production in Colombia can reach around 400,000 ounces, which undoubtedly represents a sharp increase of more than 70% compared to the approximately 235,000 ounce of gold in 2022. The other two projects closest to the first planned growth milestone in Aris mining Corporation's pipeline are the optimization and improvement of the segovia mine, which will enable the company to achieve its annual production growth target of 400,00 ounces. This means that despite recognizing the growth potential, which, once realized, will allow Aris' share price to follow the underlying positive trend of the gold price.
Pubblicato : 2 anni fa di Alberto Abaterusso in Finance
This analysis assigns a Buy rating to shares of Aris Mining Corporation (TSX:ARIS:CA), a Canadian gold producer in Colombia.
This is a gold mining operator that could have given a significant boost to its future growth thanks to two milestones achieved in the last 18 months, essentially as follows:
• The addition of the consistent cash flow generator of the Segovia gold mine (132 km northwest of Medellin, Colombia) to the company's portfolio of mineral development projects, including the large undeveloped Soto Norte gold project (7 km northwest of California, Colombia), following the merger of Aris with GCM Mining, a well-known mid-sized gold mining company in Latin America, in September 2022. Although indirectly, Aris Mining Corporation fully owns the Segovia underground gold mine.
• In July 2023, the company received the green light from the local regulatory authority to build the Marmato Lower Mine, which will provide access to wider porphyry mineralization. This additional gold ore resource is located below current upper mine operations and once operational, will increase the production profile of the Marmato mine, located 85 km south of Medellin, Colombia, meaning the facility will produce five times its current production and could deliver gold ounces for more than twenty years. Although indirectly, Aris Mining Corporation fully owns the Marmato underground gold mine.
Aris Mining therefore believes that gold production in Colombia can reach around 400,000 ounces, which undoubtedly represents a sharp increase of more than 70% compared to the approximately 235,000 ounces of gold in 2022.
But it's not over yet. Regarding the development of the Soto Norte project, should Aris Mining Corporation exercise an option to increase its shareholding in the joint venture (JV) from 20% to 50%, Soto Norte has the potential to make a further strong contribution to Aris future ounces in the order of 50% of an estimated annual gold production of 450,000 ounces. The Soto Norte project is being developed by Aris Mining Corporation in a joint venture with Mubadala Investment Company - a wholly owned investment vehicle of the Government of Abu Dhabi - with the UAE partner holding 80% of the JV. The project is now awaiting environmental approval from the Colombian regulatory agency, which must give the green light for mining development to proceed.
In addition, there is the Toroparu Project, located 213 km west of Georgetown, Guyana, with its total Measured and Indicated Mineral Resource of approximately 5.4 million ounces of payable gold grading 1.45 grams of gold per ton of mineral, according to the technical report dated March 31, 2023. This gold ounce potential is important as it offers many chances for the company to grow further in the future and although no financial viability has been demonstrated as they must be upgraded to reserves first, they bode well for Aris Mining Corporation's strong growth plan. Currently, Aris Mining Corporation, which owns 100% of the Toroparu Project, albeit indirectly, is engaged in studies aimed at updating and optimizing the development plan for the Guyana asset.
However, the mineral projects closest to the first planned growth milestone in Aris Mining Corporation's pipeline are the optimization and improvement of the Segovia mine including the expansion of the capacity of a processing plant, and the development of the lower zone of the Marmato mine.
These projects will enable Aris Mining Corporation to achieve its annual production growth target of 400,000 ounces. However, this will not happen until 2026 at the earliest, as the lower zone of the Marmato mine suggests that the first gold cannot be poured until the third quarter of 2025.
This means that despite recognizing the growth potential, which, once realized, will allow Aris' share price to follow the underlying positive trend of the gold price much more faithfully than today, the shares remain, for now, fully exposed to fluctuations in the price of gold.
The Positive Correlation Between Aris Mining and Gold Prices
This can be observed in the chart below: Although the two assets in the chart are positively correlated, Aris Mining Corporation shares have only seen an 18.5% increase over the past five years. This trend has not been enough for ARIS to avoid an underperforming trend against gold futures, a benchmark for the gold price that, on the other hand, showed an underlying trend that was resolutely projected upwards. The gold price thus exceeded ARIS.TO and recorded an increase of more than 30%.
Holding a position pending the realization of growth projects and therefore regardless of the development of the gold price exposes the investment to the following risks.
There is a risk of loss if the investor urgently needs his money back and the share price has been dampened by a sharp decline in the price of gold. Or that investors are missing out on the opportunity to invest in other assets that have become so attractive that, in comparison, continuing to hold gold and gold-backed assets like Aris Mining is just an uncompetitive way of employing money.
Instead, investors should consider Aris Mining Corporation to benefit from the strong gains that gold prices experience from time to time, taking advantage of the marked positive correlation that exists between the stock price and the price of the yellow metal.
The chart below illustrates this positive correlation between the 2 assets.
This positive correlation, represented by the yellow area graph, is also very strong, as the area was almost always above zero and close to the upper limit of the -1 + 1 correlation coefficient range. This means that when the price of the yellow metal rises, so does the share price. The reader may be confused by the fact that the share price has increased much less than the price of gold in recent years. However, these performances are the result of the difference between prices five years ago and current prices and explain nothing in between. They are therefore not a measure of the relationship that exists between the price of gold and the price of Aris Mining’s stock.
The correlation between the securities is undoubtedly positive, although Aris Mining Corporation's stock price on the x-axis has a much smaller slope than the precious metal price on the x-axis. This trend comes as Aris Mining Corporation has fallen much faster than the gold price during the bearish sentiment around the precious metal. As previously mentioned, investors should be aware of this risk if they are seriously considering holding shares in this company for the long term, well ahead of the company's 2026 production growth target.
In the chart above from Seeking Alpha, gold futures (GCZ2023) are the benchmark for gold.
If the investor instead wants to consider Aris Mining Corporation to gain exposure to the next rally in the gold price, which promises to be driven by a strong catalyst, as explained below, then his strategy will be positioned to benefit from a high beta-gold coefficient.
Gold beta measures how much the stock price of Aris Mining Corporation could rise if the gold price increases by a certain percentage.
For this purpose, the last 52 weekly ARIS stock price returns are the output, while the 52 weekly gold futures returns are the input to a linear model that produced the following results. Although the estimate of the beta gold coefficient should be treated with caution given the relatively low value of the coefficient of determination R2 of the hypothetical relationship between gold prices and stock prices, a beta gold value of 1.7 suggests that the stock price could potentially rise sharply during a strong recovery of the gold price. R2 is 17%.
As for the R2, which is 17%, this can be increased if more input variables are added to the model and/or the model is run for a longer period than 52 weekly returns. The model takes into account weekly returns from the last 52 weeks and not further in the past, based on the idea that markets in the future will look more like they did in the last 52 weeks than in previous years as certain macroeconomic and geopolitical factors continue to be the case. These are increased inflation, restrictive monetary policy, conflicts in Ukraine, and geopolitical tensions.
Now gold, which has lost a significant 6.2% per ounce over the past month, is under strong downward pressure from a rise in U.S. Treasury yields and the strong U.S. dollar following the Federal Reserve's "higher for longer" policy. The price per ounce is likely to remain subdued for a while due to the same factors, but thereafter there should be a strong recovery let's say sometime in late 2023/early 2024.
The Upside Catalyst for the Price of Gold
The catalyst for a sharp rise in gold prices could come from the expected economic recession as early as 2024 because the strong headwinds from the worsening cycle will strengthen gold's safe-haven qualities, which investors view as a protection for their portfolios.
The recession should follow a significant deterioration in consumer demand, which alone accounts for nearly 70% of US GDP.
US consumer demand is weakening because it reflects US consumers' views on their incomes, businesses, and labor market conditions in the near future, and this view is no longer optimistic. US consumers gave the three components just mentioned a score of 70. This is low and has historically been associated with a recession within a year of the survey.
US consumers, or 70% of the US GDP, are struggling with this problem: higher borrowing costs, which have to stay “higher for longer” maybe even after the Fed Funds rate reaches the expected peak of 5.6% this year, combined with core inflation still well above the 2% target, weighs like crazy on the purchasing power of US households.
That demand is also weighed down by a record $1 trillion in outstanding credit card balances with stellar interest rates and more than $1.7 trillion in federal student loan debt, and it appears no longer able to rely on excess savings accumulated during the COVID-19 crisis.
This week new signs of economic recession have emerged:
• September 2023 saw the lowest private sector job growth since January 2021, which also fell short of expectations.
• New orders growth is losing momentum as high labor costs and rising inflation continue to dampen consumer demand, which in turn impacts business activity. If prices stop rising so quickly, the services sector will likely stagnate or shrink. This interpretation of the ISM services index is confirmed by S&P's Global US services PMI reading in September which indicated:
This situation of high inflation/high borrowing costs is expected to persist, increasing the likelihood of a sharp economic slowdown, even as analysts of large banks continue to suggest a soft landing.
This situation of high inflation/high borrowing costs is expected to persist, increasing the likelihood of a sharp economic slowdown, even as banking analysts continue to suggest a soft landing.
Inflation threatens to worsen as a result of the pressure on the oil supply. OPEC+'s policy of reducing the supply of barrels of oil is now getting a boost from Russia in retaliation for the West's intervention to support the Kyiv government against the Russian invasion.
Regarding borrowing costs, as the labor market remains at historically tight levels, the likelihood that the Federal Reserve will need to lower core inflation through further aggressive monetary policy on interest rates increases significantly.
As a result, an economic recession is predicted by Duke professor and Canadian economist Campbell Harvey and more recently Michael Pearce, chief US economist at Oxford Economics, said:
A recession as early as 2024 will result in investors seeking the safe haven of gold as a form of protection against the risk of devaluation of their assets.
Trading Economics analysts predict a gradually higher price per ounce of the precious metal of $1,869.26 by the end of this quarter, and $1,933.95/oz in twelve months.
The Stock Valuation and the Risk of Investing in Aris Mining Corp
For investors considering Aris Mining Corporation in light of the expected strong recovery in the gold price, at the time of writing, shares of ARIS were trading on the Toronto Stock Exchange at a market price of CA$3.17 each, giving it a market capitalization of CA$422.57 million.
Shares are significantly below the middle point of CA$3.255 in the 52-week range of CA$2.77 to CA$3.68. Shares were trading below the 200-day simple moving average of CA$3.62 but slightly above the 50-day simple moving average of CA$3.09.
The Fed's “higher for longer” monetary policy will continue to put downward pressure on gold prices as the high yield environment does not bode well for the yellow metal and Aris shares should create lower entry points than current ones due to their positive correlation with the yellow metal.
The chart illustrating the 14-day Relative Strength Indicator suggests that ARIS shares have taken a pause due to the bearish sentiment surrounding the precious metal. The shares do not appear to be oversold yet, so there is plenty of room for a good chance for more attractive market valuations.
For the retail investor, it makes sense to wait a little longer before buying shares of Aris Mining Corporation, as the highlighted impact of Fed policy on gold prices gives the opportunity to allocate less money when investing in this stock.
At the moment, Aris Mining Corporation shares do not seem expensive at all, also based on the following indicator, which is used to compare the profitability of Aris Mining's business with its most direct competitors.
In fact, Aris Mining Corporation has a 12-month EV/EBITDA ratio of 3.14 versus McEwen Mining Inc. (MUX)'s -2.99x, Perpetua Resources Corp. (PPTA)'s -7x, Dakota Gold Corp. (DC)’s -5.90x, Caledonia Mining Corporation Plc (CMCL)’s 6.72x, and Gold Royalty Corp. (GROY)’s -14.55x.
Aris Mining Corporation is much better positioned than its competitors, reducing the risk of exposure to the gold price should the gold price rally not occur or be much less intense than expected. However, if the gold price environment improves dramatically, a favorable comparison in EV/EBITDA terms will also increase the chances of a good margin of return during the gold bull market, piquing traders' interest.
A stock comparison based on the EV/EBITDA ratio makes a lot of sense according to this analysis because investors heavily consider EBITDA when assessing the profitability of a capital-intensive industry like a gold mining company.
The ratio is calculated based on Aris Mining Corporation's 12-month EBITDA, which was $152.8 million as of June 30, 2023.
The EBITDA stems from the following financial and operational measures:
• 12-month total revenues of $403.5 million as Aris Mining Corporation sold approximately 308,087 ounces of gold at a realized gold price that was approximately $1,778/oz in H2-2022 and $1,888/oz in H1-2023. The gold price in H2-2022 is an estimate from the full year 2022 minus H1-2022 financial results.
However, this estimate and subsequent estimates of trailing 12-month production and costs are affected by the merger of the former Aris Gold Corporation with GCM Mining, which formed the current business of Aris Mining Corporation, 100% indirect owner of the Segovia operation.
• 12-month All-In Sustaining Cost of approximately $1,144/oz from the production of 305,449 ounces, as:
Segovia contributed 90% of total H1-2023 production of 104,906 ounces, at an attributable AISC/oz of $1,225, while Marmato upper zone for the rest of production. In the case of Segovia, ounces also come from the activities of artisanal and small-scale miners in the surrounding area, so the mine operated by Aris Mining brought in 52,732 ozs at AISC/oz of $1,007, while small partners delivered 41,663 ozs at the facility of the company and AISC/oz was estimated at $1,236.
H2-2022 production was approximately 200,543 from full-year 2022 production of 215,373 ozs at an AISC/oz of $1,128 less H1-2022 ante Aris Gold Corporation-GCM Mining merger production of 14,830 ozs at an AISC/oz of $1,487.
The company has issued full production and cost guidance for 2023, with the Segovia operation expected to be 195,000 to 210,000 ounces at an AISC/oz of $1,125 to $1,175, with attributable AISC/oz to be $1,000 to $1,050 with regard to the mine operated by the company while $1,250 to $1,300 with regard to the production that is expected to be supplied by small independent miners.
The Marmato Upper Zone will continue to contribute to Aris Mining Corporation's total production for the full year 2023, with an expected production of 20,000 to 30,000 ounces.
In the Segovia mining district, Aris Mining Corporation is currently engaged in efforts to optimize and improve gold processing, which caused a record production of 19,406 ounces in August 2023, or an increase of 24% compared to the average for the first seven months of 2023. While the discovery of 32 different mineralized vein structures in the immediate vicinity of the main active mine bodes well for Aris’ growth strategy.
The company will also continue to build the Marmato lower zone mining operation, work on the Soto Norte gold project, and upgrade the Toroparu measured and indicated mineral resources.
Based on the funds allocated in the first half of 2023 for the maintenance and development of ongoing activities and growth projects, Aris Mining Corporation needs about $90-95 million per year. The company seems to be able to afford this allocation of funds based on the following indications:
• Higher gold production from Segovia due to operational improvements, especially following the expansion of the processing facility, which should also have a positive impact on costs.
• Gold prices are expected to remain supportive as the precious metal gains momentum due to its safe-haven properties in an increasingly uncertain macroeconomic and geopolitical global environment.
• An acceptable financial position despite net debt of $165.8 million (= cash and equivalents of $214.3 million less total debt of $380.2 million as of June 30, 2023), as an interest coverage ratio of 3.87x suggests that the company can easily pay off the interest expense with the operating income. The interest coverage ratio is calculated as the trailing 12-month operating income of $118.5 million divided by the trailing 12-month interest expense of $30.6 million. Investors expect this ratio to be at least 1.5x to assume that the company has the ability to pay off its outstanding debts.
This Makes Aris Mining Particularly Suitable as a Catalyst for a Higher Gold Price
Aris Mining Corp has a trailing 12-month EBITDA margin of 37.87%, significantly outperforming all of its closest competitors, as illustrated by the chart below. As profitability is one of the main drivers of share price in the stock market, a higher margin means that the rise in the gold price (the upside catalyst) will be transmitted to ARIS' share price much more effectively than its competitors. The higher EBITDA margin should in theory drive most traders' interest in Aris Mining rather than its rivals when gold is back in an uptrend mode.
More About The Risk
The risk of holding shares in Aris Mining Corporation comes from country risk and low trading volumes, which investors are advised to monitor going forward through the following information.
Mines in Colombia are not without accidents, and it seems that even those under regular permits are at risk, as many of you may remember that an explosion last March caused 21 fatalities in five coal mines in the village of Peñas de Cajón, in a rural area of Sutatausa in the Cundinamarca Department.
Furthermore, a significant portion of the population lives in economic conditions of extreme poverty with a food deficit, which does not have good repercussions on the Latin American country's economy.
And then the mining areas are also exposed to geophysical risk, because not too far away in the Andes is the turbulent Nevado del Ruiz volcano, which often forces the authorities to declare a state of alarm.
In addition, Aris Mining Corporation stock is characterized by low trading volumes as illustrated by the following charts. So if there are too many shares of this stock in the portfolio, it may be difficult to soften the position quickly enough to avoid losses from falling gold prices.
The average volume (3 months) should be at least 4 times the volume needed for the position.
Since mid-September 2023, shares of Aris Mining Corporation have also been listed on the US stock exchange of the NYSE American under the symbol ARMN:
On the US stock exchange, under the (ARMN) symbol, shares were trading at $2.33 per unit as of this writing for a market cap of $318.30 million. Shares are trading significantly below the 200-day simple moving average of $2.69 but above the 50-day simple moving average of $2.29.
Shares are below the middle point of $2.815 in the 52-week range of $1.96 to $3.67. Additionally, the 14-day RSI's trend of 44.4 suggests that shares have plenty of room for downside in a high-interest rate environment, creating more attractive share prices.
Considering how Aris Mining Corporation's stock price could perform if gold turns bullish on the upside catalyst of the economic recession, current stock prices appear to be fairly valued.
Let's see why: the stock consists of 137.2 million shares outstanding, which equates to about 227,500 ounces of gold or halfway of the 2023 production guidance. One common share is expected to represent approximately 0.00167 ounces of gold. Should gold reach $1,916.63 within 12 months (up 3.7% from current levels), Aris Mining Corp. shares will be worth $3.18 apiece on the US exchange and $4.34 CAD apiece on the Toronto Stock Exchange at current exchange rates.
Compared to current share price levels, the expected return is over 40%. This margin will also increase due to the Fed's persistent "higher for longer" policy creating more downward pressure on current stock price levels. This expected margin of return compares favorably with the expected decline of 10.3% in the United States Stock Market Index 500 (currently 4,304.33 points compared to the 12-month target of 3,861.71 points).
This analysis views Aris Mining Corporation stock as an interesting vehicle to gain exposure to gold prices that are set to experience a strong recovery. As the economy enters recession, there will likely be a bull market for the yellow metal, as strong headwinds from the cycle's deterioration will reinforce gold's safe-haven qualities that investors look to as a hedge for their portfolios.
Aris Mining Corporation's stock has a strong positive correlation with the gold price as the company's gold production in Colombia is on track to grow significantly in 3 years.
Shares are not expensive relative to the growth outlook, but with the stock price potentially becoming even cheaper due to the Fed's "higher for longer" stance on interest rates, this analysis recommends waiting a bit for more attractive entry points to form before buying the shares.
Temi: Markets