New Found Gold: Interesting Prospects And Low Share Price (TSXV:NFG:CA)

A “Buy” rating on shares of New Found Gold Corp.

This analysis provides another “Buy” recommendation as the previous analysis did. The previous analysis indicated New Found Gold Corp. (NYSE:NFGC) (TSXV:NFG:CA) as a buy, but to be executed as soon as the shares would become cheaper under the Federal Reserve’s “higher for longer” interest rates policy. Thereafter, investors had the opportunity to buy shares of New Found Gold at a lower share price in anticipation of promising prospects.

Indeed, exploration and testing activities at the company’s Queensway gold project in the province of Newfoundland continue to provide opportunities for higher share prices, and this could gain momentum as gold prices rise on expected strong safe-haven demand in the US amid the looming recession. While this is still considered a likely scenario today, previous analysis also suggests that higher gold prices would be a positive catalyst if the headwinds from the expected US downturn were offset by robust safe-haven demand for gold.

The Drivers of the Bullish Market around New Found Gold Corp

In the previous analysis, we highlighted three sub-periods in which the market value of New Found Gold shares experienced a sharp increase, which, as explained, investors also sought as protection against the negative consequences of the following events:

1. from the disillusionment of many who, based on a convincing narrative of the moment in the US stock market, believed that the Fed was on the verge of reversing its policy of raising interest rates. Lower interest rates are an upward catalyst for US stocks, as supported by lower corporate borrowing costs, improved growth prospects lead to expectations that future cash flows and profits will be higher, which is the main driver behind share prices. But contrary to their (false) expectations, on September 21, 2022, a further drastic tightening of the Fed’s monetary policy to limit rising inflation came like a cold shower for the stock market bulls. As sentiment weakened significantly after the summer 2022 uptrend, U.S. stocks suddenly found themselves at risk, creating headwinds against which New Found Gold stocks were seen as protection.
2. from the collapse of three major lenders – Silicon Valley Bank, First Republic, and Signature Bank – in early 2023 –, raising concerns about a possible contagion in the US financial sector affecting other banking institutions. Safe haven purposes fueled demand for New Found Gold shares.
3. due to fears of an impending recession fueled by Federal Reserve protocols. The Fed’s decision to keep the benchmark interest rate on federal funds unchanged after the June 13-14, 2023 meeting for the first time after ten consecutive increases: The report showed that the degree of avoidance of the economic downturn was assessed against the scenario of a possible further interest rate increase. Thus, Fed officials’ pause on the rate hike policy to assess the impact on the economy was taken by the market as a signal that the cycle could indeed be heading toward recession. The safe haven purpose increased the demand for New Found Gold stocks.

During these three sub-periods, bullish sentiment in Gold Spot Price (XAUUSD:CUR), driven by safe-haven demand amid the shift to bearish sentiment in US equities, the regional banking crisis and recession fears, was matched by equally positive sentiment in the shares of New Found Gold Corp. In fact, in the two charts below you can see that the ocher area curve that describes the correlation index between the price of gold and the New Found Gold share price was above zero. Because the ocher color area curve was above zero, the correlation between the two assets was positive over the three sub-periods indicated above. Positive correlation means that when one asset goes up (or down), the other asset that is positively correlated with it also goes up (or down). So, regardless of the return they generate at the end of a given sub-period, their prices tend to move in the same direction. Instead, a negative correlation means that when one asset goes up (or down), the other asset goes down (or up), so their trends tend to diverge.

New Found Gold Corp. (NFGC) and Gold Spot Price (XAUUSD:CUR) in the last 5 years and their correlation in the lower part of the chart:

New Found Gold Corp. (NFG:CA) and Gold Spot Price (XAUUSD:CUR) in the last 5 years and their correlation in the lower part of the chart:

The Correlation Between New Found Gold and Gold Spot Price Temporarily Turned Negative: Here’s What Happened.

From approximately mid-October 2023 to early March 2024, the two assets were inversely correlated: Gold prices rose thanks to strong overseas demand, but neither the yellow metal nor New Found Gold shares appealed to investors as a safe haven in North America.

By the end of November 2023, one thing was clear: short-term bullish sentiment on gold prices with the US dollar index in a downtrend on hopes that the Federal Reserve would no longer increase the cost of money was generally not associated with bullish sentiment on New Found Gold as well. At that time, not only was it believed that the Federal Reserve had reached its peak interest rate, but traders also began betting on multiple interest rate cuts from the Federal Reserve by the second half of the current year. Those expectations and bets lifted the price of bullion to near its May 2023 highs because gold tends to rise when there is a prospect of lower interest rates, which reduces the opportunity cost of holding non-yielding bullion. When the US dollar falls, gold priced in US dollars becomes cheaper for foreign investors to buy, driving demand for the precious metal.

There was an “enormous, unrelenting demand for gold from overseas,” Fred Hickey, analyst, and editor of The High-Tech Strategist, said at that time in one of his weekly newsletters.

However, demand came neither from the US nor Mid-West Europe but from the East, with central banks from Poland, China, India, Singapore, Turkey, and a handful of Middle Eastern countries leading the crowd of Eastern buyers. These foreign investors demanded gold as a hedge against inflation as well as global geopolitical instability and the poor performance of their local currency-denominated investment products.

Instead, the U.S. told a “very different story”: With the US Federal Reserve taking a dovish stance at its November meeting, sending no new recession signals, and “stronger projections for U.S. economic growth”, US investors were not encouraged to embrace gold as a safe-haven asset.

In the US, despite the Fed’s previous restrictive policy to combat inflation, there was no talk of a recession, nor were market participants worried about inflation after “two extremely favorable inflation readings in October and November”. The prevailing narrative continued to fuel expectations of a soft-landing scenario, with the Fed managing to reduce inflation without triggering a slowdown and the regional banking crisis seen as long over. Fears of financial risk resurfaced in early March 2024 as New York Community Bank (NYCB) grappled with the crisis in commercial real estate. But after the group led by former U.S. Treasury Secretary Steven Mnuchin raised $1 billion, or $2 per NYCB share, market fears subsided and NYCB shares were recently re-rated by analysts at Piper Sandler who were optimistic that profitability was on the way to recovery. Furthermore, driven by AI hype, weight loss drugs, and the race for chip production, the US stock markets were projected for their “whopping nine-week run”.

In the latter part of the period of inverse correlation between the New Found Gold stock price and the gold spot price, say early 2024, the US dollar recovered, buoyed by the growing probability of a Fed rate cut later that year, but not enough to dampen gold’s appeal to foreign central banks, amid escalating conflict in the Middle East and the threat of inflation.

Thus, since gold did not have the same safe-haven appeal in the US from mid-October 2023 to early March 2024 as it did abroad, this must also have affected demand for New Found Gold shares. Because, as this analysis initially shows, before the period from mid-October 2023 to early March 2024, the shares of the Canadian gold explorer were sought as protection against certain headwinds in the North American markets.

Therefore, from mid-October 2023 to early March 2024, New Found Gold’s stock prices showed a downward trend compared to gold prices. This suggests that New Found Gold’s share price will rise as gold prices rise due to North American demand for gold as a portfolio hedge against adverse winds. If we can then predict the triggers for demand for gold as a portfolio hedge among North American investors, shares of New Found Gold are poised to be affected by the bullish sentiment.

The Upside Catalyst: the US Recession

The trigger is then the threat of a recession for the US economy as a result of the Fed’s restrictive policy to reduce inflation to the 2 percent target. Duke professor and Canadian economist Campbell Harvey has developed a strong indicator of an economic recession: If the yield on three-month US Treasuries is higher than the yield on 10-year US Treasuries, an economic downturn is only a matter of time. Currently, the three-month Treasury rate is 5.384%, compared to the 10-year Treasury rate of 4.518%. As a rule, shorter loans have a lower return than longer loans, because the longer your money is in someone else’s hands, the greater the risk that something unfortunate will happen to your right to repayment and also to your interest income. However, if the risk is perceived to be unnaturally high in the short term, this signals a more uncertain scenario, and difficult times could lie ahead. Campbell Harvey’s indicator has been a strong indicator of a significant slowdown in the US economic cycle over the past few decades and is supported by the following trends for the foreseeable future: The deterioration in U.S. citizens’ optimism, which hit its lowest level since 2022 amid inflation concerns and a poor labor market outlook, was signaled by a sharp decline in consumer confidence in April. In March 2024, consumption was ≈ 68.42% of US GDP, which, as evidence of the slowdown in the US economy, fell sharply by 180 basis points quarter-on-quarter to an annual rate of 1.6% in the first quarter of 2024 compared to 3.4% in the fourth quarter of 2023. Investment is another important component of US GDP and a key source of its funding “Loans to Private Sector in the United States” has stagnated significantly since the Fed began raising interest rates in mid-March 2022 to curb rising inflation. In addition to the slowdown that US GDP data for the first quarter of 2024 showed, the US economy has also not created the conditions for growth through new investments.

There are signs of deterioration in the labor market as well, which the Fed has consistently used as a gauge to decide when to reverse its monetary policy. The number of jobs created by the U.S. economy in April 2024 slowed to 175,000 from 315,000 in March, falling 68,000 short of market expectations. Compared to trends in the first quarter of 2024 and the trailing 12 months, the April 2024 data represented a significant slowdown. The worsening unemployment rate in the US also came as a complete surprise to market participants, as they expected the unemployment rate to remain the same and instead rose to 3.9% in April 2024 from 3.8% in the previous month.

With the U.S. economic slowdown expected, strong demand for safe-haven gold could pave the way for a rosy outlook for gold prices. The latter is a positive environment for New Found Gold Corp to reach higher levels based on positive correlation analysis.

Exploring the Queensway Project in Newfoundland

New Found Gold Corp. is based in Vancouver, British Columbia, and engages in the exploration of gold properties in the province of Newfoundland and Labrador.

The Queensway Project 15 km west of Gander City, Newfoundland, consisting of 96 mineral licenses and 6,659 claims covering 166,475 hectares of land, is currently the target of New Found Gold’s exploration team.

Newfoundland and Labrador province was ranked the fourth most attractive jurisdiction in the world for mining investment in 2022, up significantly from 21st the previous year in a Fraser Institute general ranking derived from surveys of geological attractiveness and government policy.

New Found Gold Corp. owns a 100% ownership interest in the Queensway Project with access to the Trans-Canada Highway and a renewable energy source. The robust communications and energy infrastructure nearby reduces investment risk while enhancing the gold property’s exploration prospects.

The Queensway Project extends for 110 km and several gold occurrences containing high concentrations of the precious metal have been discovered along this strike. Specifically, these gold discoveries are located along two faults in the main rock masses that extend over 110 km from north/northeast to south/southwest and are referred to as the Appleton (or “AFZ”) and the JBP.

Several gold deposits have already been discovered, and objectively speaking, 110 km along the surface offers huge exploration potential with low investment risk to meet the prospect of rosy gold prices through the installation of multi-year, high-grade, and low-cost production of gold.

Under these conditions, any progress on the Queensway project is welcomed by the market leading to a positive impact on New Found Gold Corp.’s share price. The agreement with Labrador Gold (OTCQX:NKOSF) to acquire the Kingsway Gold Project – which is reminiscent of the Queensway Project (Kingsway is colored blue in the below graphic) – for C$20 million (or approximately US$14.63 million) caused New Found Gold’s stock price to rebound better out of the inverse correlation zone with gold prices.

New Found Gold will issue up to C$20 million of common shares to Labrador Gold based on the closing price of NFG:CA shares on the TSXV on the trading day before the closing of the transaction.

To the Appleton Fault Zone (or “AFZ”), the Kingsway Project will add several high-grade gold discoveries with similar mineralization types to the Queensway Project.

Transversely, the Queensway project is divided into two quadrants: Queensway North and Queensway South.

Queensway South completed a maiden drill program in 2022 totaling 7,255 meters in 33 holes across 8 targets, with more than 80% of the holes intersecting significant gold mineralization. An additional 8,300 meters were drilled in 37 holes in 2023, but results are not yet available.

At Queensway North, exploration activity is much more advanced, with 95% of total drilling activity taking place in this quadrant, resulting in the discovery of 20 high-grade gold-bearing zones at the two main fault zones, AFZ and JBP, over what today appears to be a densely gold mineralized area of around 230 km2. Most of these high-grade gold zones are located 5 km along the AFZ and are all open in all directions, while the JBP fault has been much less explored than the AFZ, but given its proximity is likely to reveal more gold zones as well.

More than 500,000 meters of drilling has been completed at Queensway North and results to date indicate gold grades of well over 3 grams of gold per ton of ore (or “g/t”), with an average of around 6-7 g/t and peak grades above 10 grams per ton of ore, outlining the potential to build a large, high-grade gold deposit. According to the World Gold Council, large, high-grade underground operations produce gold from resources containing 10 or more grams of gold per ton of mineral.

In addition to more superficial layers, thanks to an industry-leading 3D seismic survey recently completed by New Found Gold, it is also possible to glimpse what may lie well beneath Queensway, given that on average drilling did not go beyond 140 meters deep. The 3D seismic program focused on the highly prospective northern section of the AFZ and covered 47 square kilometers as seven high-grade gold zones were discovered in this area in the last 16 months. This type of analysis does not appear to be very common among gold exploration companies, but previously a similar analysis to better address further drilling activities and increase gold discovery likelihood was carried out by North American gold giant Agnico Eagle Mines Limited (AEM) (AEM:CA) for the Fosterville mine, 20 km east of Bendigo, Victoria, Australia. Orogenic systems such as Queensway are known to extend to depth, and when compared to the Fosterville orogenic mineralized system (light blue areas), Queensway could well extend several hundred meters beyond the average 140 meters explored to date.

Fosterville is an underground gold mine that produced 56,569 ounces of gold in Q1-2024, representing 6.4% of Agnico Eagle Mines Limited’s total gold production of 878,652 ounces in the first quarter of 2024. Consistent with the World Gold Council classification as a high-grade mine, Fosterville is an underground production averaging 10.5 g/t and is a low-cost asset with a total cash cost of $537/oz compared to the company’s total cost of $1,190/oz.

Another thing that gives hope to those who have high expectations for Queensway is this: The Fosterville area has been a mining area for many decades and the beginning of gold mining activity dates back to the late 19th century. In present-day Fosterville: underground mining began in 2005, following near-surface, low-grade mineralization gold production. The mine has a mine life until 2033 and aims to produce 210,000 oz of gold at total cash costs of $698/oz in 2024. At the end of 2023, the Fosterville mine had proved and probable gold reserves of 1.682 million ounces grading 6 g/t, measured and indicated resources of 1.512 million ounces grading 4.05 g/t, and inferred resources of 1.461 million ounces grading 4.5 g/t.

Environmental, hydrogeological, and geotechnical investigations and Phase II metallurgical test studies are currently underway. Additional drilling is also underway until the 650,000-meter program is completed. Phase I metallurgical tests reported 90% to 96% gold recovery rates using conventional processing techniques with gravity separation and carbon leaching. These activities will continue thanks to financial resources that at the end of 2023, were approximately $43.4 million in cash and short-term securities, and no debt, thanks to the proceeds from the $56 million bought deal financing completed in early November 2023.

The Stock Price: Share Price is Low Versus Historical Trend

Amid a promising outlook for the price of gold as a portfolio hedge driven by a deeply uncertain global environment, New Found Gold has the potential, gradually emerging from Queensway North, to give more visibility to its shares in the North American stock markets.

In the near term, as the recession approaches, North American investors will certainly look to protect themselves from the headwinds. This analysis showed that not only gold but also a position in New Found Gold Corp. stock could serve as a safe haven as its shares rallied significantly when gold in the US was sought to shield from certain headwinds. The share price is low compared to historical trends. It represents an opportunity for investors looking to participate in the expected gold price rally via shares of New Found Gold Corp.

Under the NFGC symbol, New Found Gold Corp. shares were trading at $3.51 apiece on the NYSE at the time of writing, giving it a market cap of $665.60 million. Shares are much closer to the lower bound than the upper bound of the 52-week range of $3.02 to $5.27. Shares are also almost completely below the MA Ribbon.

With the Fed not expected to make its first rate cut later this year, there could be some negative pressure on New Found Gold Corp shares as keeping interest rates high does not benefit demand for non-yielding gold, and New Found Gold and the gold spot price are back to positive correlation after a temporary divergence. The RSI also suggests that shares have plenty of room to significantly move lower, but that is very difficult to happen as markets have already largely priced in the Fed’s “higher-for-longer” hawkish stance. Instead, these prices appear to be an opportunity as safe-haven gold looks set to see a sharp rally with recessionary headwinds potentially pushing demand for New Found Gold Corp. shares up as well, showing a newfound positive correlation between the 2 assets.

The same considerations apply to shares listed on the Canadian market.

Under the NFG:CA symbol, New Found Gold Corp. shares were trading at CA$4.78 apiece on the TSXV at the time of writing, giving it a market cap of CA$910.54 million. Shares are much closer to the lower bound than the upper bound of the 52-week range of CA$4.08 to CA$6.93. Shares are also almost completely below the MA Ribbon.

Conclusion

New Found Gold Corp. shares receive a “Buy” rating.

This stock has bright prospects in the province of Newfoundland, where the exploration team is working on the Queensway project near Gander and sees a good opportunity to install good, high-grade, low-cost gold production in the future.

Any further development of the project, whether through drilling or metallurgical test results, purchase of other adjacent properties or capital raising, is expected to have a positive impact on the share price.

Meanwhile, the price of gold per ounce is likely to rise. The looming US recession will increase demand for gold as a portfolio hedge among North American investors, which should also increase demand for New Found Gold Corp., based on an analysis of the drivers of the past correlation between spot gold prices and the stock.