The Market Is Overlooking Recovery Potential Of Fortitude Gold (OTCMKTS:FTCO)

A “Buy” rating for Fortitude Gold Corporation

This article upgrades the rating on Fortitude Gold Corporation (OTCQB:FTCO) stock to a “Buy” rating from the “Hold” rating in the previous analysis in early December 2023.

Retail investors were suggested to remain anchored to gold prices through FTCO as gold prices and FTCO share prices are positively correlated, while 2024 was seen as a very positive year for the precious metal. The stock saw a sharp rise shortly after, peaking in the second half of March 2024, as gold traded higher. Retail investors were also advised to take advantage of any significant dip in the FTCO share price as this would increase the chances of a good profit margin in the wake of a gold price rally. Currently, it appears that another dip is coming that will provide the retail investor with an opportunity to buy FTCO stock.

The retail investor must be aware that the FTCO stock is characterized by a low volume of liquidity in the US OTC market, as the stock had an average volume (3 months) of 117,671 shares. If the retail investor takes too large a position in FTCO, it may be difficult to reduce or exit shares when circumstances warrant.

The Market Is Overlooking the Possible Revival of Fortitude Gold

Fortitude Gold Corporation is a gold company based in Colorado Springs, Colorado. This company produces gold from its flagship metallic deposit, a 100% interest in the Isabella Pearl Mine in Mineral County, Nevada.

The open-pit mine is nearing the end of gold production and as a result, there is a general bearish market sentiment towards this stock, resulting in a fundamental downtrend in the share price. The market currently appears to place more emphasis on the declining Isabella Pearl mine than on the following 3 upside potential:

1. the estimated significant production volume of 51,000 recoverable gold ounces at the pad (versus 38,000 ounces produced in 2023), which will allow Isabella Pearl to operate beyond 2024.
2. the opportunity to exploit the higher-grade oxide content of the Isabella Pearl gold ore deposit. As for the exploitation of higher-grade resources, the company is awaiting the decision of the Bureau of Land Management. The regulator must approve deeper mining. It appears that the regulator is on track to issue a positive statement and the decision could come before the second half of 2024. While awaiting approval to exploit the higher gold zone, Fortitude Gold produced 3,983 ounces of gold in the lower gold zone of Isabella Pearl in the first quarter of 2024. This production follows 37,996 ounces of gold produced throughout 2023 (down 8.7% YoY), in line with the annual production target range of 36,000 to 40,000 ounces.
3. the development activities that, supported by a buoyant financial situation, may lay the foundation for continued production well beyond 2025 by activating some gold deposits in western Nevada. Currently, the County Line and Golden Mile properties are the highest potential properties in the company’s portfolio, which consists of five gold properties in the Walker Lane Mineral Belt and one more gold property in western Nevada. The County Line Property and the Golden Mile Property submitted an operating plan to the Nevada Bureau of Land Management in 2022 and 2023. With these two properties also receiving approval to build a mine and begin production, FTCO could produce approximately 40,000 ounces per year at least through 2028.

According to Jason Reid, CEO and President of Fortitude Gold, there is therefore solid potential to expand gold production at the Isabella Pearl Mine and surroundings for several years beyond 2024.

Due to higher gold prices (up 7.6% year over year to $1,939 per ounce in 2023) and lower operating costs (total all-in sustaining cost declined 9.5% YoY to $656 per ounce of gold sold in 2023), FTCO can support all of the above activities with an increased cash balance of $48.7 million that as of 2023 reflected a YoY increase of 8%. The company’s total debt was just $631,000. The financial position is good, as shown by an Altman Z-Score of 8.14. This index shows that FTCO is not at risk of financial insolvency and can therefore count on solid financial pillars. On top of this, the company pays a monthly dividend of $0.04 per share, resulting in a dividend yield of 9.66% as of this writing. The next payment is scheduled for April 30.

Benefit from Gold Price Cycles through FTCO

The share price has ups and downs that mimic the cyclical nature of gold prices as can be seen in the positive correlation between Fortitude Gold Corporation and the Gold Spot Price (XAUUSD:CUR). In fact, the curve that shows the positive correlation, i.e. the yellow area in the lower part of the following graphic, has always been above zero for the last three years.

Except for very few cases, here’s what happened in the last three years: when gold spot price was bullish, FTCO stock price also rose, and when gold was bearish, FTCO was also affected by negative sentiment.

The gold mining and exploration sector offers many opportunities to profit from physical gold price trends without having to invest directly in gold bullion. The retail investor can benefit from the bullion through FTCO, as he would certainly not have the possibility to use large funds as is the case with large investors or banks who buy gold bars. Then the strategy is to buy FTCO shares when they hit a dip and, once positioned, wait for the next upward catalyst of higher gold prices to trigger another rally in FTCO. Based on the strong positive correlation analyzed above, a higher gold price will most likely result in positive momentum in FTCO stock.

The Catalysts that Retail Investors of FTCO Must Watch

The catalysts likely contributing to bullish sentiment on FTCO’s stock price are interest rate cuts and the expected economic recession following the Federal Reserve’s restrictive monetary policies to combat high inflation. The rate cuts bode well for gold prices and gold stocks like FTCO, as this change in Fed interest rate policy lowers the opportunity cost for investors to hold gold and gold-backed securities such as FTCO instead of fixed-income securities like US bonds. From $2,000 per ounce in mid-February 2024, spot gold prices have risen 18.6% to currently $2,372.23 per ounce, largely due to strong safe-haven demand amid geopolitical heat, especially in the Middle East, combined with US interest rate cut expectations. The rate cut is expected to push gold prices higher, and among Wall Street banks, gold analysts at The Goldman Sachs Group, Inc. (GS) raised their year-end forecast to $2,700 an ounce. In the recent past, such an expectation has already had a very positive impact on the FTCO share price: Amid rising bets on a rate cut by the Federal Reserve, gold prices did not stall at the record high reached in early March 2024, but instead rose for eight straight sessions, posting their best weekly gain since last October. FTCO stock rose more than 30% in just a few weeks: from $4.4 on March 8, 2024, the share price rose to a high of $5.8 on March 21, 2024.

The share price of FTCO has another upward catalyst from rising gold prices, as the metal is sought as a portfolio hedge. The price is therefore expected to continue to face upward pressure due to inflation fears triggered by tensions in the Middle East. In the longer term, however, there will be another concern for the portfolios besides Middle East tensions, which is the economic recession, as the economy is coming under pressure from “higher-for-longer” US interest rates to curb high inflation. Duke professor and Canadian economist Campbell Harvey has developed a strong indicator of an economic recession: If the yield on three-month U.S. Treasury bonds is higher than the yield on 10-year U.S. Treasury bonds, an economic downturn is a matter of time. Currently, the three-month Treasury yield is 5.389% compared to the 10-year Treasury yield of 4.653%.

The headwinds that will drive investors to return to the safe haven properties of the yellow metal will also benefit FTCO stock.

A Target Purchase Price for FTCO

FTCO stock appears to be on track to hit a bottom in the price cycle, providing an opportunity to buy shares and position yourself ahead of the expected new rise in gold prices. The shares traded at $4.94 apiece for a market cap of $120 million as of this writing. Shares are getting closer and closer to the lower bound of the 52-week range of $3.61 to $7.32. Shares were almost completely below the MA Ribbon.

The 14-day RSI is in a downtrend at 40.69, suggesting there is room to the downside for FTCO shares amid headwinds from the growing debate over whether the central bank will make fewer than 3 cuts this year, “as sticky inflation narrows the chances of rate cuts”. Reflecting the same kind of headwinds, the FTCO traded lower in late February 2024 until bottoming on March 8, as more persistent inflation than many had hoped from a resilient economy led investors to roll back rate cut expectations, creating negative pressure on non-yielding precious metals such as gold. The price target for buying FTCO stock is around $4.5 when the RSI is expected to be at an oversold level. In any case, this analysis suggests taking as a reference the decline in the probability that the Fed will cut interest rates at the upcoming FOMC meeting in June. Rate traders say there is a 20% chance the Fed will cut interest rates by 25 basis points in June. The probability is down from 55.2% the previous month, creating a headwind for FTCO, whose share price is currently at a 16% discount from its peak of $5.8 on March 21. As economic data continues to point to a slowdown in the disinflationary process, traders will further reduce the likelihood of a rate cut in June. Retail investors are therefore advised to aim for a zero percent rate cut probability in June, as FTCO will then likely be at the desired bid level given the additional headwinds that will blow along the way.

Conclusion

Fortitude Gold Corporation has a gold production facility in Nevada that is nearing the end of operations. The market is just discounting this scenario at the moment, which is causing the underlying downtrend in the share price, but it overlooks the solid potential for the company to extend the life of its operations well beyond 2024.

The company has a solid financial position to support all development activities to extend the life of the business by several years and continue to provide retail investors with an alternative to being exposed to the changes in the price of gold, other than receiving a monthly dividend.

There is a positive correlation between this stock and the price of gold, and since the metal is expected to perform positively in 2024, retail investors could consider creating or increasing their position in FTCO shares as soon as the share price hits a dip. It looks like a dip in the stock price is coming soon, so this stock deserves a “Buy” rating now.

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.