Why New Pacific Metals Could Underperform (NYSE:NEWP)

Analysts are Forecasting Lower Silver Prices in 2023

In 2023, silver prices are more likely to fall than rise, as analysts estimate the ounce at less than $20 in 12 months from now, reflecting a 9.3% decline from current levels.

Why Investors Should Unload New Pacific Metals Corp.

Therefore, US-listed equity investors should reduce their exposure to silver by reducing stocks that represent companies investing in silver exploration and production.

Investors may wish to sell some shares of New Pacific Metals Corp. (NYSE:NEWP) and free up some cash to reinvest in different assets in the financial markets.

Over the last 12 months, shares of New Pacific Metals Corp. are down 11.5%, while prices for Silver Futures – Expiry March 2023 are down 8.2%, meaning the US-listed stock is quite volatile compared to the commodity it targets, as the below chart from Investing.com shows.

A further 9.3% drop in the silver price, as analysts have estimated, could lead to a further significant fall in the market value of New Pacific Metals Corp.

From a technical point of view, analysts at GuruFocus calculated a 14-day Relative Strength Indicator of 55.68, which means the stock still has ample room for further downside as oversold levels are still a long way off despite last year’s plunge.

Additionally, New Pacific Metals Corp.’s asset portfolio consists of mineral assets that, while not in a production stage yet, are in a politically unstable country and this is another concern that is likely to weigh on the share price.

Silver Price Prospects

Silver Futures – Expiring March 2023 (SIH2023), the benchmark silver price, is trading at $21.93 at the time of writing, down about 0.63% from the previous close and -8.8% year-to-date, suggesting the existence of a bearish sentiment that has been plaguing the price of the precious metal for some time.

The negative trend can be explained by heightened concerns about a sharp fall in silver demand this year, which could follow if the expected economic slowdown resulting from hawkish central banks means companies need less silver for industrial purposes.

Furthermore, as part of the anti-inflationary monetary policies being implemented by central banks, a rate hike would determine its negative impact on the next silver price for two main reasons.

First of all, a higher interest rate would make investing in fixed-income securities like bonds much more attractive than when interest rates were kept at accommodative low levels to support the economy, and this would increase demand for bonds, while silver would be on the downside. Silver is seen as a way to protect the portfolio from the negative impact of financial market uncertainty, but currently, the exposure to the metal price comes with a high opportunity cost of not owning a fixed-income security because interest rates are now rising.

The second reason is slightly more technical. Consider the following trends. The University of Michigan consumer sentiment for the US was at a thirteen-month high of 66.4 in February of 2023 (up from 64.9 in January), topping projections of 65, while initial jobless claims in the US were 189,250 as a 4-week moving average through the week of February 4, 2023, the lowest level since late April 2022.

As the economy continues to show signs of resilience rather than regression, which the US Federal Reserve wants to see instead for further moderation in inflation growth, financial markets will face further rate hikes, albeit likely to be significantly less severe than in 2022. Rate hikes are good for bond demand, but not for silver. With the ongoing disinflation process to reach the 2% annual inflation target, monetary policy and its impact on inflation are expected to push real interest rates up sharply, which of course supports fixed-income investments but not silver.

New Pacific Metals Corp. in the Metals and Mining Industry

Headquartered in Vancouver (Canada), New Pacific Metals is a Canadian precious metals exploration company developing metallic projects in Bolivia.

The company’s flagship project, the Silver Sand Project, is New Pacific Metals’ closest-to-production metallic project for which a study released last month outlines a preliminary economic assessment.

New Pacific Metals is exploring a second metallic project recently discovered, the Carangas silver-gold project, which is undergoing some drilling activity to evaluate mineral resources.

Finally, there is a third project, the Silverstrike Silver-Gold Project, which has also been conducting drilling activities for several months.

The Silver Sand Project

In 2021, the Silver Sand Project underwent a 55-hole drilling program that evaluated over 13,000 meters. The results have helped the company to better understand the structure, shape and orientation of the silver deposit and to develop the best techniques and models for efficient mine exploitation.

In 2022, the Silver Sand project completed an 86-hole drill program that evaluated over 19,000 meters of mineral samples, the results of which were processed to increase mineral resource estimates. The mineral resources have been evaluated based on increased confidence in the presence of silver in the central area of the deposit and a better understanding of the potential expansion of the resource beyond that zone.

All results from previous drilling campaigns have been incorporated into the Preliminary Economic Assessment (PEA), which was published on January 9, 2023.

The PEA study states that the net present value (NPV) of the Silver Sand project, calculated using a 5% discount rate, is $726 million while the internal rate of return (IRR) is 39%.

While the IRR undoubtedly indicates an interesting project in terms of what it can give back to the company going forward (as investors typically consider a mineral project with a 25-30% IRR to be profitable), the silver sands project raises questions about the parameters used to determine the NPV.

First, in an environment where the cost of borrowing has increased dramatically over the past year, the discount rate applied, which can be viewed as the cost of the capital required to finance the investment, is likely below the market average. Not to mention the cumulative impact on the monetary cost of several rate hikes made by the US Federal Reserve in 2022, plus the additional hikes that will be necessary to fuel the disinflation process.

Second, the silver price of $22.50 per ounce, which analysts have used to determine the project’s future cash flows or earnings, is a price that deviates significantly from an average silver bullion price of just under $20 an ounce over the last 5 years.

The choice of this price input is also questionable from a conservative point of view.

Therefore, there is a risk of overvaluation of the project.

Additional data from this PEA study indicates that the Silver Sand Project is expected to produce silver at an annual average production of 10-12 million ounces for more than 14 years.

The Country Risk

The investor should also consider the risk that political and social conditions in Bolivia pose to the mining activities of New Pacific Metals and other operators who may have assets in the country.

The Sprott ESG Mining Risk Heatmap 2022 has assigned Bolivia an average rank of 4.3, indicating a high risk of disruption for mineral activities in the country.

Bolivia certainly cannot be described as a country with a calm political situation and no internal social tensions. The political life of the South American country has been marked over the past three years by the resignation of Evo Morales as the country’s President in 2019 and the subsequent installation of the ad interim government (2019 – 2020) by Jeanine Áñez Chávez who was later accused of coup d’état.

The Carangas Silver-Gold Project and the Silverstrike Project

In Bolivia, New Pacific Metals has also completed 115 drill holes at the Carangas silver-gold project and assayed a total of 50,368 meters of mineral samples by 2022, with results indicating a potential area of approximately 1,000 meters long by 800 meters wide by 200 meters thick of silver mineralization.

In addition, New Pacific Metals completed 10 drill holes for 3,200 meters of mineral sampling at the Silverstrike project, a portion of which appears to indicate near-surface precious metal mineralization.

However, before these two projects become viable silver mining projects, it will take some time and financial investment.

For the six months that ended December 31, 2022, the company suffered a net loss of $3.96 million (or $0.03 per share), deteriorating from the net loss of $2.67 million (or $0.02 per share) for the same period in 2021.

Operating expenses for the six months ended December 31, 2022, were $3.99 million, a 35% increase over the prior year.

As of December 30, 2022, the company holds $18.33 million in cash and short-term investments in support of its operations in Bolivia.

The Stock Valuation

Shares of New Pacific Metals Corp. were trading at $2.60 per unit giving it a market cap of $427.18 million as of this writing.

Shares are almost on par with the 200-day simple moving average line but significantly above the 100- and 50-day simple moving average lines. The stock price was down 11.5% over the past 52 weeks and has determined a 52-week range of $1.89 to $4.35.

Based on the above technical indicators, the shares do not appear to be trading low. Silver price expectations are not positive, so there is currently no chance that New Pacific Metals Corp.’s share price could recover significantly from current levels.

Given the status of the key mineral project, its valuation and the political situation in the host country, these factors could affect the long-term prospects of the stock and be a deterrent to purchase. So even with silver trading higher, investors could find other silver stocks in a stronger position than New Pacific Metals Corp., creating a risk that this stock will lag the industry.

In the near term, New Pacific Metals Corp.’s share price might still outperform some of its peers, but that would require a very rapid rise in silver prices, which is unlikely given today’s macroeconomic conditions.

New Pacific Metals Corp. is also traded on the Toronto stock exchange under the symbol of NUAG.TO. Shares were trading at CA$3.45 per unit for a market cap of C$541.82 million. The 52 Week Range was CA$2.55 to CA$5.58. The 50-Day Moving Average was CA$3.412 while the 200-Day Moving Average was CA$3.4941.

Conclusion

Investors should consider selling New Pacific Metals Corp. as it could suffer quite a lot from the non-positive outlook for silver in 2023. It seems that its shares could fall significantly if the metal continues in a downtrend.

Because of its mineral operations and location, New Pacific Metals Corp. is unlikely to become one of the industry’s most popular silver stocks, which will not be of help to the stock price.