CA - Seabridge Gold: An Attractive Valuation While Gold Is Weakening

2023-06-29 15:11:42 ET

Summary

• During the three months that ended March 31, 2023, Seabridge Gold Inc. posted a net loss of $7.88 million ($0.10 per share).
• On May 11, 2023, Seabridge Gold entered a royalty agreement with Sprott Resource Streaming and Royalty Corp. for $150 million.
• I recommend buying a small position in Seabridge Gold between $11 and $10.35 with possible lower support at $10.

Introduction

Toronto-based Seabridge Gold Inc. ( SA ) released its consolidated financial statements ending March 31, 2023, on May 15, 2023.

Also, on May 11, 2023, it announced that (emphasis added):

Its wholly-owned subsidiary, KSM Mining ULC, has agreed to the principal terms of a royalty agreement under which Sprott Resource Streaming and Royalty Corp. ("Sprott") pays KSMCo US$150 million (approximately C$200 million at the current exchange rate) and KSMCo grants Sprott a 1.2% net smelter royalty on its 100% owned KSM project located in northern British Columbia, Canada. The proceeds will be used to complete the physical works at KSM for which Seabridge expects to achieve a designation of ' substantially started ' from the B.C. government.

Chairman and CEO Rudi Fronk said in the press release:

this is going to be a very busy and productive year as we move forward with site infrastructure at KSM and exploration drilling at three promising projects in Canada and the U.S.

Note: I used the most recent presentation published on May 2023.

This article updates my preceding article, published on February 6, 2023.

1 - Seabridge Gold's extensive portfolio

Seabridge Gold owns 100% ownership of an extensive portfolio of premium North American exploration Projects with six gold core projects and three non-core projects:

• Kerr-Sulphurets-Mitchell ("KSM") - British Columbia, Canada. The mine is the largest undeveloped copper/gold property in North America and the most valuable project for the company.
• Courageous Lake - Northern Territories, Canada.
• Iskut , which is 30 km Northwest of KSM - British Columbia, Canada.
• Snowstorm - Nevada, USA.
• 3 Aces - Yukon Territory, Canada.
• Snowfield Property acquired from Pretium Resources.
• Grassy Mountain.
• Quartz Mountain.

However, the most critical project that will make or break Seabridge Gold Inc. is the KSM project , which is the most advanced and has the potential to find an acquirer in the next few years.

2 - A look at the balance sheet

During the three months that ended March 31, 2023, Seabridge posted a net loss of $7.88 million ($0.10 per share) compared to a net loss of $4.96 million ($0.06 per share) for the same period in 2022.

Cash on hand and cash equivalent were $31.22 million in 1Q23, down from $236.47 million in 1Q22. However, the recent transaction with Sprott will increase cash to about $180 million, again providing some leeway to Seabridge.

At least so far, one positive is that the company seems serious about keeping dilution in check, which is a constant danger for investors in this segment.

The outstanding diluted shares are now 81.56 million , up only 2.9% YoY. However, with dwindling cash now at $31.22 million from $236.47 million last year, I wonder about an imminent shares-bought deal that could smash the company's apparent resolution.

3 - Investment thesis

An important caveat emptor is that Seabridge Gold is NOT a gold or metals producer, and investing in these development-stage companies demands extreme caution. The risk of dilution and failure is very high, and completing such projects can take many years.

A mining project is a complex and expensive endeavor demanding years of preparation and a considerable amount of CapEx before getting an eventual greenlight. Hence, no fundamental reasons could justify a stock price valuation at this stage, and it is all in the eyes of the beholder.

To clarify, Seeking Alpha published my article about NovaGold Resources (NG) yesterday, which dropped nearly by half after releasing its second-quarter results. I recommend reading my article by clicking here.

The company owns about three solid projects that could produce down the road. One of the most advanced projects is the KSM/Snowfield project.

In 2021, Seabridge Gold started early-stage construction activities at the KSM Project to achieve the "substantially started' status by July 28, 2026 , which is required to maintain the validity of the Environmental Assessment Certificate for the Project's life.

The Kerr-Sulphurets-Mitchell or KSM/Snowfield is a massive project with 59 years of project life. Total P1 and P2 reserves represent the bulk of the company's reserves, with 23.2 Moz of gold , 16 billion pounds of copper , and 122 Moz of silver, with a Mine life of 39 years.

However, the KSM copper/gold project requires $1.5 billion in Capital Costs and eventually more with the recent Snowfield acquisition. It is a large investment that could attract only a few major gold producers.

I believe the KSM mine will be segmented into several phases due to the initial CapEx required.

Therefore, I recommend trading Seabridge Gold Inc. short-term and keeping a minimal long-term bet on the back burner for the eventual final payday if the company finds a gold major willing to complete the project.

4 - Stock Performance

SA is down 16% on a one-year basis, performing better than a few competitors, such as Vista Gold (VGZ) and NovaGold Resources.

Seabridge Gold Balance sheet history ending 1Q23 - The raw numbers

Warning: Seabridge Gold Inc. is not generating revenues. I have converted the numbers indicated in C$ in the filing to US$.

Source: Press release.

A few historical financial data in one chart:

Trailing 12-month free cash flow ("ttm") is now a loss of $167.91 million and a $36.89 million loss in 1Q23.

Technical Analysis (short-term) and Commentary

SA forms an as cending channel pattern with resistance at $14.25 and support at $10.65 .

Ascending channel patterns or rising channels are short-term bullish in that a stock moves higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. The ascending channel pattern is often followed by lower prices, but only after a downside penetration of the lower trend line.

The strategy here is to sell between $14.5 and $13.7 with possible higher resistance at $16 and wait for a retracement between $11 and $10.35 with possible lower support at $10 .

Despite a gold price above $1,900 per ounce, the recent FED decision to hike interest twice more in 2023, despite a pause recently, had a bearish effect that may last a few more weeks. Thus, it is perhaps a good opportunity to use those oversold situations to start a small long-term position.

Gold prices are crucial for development-stage gold miners like Seabridge Gold Inc. Thus, watch gold like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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