SEA:CC - Seabridge Offers Huge Gold/Copper Reserves At Deep Discount

• The KSM project, 100% owned by Seabridge Gold, is arguably the biggest undeveloped gold/copper mine located in Tier 1 jurisdiction.
• The recent 2022 PFS concluded robust economics, however, it requires a CAPEX of $6.4 billion.
• The company has construction and operating permits making it an even more unique gold/copper project.
• Apart from KSM, the company holds other assets that deliver value and optionality.

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2022 has been a rough year for investors in the gold space as the metal has dropped much in the second quarter. The stock price of Seabridge Gold ( SA ) is affected by this fall in the gold price, resulting in a decline of 40% from its highs last April. However, the fundamentals of the company have improved. The 2022 PFS showed robust economics of Seabridge Gold's KSM flagship project, which is one of the biggest undeveloped gold/copper reserves in a Tier-one jurisdiction. Seabridge Gold also has other projects that offer additional value and optionality. Hence, the current market capitalization of only $1 Billion offers massive reserves for a cheap valuation.

KSM

Seabridge Gold acquired the next-door Snowfield deposit from Pretium Resources (PVG) in 2020. The initial KSM project was already massive, but this acquisition made it even bigger and provide better economics, which was recently demonstrated in the 2022 PFS . The new mine plan incorporates the acquired Snowfield project and excluded the copper-rich Kerr and Iron Cap project. The first impression would suggest that the better economics is mainly due to the higher gold price, however, this is not the case. First, the Kerr and Iron Cap projects are excluded from the mine plan, so capital-intensive block cave mining is eliminated. Second, the strip ratio is reduced to approximately 1:1. This low strip ratio is significant, especially because of the massive size of the project. Third, the mill throughput is increased to 195.000 tonnes per day. This massive mill enables the average production of 1.413 million ounces of gold and 251 million pounds of copper during the first seven years. Thereafter, an average annual production of 1.027 million ounces of gold and 178 million pounds of copper. To put this into perspective, the only comparable project is NovaGold's ( NG ) Donlin project.

The 2022 PFS showed robust economics, as presented in the table below. The many copper by-products resulted in a low AISC of $601. The initial capital expenditures are estimated to be $6.4 billion. This is a huge amount that only a few companies can put on the table. Fortunately, the NPV is greater than the initial CAPEX, which is always a must for me.

Permits - "Substantially" status

The KSM project has successfully completed the environmental approval process , so it has the required construction and operating permits in hand for 2.3 billion tonnes in tailings facilities. This de-risks the project greatly because obtaining permits is very challenging nowadays. The permits would expire in 2026, however, they become valid until perpetuity if the company can prove it has 'substantially started' the project. Seabridge Gold is expected to need upward of Canadian $300 million in funding to start substantially. To fund these expenses, management sold a royalty of 60% of the silver to Sprott Investments for $225 million. This silver royalty represents only 3% of future revenue. If management chose the alternative of equity dilution to fund the project, it would have resulted in a share dilution of approximately 18%. This shows that management is focused on minimal share dilution.

Other projects - Optionality plays

Seabridge Gold bought three exploration projects between 2016 and 2020. The exploration team has a great track record in finding new resources, so their exploration activities are always interesting. Besides the massive KSM project, Seabridge Gold owns the Courageous Lake project, which is one of Canada's largest undeveloped gold projects. The figure below shows the portfolio of projects.

The Courageous Lake project contains 6.5M oz at 2.2 g/t Au. The 2012 PFS shows only a marginal single open pit with an average annual production of 385.00 oz. However, the economics of the project increases significantly when the current exchange rate of Canadian dollar to USD and a higher gold price is used. The economics envisioned in the 2012 PFS are shown in the table below. Seabridge Gold suggests that there are opportunities to enhance project economics and recent internal studies confirm the potential for a smaller, less capital intensive and more economic robust starter project. Courageous Lake represents much value for Seabridge Gold, especially compared to the current market capitalization. Management is evaluating the best path forward to unlock value through a potential sale or joint venture.

The exploration projects are early-stage. Here is a summary of the three main projects:

The Iskut project is located only 30 km from the KSM project. The drill results from the 2020 drill campaign found a large copper/gold porphyry, similar to Deep Kerr. The 2022 campaign will follow up on these targets and will look underneath the current resource at the Bronson Slope copper/gold project.

The Snowstorm project sits on the intersection between three major Nevada gold belts where over 300M oz of gold has been discovered. In an announcement on April 2022, CEO Rudi Fronk stated the following:

Conditions around advancing this project remain challenging but incremental progress continues. We knew a multi-year exploration program would be required to advance a deep blind target and we remain confident of the potential. Integrating these new results into our understanding is expected to further define targeting in our next campaign designed to advance towards discovery of a Turquoise Ridge style opportunity.

The 3 Aces project is located in the Yukon. The project was bought in May 2020 and contains some very encouraging drilling results with good gold intercepts near the surface. Seabridge completed geophysical and surface mapping/sampling in 2021, and they are waiting for the permits for a large drill program planned for 2022.

Risks

Seabridge Gold's value depends on its success in starting a joint venture for the KSM or Courageous projects. So, the biggest risk for Seabridge Gold shareholders is that they cannot find a partner to start a JV. I think this has a very low possibility because it is one of the biggest undeveloped Au/Cu projects with permits. Furthermore, is the new KSM project as envisioned in the 2022 PFS much more attractive for the majors. On the one hand, the removal of the block cave was a real game changer because there are only two companies (Newcrest Mining & Freeport-McMoRan) that have experience in block cave mining of this magnitude. On the other hand, the footprint of the project is much less compared to the 2016 PFS.

Value creation

The stock offers massive reserves at a cheap valuation. Theoretically, each $12.93 share controls $1143 of gold and $295 of copper in the ground. NovaGold is the only company with a comparable project. Each $4.62 share of NovaGold controls 0.057 ounces of gold, which is $97.19 of gold in the ground.

The company did an incredible job by creating massive reserves in the ground and the pre-feasibility studies of the KSM project and Courageous Lake project shows it is economical to mine. The new task for management is to translate these ounces in the ground to cash for the shareholders. The valuation of Seabridge Gold is dependent on creating a JV for the KSM or Courageous Lake project because the company itself is never able to finance the CAPEX itself. I think that the likelihood of completing a JV for the KSM project is not dependent on favourable market conditions because it is one of the few massive projects with permits.

It appeals to me greatly that management, board and insiders own >30% of the shares, which aligns management with shareholder interests. Hence, I am confident that management will make the right JV decisions for KSM or Courageous Lake.

Conclusion

The recent PFS show robust economics for the massive KSM project. The project is de-risked because it has construction and operating permits. This separates KSM from other projects because permits are very hard to obtain nowadays. The stock price does not reflect any value for the KSM project because Courageous Lake and the other projects represent almost the current market capitalization of around $1 Billion. So, investors can perhaps buy the world's biggest gold/copper resource for free. A significant increase in the stock price is dependent on Seabridge Gold if they manage to create a joint venture for the KSM or Courageous Lake project. After the recent decline in share price, I see a low-risk buying opportunity for a long-term investment in Seabridge Gold.

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