Seabridge Gold Inc. (NYSE: SA, TSX: SEA) is a Canadian-based company engaged in the acquisition and exploration of gold properties in North America. While its primary focus has always been on gold deposits, many of the company’s assets also include significant amounts of silver and copper reserves. The company trades on the Toronto Stock Exchange under the ticker symbol “SEA” as well as on the New York Stock Exchange under the ticker symbol “SA.”
Share Price: $6.51/share (NYSE, March 13, 2015)
Number of Shares: 48,602,626 shares outstanding (52,058,876 fully diluted)
Business model
Unlike many of its peers in the gold industry, Seabridge was formed without the intention to actually build or operate the mines it owned. Instead, Seabridge focuses only on the activities leading up to the point of production. These activities typically include acquiring known deposits, expanding the deposits, defining the economic feasibility of the projects and securing the required environmental approvals needed to move the project to production. The company therefore primarily generates its income through taking a project ready for production and either partnering with or selling to a major mining company which would build and operate the mine.
Company history
Seabridge was founded in 1999, when inflation-adjusted gold prices were at a multi-decade low and the equities market was at an all-time high. Given that many gold projects had fallen to a point where it was no longer economically feasible to produce the gold in ground, Seabridge was formed in order to acquire interests in undeveloped gold-in-ground projects from gold producers struggling to stay in business in a low gold price environment. Seabridge would then bring these projects to the point of development so that, when the price of gold did return, the projects would again be economically feasible for producers as well as produce sizeable accretion in value to Seabridge’s shareholders from the rise in value.
From 1999 to 2002, Seabridge acquired nine different North American gold deposits at less than $1.00 per ounce of resource and with holding costs of less than 10 cents per ounce per year. These acquisitions included what ultimately became the company’s two core projects: the Kerr-Sulphurets-Mitchell (“KSM”) property in 2001 (located in British Columbia), and the Courageous Lake gold project in 2002 (located in the Northwest Territories).
As gold prices then rose to more economic levels, the focus of the company has been on the expansion of the resource reserves of its projects, as well as completing the economic feasibility studies. Total measured and indicated gold resources grew nearly fourfold over the next five years, and a Preliminary Feasibility Study was completed for the company’s largest asset, the KSM property, in March 2010, which has since been updated with increased reserves and throughput capacity. A similar program is also in process for the Courageous Lake gold project.
Recent developments
In 2014, Seabridge continued with drilling program efforts designed to understand the extent and grade of resources at several of the KSM project’s major gold-copper zones, including Deep Kerr and Iron Cap. These efforts have proven to increase the known or inferred reserves at these projects, which have contributed to increased project economics. Results from the 2014 drilling program are expected in the first half of 2015.
One of the largest milestones for Seabridge in terms of the KSM project was the environmental approvals necessary at both the provincial and federal levels, the processes for which began in 2008 and 2009 respectively. Many critics of Seabridge and Canadian mining projects in general cited a likelihood of unfavorable results from these reviews, particularly given the increased scrutiny shown to new mining projects. However, through years in working with the governing bodies and with the continued support of the First Nations tribe, Seabridge acquired the provincial approval from British Columbia in July 2014 and the federal approval in December 2014. This milestone removes the last legal hurdle from Seabridge partnering with a major mining company and bringing the KSM project to production.
Management
Rudi Fronk has served as Seabridge’s CEO since 1999 and has had over 30 years of experience in the gold business, primarily as a senior officer and director of publicly traded companies. Mr. Fronk and his team of experienced executives have been dedicated to the successful growth and operation of Seabridge, not only through their positions as the company’s management but also through the sizeable positions taken in their company’s own stock.
Inside and notable financial institution ownership
As indicated by the company’s latest corporate presentation, the company’s insiders together own over 30% of the outstanding shares of the company, showing further alliance of the management’s interests with that of the public shareholders.
Furthermore, an additional 35% of outstanding shares are owned by financial institutions. Perhaps the most notable of such is Mr. Albert Friedberg’s Friedberg Mercantile Group Ltd. and its affiliates FCMI Financial Corporation and Pan Atlantic Bank and Trust Ltd. Mr. Friedberg is a well-respected investor and trader in the commodities space, and his accumulation of Seabridge shares over the last year alone has not gone unnoticed. Currently holding approximately 12.4% of the outstanding shares, Mr. Friedberg has recently started acquiring additional shares at the end of February as the price of Seabridge has fallen alongside that of commodities in general.
Financial summary
Seabridge recently released its annual financial results for the year ended December 31, 2014. The summary balance sheet is shown below (all amounts presented in C$).
It is important to note that the company has no long-term debt on its balance sheet (non-current liabilities typically represent deferred tax liabilities). As discussed, the company does not mine or operate its gold projects, and therefore only produces income from the sale of its non-core assets or from the eventual partnering of its KSM and Courageous Lake projects. Therefore, the company’s primary source of funding for operations is through the issuance of additional equity. However, one of the primary goals of Seabridge and its management team is to grow the company’s resource reserves at a rate greater than shareholder dilution, as to maintain and accrete value per share for the company’s shareholders. Management has done a highly successful job at this historically as shown below.
In maintaining shareholder value, management also has done a great job of keeping costs low for running the business as to only use additional equity offerings sparingly. The net loss for 2014 was C$13.0 million vs the net loss for 2013 of C$13.6 million, despite the additional efforts needed to acquire the final environmental approvals by year end. As can also be seen, the current working capital can cover the majority of the anticipated operating costs during 2015. A detailed look into the costs can be seen below.
Based on this information, the company continues to operate at a manageable cost level without being burdened by substantial debt. The company still has liquidity to meet the company’s operating needs for much of 2015 but will continue to utilize additional equity issuances to maintain future liquidity. Despite this dilution, the company has maintained a strong track record of increasing reserves per share and will continue to have this as a primary goal while waiting for favorable partnership terms can be reached with major gold producers for Seabridge’s primary projects.
Risks
The primary risks associated with Seabridge come from its lack of revenue generation without selling company assets. Therefore, the company’s success relies heavily on the joint venturing of its primary projects with one of the major gold producers. This makes Seabridge a leveraged play on the price of gold, as if the price for gold does not increase, a deal might not be reached at a favorable price for Seabridge shareholders. However, Seabridge’s management has made it clear that a deal will not be made until prices of gold rise substantially from its current levels, as their belief is that gold is still undervalued at current prices. While I won’t go into much depth on gold as an investment, I do agree with management’s belief, given the record printing of fiat currencies around the world in the past several years and the inflationary effects that will be eventually felt from those measures.
Valuation
Seabridge closed Friday, March 13, 2015, at a per share price of $6.51 on the NYSE. This is less than 10% above its 52-week low price of $5.92, while well under its 52-week high price of $11.64.
As of September 30, 2014, the KSM project had proven and probable reserves of 38.2 million ounces of gold, 10 billion pounds of copper, and 191 million ounces of silver, while the Courageous Lake project had proven and probable reserves of 6.5 million ounces of gold. This ranks Seabridge among one of the world’s top gold companies in terms of reserves.
Compared to its peers in the gold industry, Seabridge offers investors substantially more in gold reserves per share, as well as a significantly lower enterprise value per ounce of gold. This produces an incredible value to investors not only in terms of the amount of reserves represented by each share but also by the low price an investor has to pay for those reserves.
Author disclosures
I am long SA through my holdings of the company’s common shares and long-term call options. At current levels, I am also selling short-term put options at strike prices lower than the market price to potentially take advantage of acquiring additional shares at cheaper prices.
