There is an old saying that goes "a dollar just doesn't buy what it used to." Buy a share of Sabina Gold & Silver (OTCPK:SGSVF), however, and you are getting quite the bang for your buck.
Sabina is a hybrid gold and silver company with significant cash reserves and a couple of exciting projects that you simply can't ignore. I believe the current share price does not value the company anywhere near what they are truly worth.
Back River - High Grade, Potential Low Cost Mine
The company's biggest project is Back River in Northern Canada, which has a 6.6 million ounce gold resource. A pre-feasibility is underway, with results expected in the third quarter of this year.
The resource is high grade - 4.7 million ounces of gold in the measured and indicated categories, at 6.0 grams per ton gold, and 1.9 million ounces of inferred gold at 7.8 g/t. In addition, the total resource of over 6 million gold ounces has increased from just 4 million ounces in 2010, but significant exploration upside still remains.
Results of the preliminary economic assessment were very positive: at $1250 gold, the study shows an after-tax Net Present Value of about $649 million (5 percent discount).
The average cash cost comes in at $542, so I would expect all-in costs to come in under $1150, which means the mine could be quite profitable even at the current low gold price (NYSEARCA:GLD).
The PEA says the mine will produce an average of 300K ounces a year for 12+ years, and carries an internal rate of return of 25 percent with 3-year payback, based on $1250 gold.
Higher-cost mines continue to shut down (See: Atna Resources, Golden Minerals). Lower grade and higher cost exploration projects are being scrapped as well. Back River, however, appears to be economically feasible because of the projected low costs and relatively low amount of capital required to bring it into production. Pre-production capital required is listed at $450 million, which I think is quite reasonable based on the projected future cash flows and estimated payback period.
Based on these strong economics, I think financing should be easy to attain going forward. Personally, I think signing a gold stream agreement with a company like Franco-Nevada (NYSE:FNV), Sandstorm Gold (NYSEMKT:SAND) or Silver Wheaton (NYSE:SLW) would make the most sense for Sabina, as opposed to issuing shares or taking on debt.
Hackett River Silver Royalty
Sabina has a significant silver royalty on Xstrata Zinc's Hackett River project as they will receive 22.5 percent of the first 190 million silver ounces produced, dropping to 12.5 percent thereafter.
The potential cash flow to Sabina from this royalty is quite significant and this seems to have been ignored by the market. At just $22 silver, the company could potentially bring in $71 million in cash flow annually, giving the royalty a NPV of about $600 million!
Xstrata is very active on the project and is expected to spend about $40 million on developing it in 2013, according to the company presentation.
Is Silver Wheaton Interested?
Another interesting part of this story is that Silver Wheaton currently owns 6.7 percent of the company.
It's possible that SLW is interested in buying Sabina's royalty on Hackett River, which would give Sabina enough capital to bring Back River online.
Silver Wheaton could even be interested in buying a gold stream on Back River, as they have started to add more gold streams in their portfolio for diversification (such as the gold streams they bought from Vale).
So, What Does $1 Buy You? A Whole Lot in Sabina's Case
I haven't even mentioned the best part of this story: Sabina has a ton of cash.
Sabina has a cash balance of $124 million after their most recent $20.6 million equity raise on June 11(which was raised at $1.40 per share I might add). The company has no debt.
With a current market cap of $164 million, This gives Sabina an enterprise value of just $44 million.
Insiders are Buying Shares
To make the story even more compelling, insiders have been accumulating shares, which could mean that they think the stock is undervalued and poised to go higher.
- On June 13, Angus Campbell, VP of Exploration, bought 35,000 shares at $1.40.
- Robert Pease, President and CEO, bought 20,000 shares at $1.40.
- Wes Carson, VP of Project Development, bought 75,000 shares at $1.40.
- Elaine Bennett, VP Finance and CFO, bought 25,000 shares at $1.40.
- On June 12, Scott Bradbury Hean, a Director, bought 30,000 shares at $1.40, but he sold them in the public market on June 19 at $1.07.
- In addition, Dundee Corporation, a holding company based in Toronto which owns 11.2 percent of Sabina, bought 5.7 million shares at $1.40 on June 13.
In conclusion, I believe this is one incredibly undervalued company and could be a great opportunity, especially if you think gold and silver prices are poised for a rebound like I do.
To those who follow the market, the undervalued nature of Sabina might not be surprising. However, while the gold and silver market remains depressed and there are certainly other good deals out there, I can't find another mining stock that has the cash cushion and project upside like Sabina does.
This is what sets Sabina apart. While other mining stocks have to issue shares or take on debt just to remain alive, Sabina is in an enviable position.