Seabridge Gold (NYSEMKT:SA) just announced that it has found a major discovery below the iron cap deposit at its KSM Project. The company announced drill results that were extremely promising, highlighted by a 500+ meter drill hole that contains 0.69 gpt. of gold and 0.3% copper. This, along with other long drill holes indicate that there is substantial gold and copper mineralization, and as a result the company is going to do more research so that it can release a resource estimate early next year.
Investors will recall that I recommended the stock last year as a way to play rising gold prices. Management is very explicit in its intent not to develop the KSM deposit into a mine but to hold onto it until the gold price rises so that investors can get the unique leverage power of owning gold in the ground. But as we can see here, this is more than simply an idle asset whose value rises and falls with the prices of gold and, to a lesser extent copper and silver. Management's expertise is in exploring and in resource definition and development and we can clearly see that it is doing just that in order to add shareholder value.
But as promising as today's news is the general investment thesis doesn't change. The KSM Project costs way too much money -- over $6 billion -- in order for the company, which has just $16 million in cash and a valuation of just $500 million. It is also not economic if you use a reasonable discount rate or stress-test the economic analysis. So the appeal of KSM and Seabridge Gold is in its gold price optionality, but this optionality is compelling, and it can potentially deliver 1,000%+ gains or more should the 2011 highs be breached.
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