Seabridge Gold: Enormous Option Value

| About: Seabridge Gold (SA)

Seabridge Gold (NYSEMKT:SA) ($14.97) has issued several updates in the last several months reporting an expansion of its gold resources at its two furthest-along projects, Courageous Lake and the Mitchell site (at Kerr-Sulphurets). These two projects now are reported to host 23.3 million ounces in the measured, indicated and inferred categories. This is equivalent to 0.61 AU ounces behind each of SA’s 38 million fully diluted shares.

The company is updating a preliminary assessment on Courageous Lake that it expects to improve the financial feasibility of developing a mine. Since the 2005 assessment, the property’s resource has been expanded, and although mining costs have risen, some areas of savings have been identified. The current resource model is about 10.2 million ounces at an average of 2.0 grams per ton. The 2005 preliminary assessment estimated cash mining costs of $279 per ounce, capital expenditures of $630 million, and, at $500 gold, a total of $324 million free cash flow on an assumed 4.6 million ounces life-of-mine production. That assessment projected about a $230 million increase in fcf for each $50 rise in the gold price. Thus, $650 gold would yield fcf of about $1 billion over the projected 8.5 years of production. All those numbers should increase with the updated study that reflects the considerable expansion of the resource.

No feasibility study is available for Mitchell, which SA’s press release in February estimated contains 13.1 million inferred ounces of gold and 2.23 billion pounds of copper.

The option value of these shares seems enormous.

Here’s one way of looking at it:

Assume, for argument’s sake (pending a feasibility assessment at Kerr-Sulphurets) combined capex for the two projects of $2.8 billion. Assume average cash mining costs of $350 an ounce (reflecting Mitchell’s lower average grade and tossing in the copper as a mere credit—which is absurd, but we’ll do it for the sake of conservatism). Assume $650 gold. Roughly: 23.3 (m oz) x $300/oz cash profit = $6,990 million. Take off $2.8 billion plus six years’ carrying cost (another $1 billion?) and you’re left with $3.19 billion in total realizable value. Divided by 38 million shares, that’s $84 a share. At $15, today’s stock price, SA would produce a 19% compound annual return for 10 years to reach that level.

To run the exercise at $1,500 gold is at least entertaining. Assuming no benefit from lower-grade ore becoming payable:23.3 (m oz) x $1,150/oz cash profit = $26,795 million. Less capex and carrying cost of $3.8 billion leaves $23 billion in total realizable value. Divided by 38 million shares, that’s $605 a share.

It seems to me that Seabridge is an inexpensive option play on gold. In any case, you’re buying gold in situ for less than $25 an ounce, with more than 60 pounds of copper per share as a bonus. In addition, Seabridge owns six other, earlier-stage projects with a total of more than five million ounces. Some of these were extensively investigated by previous owners, others less so. The factual parts of the foregoing can be confirmed at the company's website.

Disclosure: I’ve owned this one for years.