Seabridge Gold (NYSE:SA) is a Canadian gold exploration company engaged in the business of acquiring non-producing uneconomic gold resources. They acquire these resources from the likes of Newmont and Placer Dome as the majors found these properties to be economically unfeasible for future business (most are located at fly-in locations where the cost of extraction is too high). The firm has no proven reserves and no intention of starting a gold mine, because the management does not believe in operating mines since they think the extra returns do not justify the extra costs and risks. The firm's basic guiding principles, per the company's website, are remaining fully exposed to the gold price and maximizing gold ownership per common share and its ultimate objective is effectively turning cash into gold, contrary to the gold industry's current practice of converting gold into cash flow.
Seabridge's stock is up over 100% in less than six months, boasting a market cap of ~1.4bln USD. However, despite the recent rise in gold prices, there doesn't seem to be an asset or a story or any other good reason to justify this move. The firm's basic value proposition is a high leverage perpetual option on gold prices, which is most likely to expire soon. The company is simply engaged in the business of producing press releases - continuously declaring more and more "inferred resources" at their properties.
~70% of their resources are "inferred"
As defined by the Canadian Institute of Mining, Inferred Mineral Resources are those for which quantity, grade, or quality can be estimated on the basis of geological evidence and limited sampling. Thus, these resources may be "assumed, but not verified, to have geological and grade continuity." In other words, it is a cheap process that is tantamount to the 2nd inning of a ball game for legitimate gold exploration companies.
Most Canadian mining companies further state the following cautionary note to U.S. Investors concerning estimates of Inferred Resources:
We advise U.S. investors that while the term "Inferred Mineral Resource" is recognized and required by Canadian regulations, the U.S. Securities and Exchange Commission does not recognize it. "Inferred Mineral Resources" have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of a feasibility or other economic study. U.S. investors are cautioned not to assume that any part or all of an inferred mineral resource exists or is economically or legally mineable.
It is important for investors to understand that inferred resources are not even recognized in the United States. Yet, the burgeoning level of speculative resources proclaimed by Seabridge has been driving this stock higher. Per the latest update on the company's website around 70% of Seabridge's resources are under the highly speculative Inferred category.
The company hires mining consultants "independent" of Seabridge to complete these "objective" assessments and resource updates. Really?
How independent are Seabridge's mining consultants?
The company has hired several consultants to conduct a preliminary assessment of its Courageous Lake property. Under the Canadian rules, estimates of Inferred mineral resources may not form the basis of a feasibility or other economic study, yet Seabridge went ahead and hired mining consultants to conduct a study and called it the Preliminary Assessment of the Courageous Lake project. A preliminary assessment is NOT a feasibility study. Rather, a preliminary assessment reviews "inferred" data provided almost exclusively by Seabridge, and the assessment was mostly based on highly speculative Inferred Resources.
One of Seabridge's most valuable properties in terms of speculated Inferred resources, the Courageous Lake property, was assessed under the direction of T.J. Smolik of TJS Mining-Met Services Inc. back in 2005. He's considered a Qualified Person and independent of Seabridge per the company's updated preliminary assessment report. However, T.J. Smolik serves on the board of directors of another Canadian company, Arizona Star Resource Corp. (ticker: AZS). It turns out that Arizona Star Resource Corporation's chairman is James Anthony, the same chairman of Seabridge. Coincidence? Another board member and director of Arizona Star is Rudy Fronk, the President / CEO of Seabridge. Coincidence? Not to mention the fact that both Seabridge's and Arizona Star Resource Corp.'s top holder is Pan Atlantic Bank and Trust Ltd.
If investors are going to rely upon preliminary assessments when valuing a gold company, that is a risk they may choose if they find "inferred" statistics valid (against the SEC's recommendation). However, do you want these studies to be completed by a friend and fellow board director to the Chairman, President and CEO? In the United States, this would not fly.
Furthermore, another "independent" Qualified Person who signed off on Courageous Lake's updated resource estimates back in 2005, as an employee of the firm Resource Modeling Inc., turns out to be a full-time employee of the firm called Mintec, too. Guess who Mintec's founder is? Frederick Banfield, who sits on the board at Seabridge. It must be a coincidence.
Without a substantial portion of the Inferred Resources used in the preliminary assessment of the Courageous Lake project, the total cost of production per recoverable ounce is going to go up and will most likely put the feasibility of this project into question even at current gold prices. The total estimated per ounce cost of $423 (+30%/-20%) in the assessment completed back in 2005, is higher than the average total cost of $393 per ounce based on the 12 recent gold transactions in the industry. If you take into account that the mining costs go up roughly 5-10% a year and the fact that around 58% of the resources used in the preliminary assessment were Inferred Resources, the total estimated per ounce cost of the Courageous Lake project would've been much higher than the 2005 estimate of $423/ounce, had the assessment been done today based on the actual amount of recoverable resources.
On a side note, there's no recent preliminary assessment done on company's other big project, the Mitchell Creek deposit. The last preliminary economic evaluation was done by Placer Dome back in 1996 and is considered out-of-date. Placer Dome's study at the time reveals around 2.1MM ounces of gold and 1300 million pounds of copper in the Indicated category. Similarly, Dutton Associate's May 2006 report states that Falconbridge's view was that the Mitchell target has 2MM ounces of gold resources, which is a much smaller number than Seabridge's Inferred Resource estimate of $13MM ounces. Well, the much lower estimates made by two other big mining companies that looked at the same property before makes you think whether Seabridge's management has been continually inflating its resources under the highly speculative Inferred Resources category.
Both Courageous Lake and Mitchell Creek deposits are at very remote locations which increase the total cost of mining. The preliminary assessment report for Courageous Lake states that it would take at least six years to start mining operations for this project. There's also no full feasibility study in sight for either of Seabridge's two biggest projects and no announcement of a big mining partner who is or might be interested in either of these projects.
The bottom line is that Seabridge's two biggest projects at such remote locations, Courageous Lake and Mitchell Creek, are nowhere near the economic feasibility required to justify the company's current market cap of $1.4 billion.
Why did the big mining companies that have already spent millions of dollars on these projects sell their interests to Seabridge?
Falconbridge (acquired by Xstrata) sold its interest in the Mitchell Creek Deposit as recently as 2006 when the copper prices were near multi-year highs. Newmont on the other hand sold its stake in the Courageous Lake property to Seabridge back in 2002.
The big mining companies have already looked at these projects as recently as 2002 and 2006 and decided to sell their interests at a fraction of Seabridge's current market-cap. The previous owners of Seabridge's properties spent $300+ MM and decided not to proceed with these projects. Didn't these big mining companies who have been in the business for such a long time have the foresight to see the probability of the commodity and gold prices going higher? Why would Newmont and Falconbridge give up such great deposits at a fraction of the value that they would've had to pay in a few of years if they knew that these were such great projects at some point in the near future?
How busy are Seabridge's handful of full-time employees with Seabridge business?
Some of the "full-time" executives and employees of Seabridge include:
CFO, Roderick Chisholm is also the CFO of North Atlantic Resources currently and up until February of this year he was also the CFO of Scandinavian Gold. Quite the multi-tasker!
Chairman of the Board, James S. Anthony is the corporate strategist at Seabridge and also happens to be the Chairman at Arizona Star Resource Corp. currently. He's also the President of Suma Investments since 1986.
CEO, Rudi Fronk, who's supposed to spend 100% of his time on Seabridge affairs is also listed as one of the directors of Arizona Star Resource Corp.
On a side note, among the other employees at Seabridge, some of the corporate roles and their interesting titles include (as stated on the firm's website): World-renowned reserve expert, highly experienced mine operator, highly regarded exploration geologist. Not to mention the proven gold finder the Senior VP William Threlkeld, who's listed as a Qualified Person in some of the company's reports.
Analyst Coverage – Buy Buy Buy
The novice investor will find a glowing review of Seabridge from one of the only two analysts that cover the company – a firm named Dutton Associates. The report is released via Business Wire, and can be accessed for free on sites such as Yahoo! Finance. I hope you read the last paragraph of the report very carefully, and understand why this company will never be rated anything less than a buy:
The cost of enrollment in our one-year continuing research program is US $35,000 prepaid before commencement of our research activities, consisting of 4 Research Reports, typically published quarterly, and requisite Research Notes. Dutton Associates received $58,000 from the Company for 6 Research Reports with coverage commencing on 6/04/2004.
Furthermore, Seabridge's top holder Pan Atlantic Bank and Trust LTD's intentions were clear in the Arizona Star Resource Corp. proxy battle back in 2004. In the proxy, they've stated the need for appropriate shareholder disclosure, investor communications and new exchange listings. The owner and the management of Pan Atlantic Bank and Trust LTD are highly affiliated with top Seabridge executives, and as a result Seabridge's management apparently share the same philosophy of improving investor communications and having firms such as Dutton Associates issue paid research reports to boost the stock price and improve shareholder value.
Disclosure: The firm with which the Author is affiliated is short Seabridge Gold. The information contained within, although believed to be reliable, has not been independently verified and its completeness and accuracy cannot be guaranteed. The opinions expressed are for informational purposes only.