Sabina Silver Corporation (OTC:SBBFF) is one of a few publicly traded companies with truly large undeveloped silver resources located on one property. The Company possesses tremendous upside but it is far from being a darling among resource investors. We think that this will not stay for too long. The Company is on a steady track to success and is a likely acquisition target when the price of silver starts to move.
Sabina owns several properties (Hackett River, Del Norte and several Red Lake properties), and is actively drilling on most of these projects. But the main value is in Hackett River Project, located in Nunavut, approximately 480 kilometers northeast of Yellowknife, and 250 kilometers southwest of Hope Bay, Canada. It is also located 75 kilometers from the potential deep water port on Bathurst Inlet along the northern coast of the Canadian mainland.
Hackett River Project
The Hackett River deposit was first discovered by Rio Tinto Exploration in 1956. In the 1970s, Cominco defined a historical resource and in the 1990s Etruscan completed geophysical surveys and drilling on the Main and East Cleaver Lake zones.
In 2003 Sabina signed an option agreement with Cominco and eventually acquired a 100% interest in Hackett River property. Cominco still holds a 2% net smelter return royalty. In addition, there is a 10% net profits interest royalty retained by Etruscan Resources Inc. which is capped at $2,000,000.
Sabina defined the following NI 43-101 compliant resource:
Average grades are as follows: 4.67% zinc, 4.37 oz/st silver (149.89 g/t), 0.32% copper, 0.68% lead, and 0.009 oz/st gold (0.32 g/t).
Although zinc comprises about half of the resource total based on today’s market prices, the silver resource of over 250 million ounces is large by any standard.
Early in 2007, Sabina released the results from a preliminary economic assessment of Hackett River.
Highlights from Preliminary Economic Assessment
It is expected that the Hackett River deposit will be mined by two open pits as well as via an underground decline.
Average annual production:
12.4 million ounces silver
324.7 million pounds zinc
20.7 million pounds copper
37.0 million pounds lead
17.2 thousand ounces gold
The above silver production will put Sabina in the mid-tier silver producer category overnight (much bigger than Hecla Mining as an example). Mine life is expected to be 13.6 years with a total life-of-mine production of 4.4 billion pounds of zinc, 169 million ounces of silver, 283 million pounds of copper, 504 million pounds of lead and 234 thousand ounces gold. Initial (three-year) capital costs are $527 million, taking into account the possibility that the deep water port and the all weather road to the Hackett property will be fully funded by Sabina Silver.
The amount of capital costs required is likely to increase due to normal inflation as well as widespread price pressures in the industry. But we are confident that a negative surprise of Novagold’s proportions is not possible here. There is no comparison with the rugged British Columbia mountains where Galore Creek is located to the gently undulating topography of Western Nunavut. The engineering design requirements of Hackett are being driven by the need to accommodate the climate and permafrost in civil and other design, which has been demonstrated can easily be done in such operations as the old Lupin Mine as well as the current diamond operations of Diavik and particularly Ekati. Oftentimes, the occurrence of permafrost is actually a significant advantage.
Wardrop Engineering performed an economic analysis for Hackett River using several metal price assumptions. The project economics are robust even for the most conservative case.
The project is sensitive to zinc prices. Although short term price action on zinc has been lackluster, we remain long term bullish on most base metals.
Today, zinc prices are lower (at around $1.11/lb), but silver ($15.30/oz), copper ($3.10/lb), lead ($1.17/lb) and gold prices ($863/oz) are all considerably higher. So it is reasonable to base our analysis on somewhere in between the “base case” and the “better case” scenario. Certainly, production costs have risen, yet being conservative, we still believe that the value of Hackett River is around $1.5 billion and investors’ payback period is about 4 years - strong fundamentals for a project of this size.
The project is in one of the most mineral-rich, remote, but well developed areas in Canada. A new all-weather road is being planned that would link the Hackett River Project to the proposed deep water port facility on Bathurst Inlet. The road may receive federal and/or Nunavut funding. If this project is completed, it would have a highly positive effect on Hackett River.
Mining and Acquisition Activity in the Neighboring Areas
Sabina’s neighbors include Rio Tinto’s famous Diavik Diamond Mine and BHP Billiton’s Ekati Mine - the first diamond mine in Canada. Other companies with interests in the region include Newmont Mining (NYSE:NEM), Agnico-Eagle (NYSE:AEM), Dundee Precious Metals (DPM.TO), De Beers and Zinifex.
In 2007 alone, there were three large acquisitions of companies operating in the area. Newmont Mining purchased Miramar Gold and its large gold projects – Madrid, Boston and Doris. Zinifex, a major Australian zinc/silver producer, took over Wolfden Resources to add to its portfolio some promising Nunavut properties. Agnico-Eagle (AEM) also joined the Arctic play by acquiring Cumberland Resources and its Meadowbank gold project in Nunavut.
It is clear that Sabina is on many majors’ list of acquisition targets. By adjusting market capitalization by the cash value on the balance sheet of $55 million, its enterprise value [EV] is only $78 million, a paltry sum for major and mid-tier mining companies. The total value of vast underground resources by comparison is over $12 billion, 159 times bigger than the EV. This earned Sabina a place in the recently featured World Class Deposit Index.
Sabina’s Board of Directors appointed a new President and CEO in August. Because of added uncertainty and a general market panic, the stock fell and has not been able to fully recover since. In fact, the change in management was a highly positive development. Albert Brantley became the new President and CEO, bringing extensive mine development and construction experience to Sabina. Before joining Sabina, Albert Brantley was the COO / Chief Development Officer at Oceana Gold which currently produces around 200,000 ounces of gold annually and has multiple development projects in New Zealand, Australia and the Philippines. We have had the pleasure of meeting Mr. Brantley and believe that he is the right man for the job.
The outgoing President and CEO, who are exploration professionals rather than development experts, both remained on the Board of Directors.
Current Situation and Upcoming Developments
From our latest conversation with Mr. Brantley, there may exist some additional upside for the resource base. First assay results from additional drilling done this summer should be available by the end of January.
After the assay results are released, a resource update is going to be issued in the beginning of 2008. For the most part, Sabina will convert the remaining inferred resources into the indicated category, although an increase in the tonnage cannot be ruled out.
At that point, Sabina should have everything it needs to complete its pre-feasibility study by July 2008 (moved from the March deadline due to engineering firms’ backlog). Later in the year, the Company will submit a draft Environmental Impact Study and complete a bankable feasibility study by early to middle 2009. Beginning of construction is anticipated in 2011.
With new management and $55 million in the bank, Sabina is well equipped and fully funded to complete both the pre-feasibility and the feasibility studies in the next 18 months.
Finally, we have been able to draw an interesting parallel for Sabina Silver. In the Resource Stock Guide database, there is one company that is almost identical to Sabina Silver in many respects: Apex Silver (NYSEARCA:SIL)
Apex Silver, traded on the AMEX, is well known amongst the investor community. The notable differences between Apex and Sabina are geographical location, market valuation and the stage of the projects. Apex is entering production in a politically challenged Bolivia, while Sabina is still four to five years away from seeing first revenue from production in mining friendly Canada. Does that warrant a 30X difference in valuation? We find it hard to believe that it does.
It is a challenge to be a value investor. It often takes a long time to see any results. Yet rewards can be huge. The case for Sabina is straightforward. The longer Sabina Silver remains an independent company and avoids getting acquired by a larger company, the more we will benefit from Hackett River’s advancement to production. We are loading up and exercising patience.
Visit full profile for Sabina Silver here.
Disclosure: Please note that Sabina Silver Corporation is a sponsor of Resource Stock Guide, and certain members of Resource Stock Guide are shareholders of Sabina Silver Corporation.