Seabridge Gold (SA) reported results of an updated resource estimate for its KSM project. The new estimate was focused on Iron Cap, one of four copper-gold deposits discovered on Seabridge's KSM property (see map below). The KSM property contains huge copper and gold resources and reserves; the problem is that they are deep and they are low grade. Moreover, the projected capex to build the mine is really huge. This is why Seabridge Gold keeps on drilling, although the economic studies were completed and mining permits were obtained years ago. The aim of the management is to discover zones of higher-grade mineralization that would improve the economics of the project.
The Iron Cap deposit experienced notable growth. At a cut-off value of C$16/tonne, the indicated resources grew to 423 million tonnes ore and inferred resources to 1.899 billion tonnes ore. The volume of metals contained in indicated resources increased to 5.576 million toz gold, 2.051 billion lb copper, 62.559 million toz silver, and 38 million lb molybdenum. The volume of metals contained in inferred resources increased to 27.474 million toz gold, 12.556 billion lb copper, 158.741 million toz silver, and 126 million lb molybdenum. When compared to the February 2018 resource estimate, the total volume of gold contained in the resources increased by 31.5%, the volume of copper increased by 39.7%, the volume of silver increased by 29.5%, and the volume of molybdenum increased by 125%.
The problem is that although the volume of contained metals increased, the grades declined. According to the updated resource estimate, the indicated grades are 0.41 g/t gold, 0.22% copper, 4.6 g/t silver, and 41 ppm molybdenum. The inferred grades are 0.45 g/t gold, 0.3% copper, 2.6 g/t silver, and 30 ppm molybdenum. At the current metals prices of $1,300/toz gold, $15.5/toz silver, $2.9/lb copper, and $12/lb molybdenum, the gold equivalent grades equal to 0.8 g/t (indicated) and 0.94 g/t (inferred).
The above-mentioned grades would be sufficient for a profitable open-pit mining operation. However, the majority of the deposit is situated hundreds of meters below the surface. As a result, a block cave mining method should be used. Block cave mining is much cheaper than traditional underground mining, especially due to the economies of scale. The principles of block cave mining are well summarized in an article written by Senior Mining Engineer David Sprott:
In block caving, a large section of ore is initially undercut by drilling and blasting, creating a large unsupported roof that will start to collapse under its own weight and instability. The broken ore then breaks apart and falls into a series of pre-constructed funnels, or drawbells, and access tunnels developed underneath the caving rock mass to form ore extraction drawpoints.
But here's what's more important:
The lower operating cost of underground block cave mining can be comparable with open pit methods and can either be a viable alternative to develop a new mine or to extend the life of an existing mine. Block cave mining operating costs are typically in the order of one tenth of what other underground mining methods cost, largely driven by economies of scale where production rates can reach 30,000 to 100,000 tonnes per day. In addition, drilling and blasting costs are far less, and there are no backfilling costs.
According to materials (see chart below) from Associate Professor Shabanimashcool from the University in Tromso, the operating costs of a block caving mine with a throughput rate between 50,000 and 100,000 tonnes per day are usually around $10 per tonne of processed ore. An updated KSM PEA from 2016 projects a throughput rate of 170,000 tpd.
At the current metals prices, mining of the Iron Cap deposit should be profitable. That's especially true given the fact that the deposit contains several higher-grade zones, which offers some options to optimize the mining plan. As shown in the table below, at higher cutoff levels the gold equivalent grade grows quite notably. For example, at a C$36/tonne cut-off grade, the deposit Iron Cap contains indicated resources of 2.014 million toz gold, 556 million lb copper, 15.664 million toz silver, and 4 million lb molybdenum. It contains inferred resources of 14.323 million toz gold, 5.629 billion lb copper, 55.383 million toz silver, and 37 million lb molybdenum. In this case, the indicated gold equivalent grade equals 1.23 g/t and the inferred gold equivalent grade equals 1.44 g/t.
However, the main problem still remains. The updated PEA estimated the construction capex at whopping $5.5 billion, including a $0.927 billion contingency. The very high capex has a negative impact on the NPV and IRR of the project. The updated PEA used a gold price of $1,230/toz, silver price of $17.75/toz, copper price of $2.75/lb, and USD/CAD exchange rate of 0.8 to come to an after-tax NPV(5%) of $3.4 billion and IRR of only 10%.
However, there is some light at the end of the tunnel. According to a recent news release:
Our exploration success at Iron Cap over the past two years gives us greater flexibility to optimize project economics. Iron Cap is closer to infrastructure than Kerr and Sulphurets and its development could be faster and less costly.
It means that management believes that Iron Cap should be able to push the capex lower and also increase the cash flows generated in the early years of the mining operation. Both of these factors should help to improve the NPV as well as IRR. But it is hard to say whether the improvements will be significant enough to make the project really attractive and financeable even at the current metals prices.
Seabridge Gold has confirmed its ability to discover more and more gold. The company is extremely successful in growing its resources. Actually, the growth of gold equivalent ounces attributable to one share of the company is in the center of Seabridge's marketing strategy. The problem is that as long as the metals remain below the surface, they offer only small benefits to the shareholders. Given the huge capex estimate, it's hard to expect Seabridge Gold to be able to somehow find financing for the KSM project at the current metals prices. Despite the positive developments, KSM remains just a long-term bet on higher gold and copper prices.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.