Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Sabina Gold and Silver Corp. ($SBB.TO) used to be a $1-billion market cap gold exploration juggernaut rapidly adding ounces to the Back River gold project in Nunavut, Canada. That was early 2011.
Today the company, which owns a very large and rich gold resource in an excellent, albeit remote jurisdiction, has an enterprise value under $50 million.
The value crash demonstrates what can happen to a development company when the price of its underlying commodity, in this case gold, falls from US $1,800 an ounce to roughly $1,100.
New Sabina CEO and career mining engineer and entrepreneur Bruce McLeod insists the project was actually significantly de-risked during the period.
This morning, Sabina published a new Initial Project Feasibility Study (FS) for Back River, bringing significantly lower capex and execution risk to a project that was already quite economic at current gold prices.
Barring a gold price fall, Sabina now has the potential to re-rate its share price and finance the lower-capex Back River, which we believe a major will ultimately snap up.
By phone, Nicole Hoeller, Sabina’s Vice-President of Communications and Corporate Secretary, walks us through the new FS.
Recent Sabina share price: $0.33
Shares outstanding: 196,781,526
Market capitalization: $65 million
Enterprise value: $42.8 million
Mineral Resources: 5.33 million ounces Measured and Indicated (Grade 5.9 g/t Au), plus 1.851 million ounces Inferred (Grade 7.4 g/t Au)**
Cash balance: $22.2 million (June 30, 2015)
Expected Dec 31, 2015 cash: $17 million
* All figures approximate. All figures CAD.
**Back River October 2014 Mineral Resource Estimate
– Today’s Feasibility Study is the second FS published by Sabina in 2015 and is viewed as an Initial Project in the district. The first FS, published in May, looks at a 6,000-tonne-per-day operation producing an average of 346,000 ounces of gold annually over a 10-year mine life. The initial capital estimate was $695 million and sustaining capital estimate was $529 million (including closure).
– The new, Initial Project FS is designed to be a more financeable project in the current market environment. It considers a 3,000-tonne-per-day operation producing an average of 200,000 ounces a year over an 11-year mine life. The initial capital estimate is $415 million and sustaining capital $185 million.
– Internal Rate of Return has increased from 21% to 24.2% (after tax) at US $1,150 gold and C$ exchange rate of 0.80. The NPV5% on the project is C$480.3 million, an increased capital efficiency ratio of 49% over the larger project.
– The smaller project is designed to have less execution risk. The larger project is more complex with 15 mining areas – some of them 50 km to the north – whereas the smaller project focuses on 4 mining areas within a 5-km area. The lower capex and lower execution risk should help Sabina evolve from developer to producer.
– The majority of Sabina’s resources are at the Goose deposit. The roughly 2-million-ounce George deposit, approximately 50 km from Sabina’s Goose deposit, is not considered in the smaller FS. George can come into the fold later.
– The Initial project also has a reduced construction period, with first gold expected in late 2019 pending financing and all required permits.
– Management believes there is significant exploration upside in the district and Sabina has had success unlocking the geology. At the Goose property where the Initial Project is located, there are existing resources not included in the current mine plan that would extend the life of mine. In addition, there are many showings on other claim blocks that have had little work done on them. This is a vast region and “we will be mining here for a long time,” commented Ms. Hoeller.
– Sabina’s Back River project in Nunavut is the highest-grade undeveloped open-pit gold project in North America. Note: Back River will be mined through a combination of open pit and underground, with approximately 72% of production coming from open pits.
– Sabina considers Back River to be a large emerging gold district that spans 80 kilometres. The project already hosts over 7 million ounces of gold in the Measured, Indicated and Inferred Categories at average grades over 6 g/t on only 10Km of this area. There are over 50 priority exploration targets on the property that will be explored when the market recovers as well as existing resources not included in the initial mine plan.
– Approximately $200 million has been invested in Back River by Sabina since it acquired the project in 2009. In early 2011, the company’s shares shot above $7 and its market capitalization eclipsed $1 billion. A declining gold price and fund flows out of the sector by risk-averse investors saw the Canadian precious metals explorer/developer lose over 90% of its market value.
– The closest larger communities are within 300 kilometres of Back River. There’s a seasonal camp at Bathurst Inlet where 2-3 families live off the land in warmer months, according to management.
– The project will utilize ice-free shipping in summer months to ship supplies by sealift from the east and west coasts through the Northwest Passage on established routes already utilized by northern communities.
– Sabina has collected significant environmental, wildlife and socioeconomic data for the project and is approximately 75% through the environmental assessment process. A Project Certificate from the Minister of AANDC is anticipated in Q2 2016, which is a major de-risking milestone for the project.
– Back River is on Crown lands and as such a roughly 12% net profit interest is payable to the Crown. These revenues are funneled back to Nunavut Tunngavik Incorporated (NTI), which ensures that commitments under the Nunavut Land Claims Agreement are carried out.
– Mining engineer Bruce McLeod, with significant mine-building experience in Canada’s North, joined Sabina as CEO in February 2015. He spearheaded a cost-cutting initiative to protect the company’s treasury and in July, led a $1.3-million flow-through financing at 50 cents (~21% premium to market) that was subscribed to by directors and company insiders only.
– Sabina is undervalued relative to its peers, according to National Bank, with a .24X NAV compared to .63X NAV for the peer group average. National expects this gap to close.
– Having initiated its Environmental Assessment process in 2012, the company hopes to have its final Project Certificate in Q2 2016, which is the biggest permitting milestone for Back River. Sabina will make its final submission in late Q4 of this year with hearings expected in late Q1 2016.
– Following receipt of the Project Certificate, other permits including Water Licence (Q1 2017 estimate) will be required.
– The company will now shift its focus from the Feasibility Study to investor relations. Management will tell Sabina’s story to potential financiers throughout the fall, beginning with the Denver Gold Forum and Precious Metals Summit conferences in Colorado later this week. They want to get Sabina’s stock up to reduce potential dilution for project financing. Management would prefer a combination of debt and equity to selling streams or royalties.
Sabina CEO Bruce McLeod will host a conference call to discuss the new Feasibility Study Tuesday morning. Any gold or value investor should tune in.
Tuesday, September 15, 2015 at 6:00am PST. Canada & USA Toll Free Dial In: 
1-800-319-4610 FREE
For more information, visit http://sabinagoldsilver.com
