Estimated startup costs for Seabridge Gold Inc.’s (TSX:SEA) ambitious KSM project are raising investor concerns.
“There’s no doubt in my mind that the project is a huge, impressive asset,” said Taylor Dart, an independent trader. “But if it’s going to cost $5 billion to build, it just isn’t worth it for any gold … or copper major right now.”
Dart is worried that the estimated $5 billion in initial capital costs detailed in Seabridge’s KSM project technical report is more than 20% of Barrick Gold Corp.’s (TSX:ABX) $24.25 billion market cap. Barrick is the world’s largest gold company.
But his concern is not shared by Seabridge’s CEO.
Rudi Fronk said KSM’s capital costs will be spread over five years of construction.
“You look at the capital budgets for the big mining companies, they have big budgets annually. Our belief is that the copper concentrate and the copper production will generate a fair bit of the upfront capital through some sort of screening arrangement or off-take agreement.”
Dart said it will be difficult for Seabridge to find a partner to build and operate the mine because the asset won’t be producing revenue for a number of years.
“They have to hope that someone comes along and takes a huge shot on them,” said Dart. “There are only really two gold companies that can do that: Barrick and Newmont Mining Corp. [NYSE:NEM].”
But Fronk said Seabridge has already turned down partnership offers because it’s looking for specific joint venture terms. He added that finding a production partner won’t be a challenge.
Dart likened Seabridge’s situation to 2011, when Barrick Gold acquired Equinox Minerals Ltd. (TSX:EQN) for $8.15 billion. While this was a large purchase, Dart said the agreement didn’t have the same risks as KSM because the Equinox mines were already making money, and Barrick didn’t have to spend capital costs because the mine was already built.
Fronk is confident that the asset will be produced.
“The major mining companies will have no alternative but to go out and find new projects to bring into their portfolios. They always have and they always will,” he said. “Our belief is that as the metal markets improve, the big companies will again look for big, cornerstone projects that they can develop. Here we’re sitting with one of the largest in the world, in one of the safest mining jurisdictions and one that has gone through the environmental assessment and now has the first two and a half years of permits in hand.”
Seabridge Gold’s stock has risen 20% during 2016. It was trading at $13.50 at press time.
According to Fronk, Seabridge’s stock has outperformed the price of gold 5-1 over the past 17 years, rising 1,500% compared with gold, the value of which has increased 300%. But Dart is concerned about the performance of Seabridge’s stock over the last year when compared with Barrick’s (up 106.35%) and Newmont’s (88.6%).
“The biggest thing for me is that most of the gold stocks kept rallying into July and August and made higher highs,” said Dart, “… whereas Seabridge just kind of fizzed out in mid-June and never went any higher.”
While Dart doesn’t think that mining companies will want to take on the risk without immediate return, Fronk said large mining companies have no choice but to turn to large reserve projects to keep up production.
“When you look at the major gold mining companies and even the major base metal companies, they have issues with their production profile as time goes on,” said Fronk.
“They need big projects, they need projects that are capital-efficient and they need projects in safe jurisdictions. KSM checks all those boxes.” •
