ProShares Short SmallCap600 T.SBB

Cormark Securities: Buy rating and $1.00 target for Sabina

[stockwizard1970]

According to Cormark Securities:

https://www.ge.tt/api/1/files/6vBabWO2/0/blob?download

Sabina Gold & Silver Corp. (SBB-TSX)

Smaller Design Reduces Funding Hurdle

Recommendation: Buy

Target Price: $1.00

Investment Thesis:

Sabina holds a portfolio of properties in Canada. The flagship Back River project in Nunavut is expected to produce 350 Koz/yr to generate a 22% post tax IRR (at US$1,200/oz). Sabina is also evaluating a staged approach to development to reduce capex and remains active on exploration. It also holds a large silver stream on GlencoreXstrata’s (GLEN:LSE, not rated) Hackett River VMS which we expect will be sold to assist in funding construction at Back River.

Highlights:

- “Small-Scale” Scenario Reduces Funding Hurdle

Sabina has followed up its recent base case (6,000 tpd) feasibility study (“FS”) with a small-scale scenario (3,000 tpd) that reduces pre-production capex by 40% and improves the IRR by >10%. While the new asset produces less gold (198 Koz/yr), the project funding hurdles are much improved and the operation is simplified, both of which will improve funding optionality.

- Maintain Buy Rating, Adjust Target To $1.00

Sabina has outlined a study that shows drastically improved capex metrics and the elevated grade (>6.0 g/t) continues to drive very low cash costs (US$534/oz). That said, the current funding requirements ($415 MM in preproduction capex) remain multiples of Sabina’s market cap as certain capital components are likely fixed, regardless of the mill size. Given the selloff in the commodity relative to our long-term forecast of US$1,200/oz, we reduce our P/NAV multiple to 0.5x from 0.8x. This lowers our target to $1.00 from $1.50. Sabina continues to offer some of the deepest value in our coverage universe trading at just 0.2x NAV.

Optimized Project Cuts Capex Drastically: The updated FS focuses on a “small-mine” scenario to return a 49% improvement in capital efficiency (NPV/Pre-production capex). The capex hurdle is now $415 MM from $695 MM previously. The mine plan now drives an improved post-tax IRR of 24% at a $1,150/oz gold price and a 0.80:1 US$:C$ FX rate. The major changes to the mine design are as follows:

• Focus on O/P ounces (72% of production from the O/P) and the removal of the George property from the mine plan, resulting in a much simplified mining schedule (focus on four mining areas vs. fifteen previously).

• An elevated cut-off grade has been used, which boosts the head grade to 6.30 g/t (from 5.7 g/t), making Back River one of the highest O/P projects globally.

• Decreased throughput to 3,000 tpd in line with the higher cut-off grade to target the highest margin ounces only and allow a pre-fabricated, modular approach to surface infrastructure installation.

Capex Still A Stretch: The “fit-for-purpose” FS demonstrates a much more efficient operation and leverages the elevated grade for which the Back River asset is known. At >6.0 g/t, the operation stands out as one of the highest grade open-pit development assets on the continent. That said, the remote location and challenges of operating in the North continue to result in a capex number that is a stretch at Sabina’s current valuation (~6x current market cap). We expect that in the current market, many investors are gearing portfolios to assets that are imminently fundable for near-term cash flow. Figure 2 demonstrates that while the new FS is a significant improvement, it is a way behind our favored developers.

Stock Offers Deep Value: Despite the large funding gap, we continue to view Sabina as an extremely discounted stock. As an ultra-high grade open-pit in a secure jurisdiction, Back River remains an important pipeline asset that we expect will make it to production, but may require frothier markets to raise the required capex. It is important to note that in addition to the existing >6 MMoz high grade resource base, there is a district-scale land package that has barely been investigated. The regional geology contains multiple settings quite similar to the folded BIF (Banded-Iron Formation) hosted mineralization defined at Back River. Most zones in the existing resource remain fully open downplunge and once infrastructure is in place, mine plan expansion and extension will offer compelling economics. For this reason, producers with better access to capital or private equity may begin to take an interest in the stock. Sabina currently trades at just 0.2x its financed NAV vs. the peer group average of 0.4x and $7/oz on an in situ basis (vs. peers at $31/oz). The balance sheet remains safe for the time being with $22 MM in cash.