Seabridge Gold Inc T.SEA

SEABRIDGE BUY Trade Alert Buy - Jim Rickards Apr 14/22

[Krishak5]

One of the most attractive gold-copper acquisitions...                                                                                                                                                                                                                                                                                                                                                                                                                                   
   

Trade Alert: Buy This Gold Project Before a Big Miner Does
 

 Dear Strategic Intelligence PRO Reader,

Russia’s invasion of Ukraine, and the West’s responses to it, have made gold projects located outside Russia much more valuable.

It’s a bonus if these projects also have copper and are located in a safe jurisdiction.

The project owned by this month’s recommendation fits the bill. It has proven and probable reserves of 38.8 million ounces of gold and 10.2 billion pounds of copper.

You may ask: If it’s so great, why hasn’t it already been acquired? The main reason is that its upfront capital spending requirement is so large.

However, this is less of a challenge than it used to be. Gold and copper miners are making record profits. They are looking to replenish reserves.

Also, precious metals royalty and streaming companies have excess capital. They are looking to put to work. So, the right projects are financeable, even if they have large upfront commitments.

We see a high likelihood of a buyout bid for today’s recommendation. It makes sense to buy now, ahead of a bid that could involve an overnight premium of 30-50%.

Jim and I follow mining industry merger and acquisition (M&A) activity for our research in two other publications, Strategic Intelligence and Gold Speculator.

We recently read a note on M&A by veteran analyst Michael Jalonen from BofA Global Research. Jalonen recounts the gold sector’s history over the past 20 years. He segments this history into three periods, writing (in italics):

2000-10 – M&A frenzy reshapes gold sector.

Over the 2000-2007 period, the senior gold producers… dominated M&A activity, acting as the acquirers for nearly 80% of all gold company transactions. This led to a radical reconfiguration of the global gold sector, as 50% of the global gold producers in our universe were absorbed by peers over the 2000-10 period. Key drivers included strong balance sheets and high valuation levels for the acquirers, a plethora of high quality targets and bullish views on bullion.

2011-18 (Aug) – The rise of the mid-tier producers

Fast forward to the 2011 – August 2018 period, a time marked by a lack of merger activity amongst the senior gold producers. Instead, the senior gold producers focused on bolt-on transactions (of both mining operations and late-stage development projects), strategic acquisitions that consolidated assets near existing operations, dispositions of non-core assets to improve balance sheets, and investments in exploration companies and partnerships. Consequently, the constituents of the global senior gold producer universe remained essentially unchanged from 2011 until August 2018. Profiting from well-timed asset purchases (largely from senior producer sellers), a number of new producers evolved to mid-tier status including Acacia Mining, Detour Gold, Evolution Mining, Kirkland Lake Gold, and Northern Star Resources.

2018 (Sept.)-H1’19 - A rebirth in senior producer M&A.

Over the Sept. 2018-H1’19 period, the global senior producer sector was electrified by two mega-mergers, on Sept. 24th 2018 the $6.1 billion merger of GOLD and Randgold and on Jan. 14th 2019, the $10 billion merger of NEM and GG. These were the first mergers of senior gold producers in eight years. Adding in a partnership element, on July 1st 2019, GOLD and NEM announced the creation of Nevada Gold Mines LLC (NGM), which is 61.5% owned and operated by GOLD and 38.5% owned by NEM.

H2’19-H1’21 – The rise of the “senior” mid-tiers

The senior producer mergers were followed by a flurry of non-core asset sales led by NEM and GOLD (plus several other companies) from Sept. 2019 onward. An unintended consequence of these sales was to create larger more liquid (and what we have termed “senior”) mid-tier gold producers. Recent graduates to “senior” mid-tier producer status included Kirkland Lake Gold (Detour Gold), Northern Star (50% of KCGM & Saracen (which also bought 50% of KCGM)) and Endeavour Mining (Teranga Mining).

H1’21-present: The seniors strike back!

Senior producers flex their M&A muscle. Since H1’21, AEM-KL merged to create the third largest gold producer, NCM acquired Pretium Resources, KGC absorbed Great Bear Resources and NEM purchased GT Gold. Core assets all located in Canada.

Jalonen’s conclusion is important: “Core assets all located in Canada.” The biggest gold mining companies want to boost their exposure to Canada.

This Month’s Recommendation

Seabridge Gold (NYSE: SA) owns the KSM Project. KSM is located in a mining-friendly region of British Columbia. It’s near infrastructure and ports. KSM is one of the most attractive gold-copper acquisition targets in the world.

Seabridge Gold shares are well off their lows.



However, relative to gold prices, the stock would have to triple to regain the excitement investors had in the 2007–2011 time frame. The black line in the chart’s lower panel shows that the stock remains very low relative to the gold ETF.

Seabridge Gold’s investor presentation makes an excellent case that the stock offers “unparalleled leverage in emerging gold and copper bull markets.”

Management’s objective is to grow ounces in the ground faster than shares outstanding. It has succeeded. When most other development-stage juniors have issued tens of millions of new shares to fund operations and drilling programs, Seabridge has been disciplined with its share count.

From 2003 to 2020, Seabridge’s total gold resources have grown by 915% during a period when shares outstanding increased by only 167%. The company ranks first in gold reserves per share among public companies in the U.S. and Canada. It has five times the gold reserves per share as runners up Newmont and Agnico-Eagle Mines.

Seabridge’s copper reserves are also impressive. Each SA share has a claim on 0.57 ounces of gold reserves and 127 pounds of copper. At current metals prices, that adds up to a stupendous $1,727 per share in reserves.

Of course, this number doesn’t account for the time value of money for a multi-decade project, or the enormous upfront investment required to bring KSM into production.

However, if you only assume shareholders will extract five cents on the dollar, over time, of their reserves per share, then SA would be worth about $86, for 328% upside.

Major gold miners including Barrick Gold, Newmont, or even copper giant Freeport McMoRan might be interested in bidding for Seabridge when they run the numbers on KSM’s reserves. Or Seabridge may convince one of them to enter a joint venture in which the large miner funds most of the capital upfront for a large share of KSM’s future profits.

The numbers above are based on KSM’s 2016 Pre-Feasibility Study (PFS). A new PFS will be completed within a few months. A key difference is that the new PFS will incorporate Seabridge’s newly acquired East Mitchell deposit. Formerly named Snowfield, Seabridge acquired it for only $100 million from Pretium Resources in late 2020. It should greatly enhance what are already fantastic economics.

The bottom line is that KSM is one of the most coveted gold-copper projects in the world. And although it has a multi-billion-dollar upfront capital cost, it’s definitely financeable considering the torrents of cash now flowing into the pockets of big miners and royalty companies at current gold and copper prices.

Aside from KSM, has several other attractive projects:

• Iskut, located near Stewart, British Columbia, Canada;
• Courageous Lake, located in Canada's Northwest Territories;
• Snowstorm, located in the Getchell Gold Belt of Northern Nevada; and
• 3 Aces, located in the Yukon Territory.

So, if Seabridge is acquired, the acquirer could spin-off these projects into a new public company. Or an acquirer could pay Seabridge shareholders a combination of cash, stock, and a net profits interest for a majority stake in a KSM joint venture. That scenario would leave SA shareholders with a huge cash pile to develop its other projects.

Whichever way this turns out, we think the option value for KSM is too attractive to ignore. SA’s upside potential far outweighs its downside risks.

***Action to take: Buy Seabridge Gold (NYSE: SA) up to $23.