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It's been a rough year for investors in the ASA Gold & Precious Metals Limited ETF (ASA), with the ETF down 5% year-to-date but many individual gold developers down more than 20%. Sabina Gold & Silver (OTCQX:SGSVF) has been one of the worst performers within the group, down over 50% year-to-date, wiping out its impressive 2020 performance. However, the fundamental thesis for the stock remains stronger than ever, especially as we've seen M&A deals accelerate in 2021. Based on Sabina's very attractive valuation of ~0.53x NPV (5%) at $1,600/oz gold and significant upside on its land package, I see the stock as a Speculative Buy at current levels.
(Source: Company Presentation)
It's been a busy year thus far for Sabina Gold & Silver ("Sabina"), with the company releasing a Feasibility Study earlier this year, continuing work on its exploration ramp development, and acquiring mobile for Phase 1 open-pit mining. As of the end of Q3, Sabina noted that its Umwelt underground ramp development is at 289 meters, and the company could make a construction decision as early as next year. Despite all this progress, and a much busier M&A environment, the stock has continued to languish, despite one of the most attractive valuations sector-wide. Let's take a closer look below:
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(Source: Company Presentation)
As the table above shows, Sabina's Back River Project showed an After-Tax NPV (5%) of ~$1.0 billion at a $1,600/oz gold price and ~$1.14 billion at a $1,700/oz gold price. This After-Tax NPV (5%) does not include upside from the George deposit, which is home to ~2.20 million ounces of gold at an average grade of more than 5.50 grams per tonne gold. It also does not include upside from the Llama Extension, the Nuvuyak deposit, or potential upside from a newly drilled target, Hook, which lies between the Goose Pit and Nuvuyak. So, while the ~$800 million After-Tax NPV (5%) is already quite impressive, there is clearly further upside here from deposits outside of the reserve base.
(Source: Company Presentation)
For those that missed the Feasibility Study, Back River is one of the largest undeveloped gold projects left in Tier-1 jurisdictions, with the Nunavut project expected to produce ~225,000 ounces of gold over a 15-year mine life. Peak production is expected to be 312,000 ounces in Year 3, with first-five year production of ~287,000 ounces, which would place Back River in line with some larger gold operations held by gold majors, like Macassa currently (pre-expansion), and Meadowbank.
From a cost standpoint, Sabina's operating costs are expected to come in well below the industry average ($775/oz), and upfront capex is manageable, projected at ~$488 million. If we look at the chart below, we can see that Sabina stacks up quite well relative to peers, with costs below the peer average and a production profile even on a life-of-mine standpoint that dwarfs most other undeveloped gold projects. These attributes are important because the capex is low enough that Sabina can fund the project on its own, but it's still very attractive to potential suitors. Meanwhile, Back River's estimated operating costs are well below the industry average, meaning that the deal is accretive from a margin standpoint for potential suitors, having the potential to drag down their cost profile by acquiring/building Back River.
(Source: Company Filings, Author's Chart)
(Source: Company Filings, Author's Chart)
(Source: Company Presentation)
Finally, let's move to a larger chart above of developers of all sizes. Here, we can glean that there are very few multi-million-ounce projects in Tier-1 jurisdictions, and even fewer if one separates for resource grade. While Ascot Resources (OTCQX:AOTVF), Bellevue Gold (OTCPK:BELGF) make the cut, they are much smaller in size, with the only ones boasting 5.0+ million ounces of gold-equivalent resources at 4.0+ grams per tonne gold being Osisko Mining (OTCPK:OBNNF), and Skeena Resources (OTCQX:SKREF). This combination of grade and size contributes long mine lives with industry-leading economics (relatively low capex + high margins). As of this week, Sabina is now just one of two companies in this small group of world-class projects without a potential partner. For those unfamiliar, Osisko Mining is currently exploring a possible joint-venture or earn-in agreement with Northern Star Resources (OTCPK:NESRF).
(Source: Osisko Mining Company News Release)
So, why Sabina as a takeover target?
When it comes to million-ounce producers looking for growth, there are not enough ~225,000-ounce mines out there in North America/Australia to go around after a busy M&A spree in the past two years. This includes Detour Lake being snapped up, Pretium Resources (PVG) being acquired, Osisko in exclusive talks with Northern Star, and Corvus acquired by AngloGold Ashanti (AU). So, for companies like Barrick (GOLD) with tax losses in Canada that could provide future tax breaks by acquiring a Canadian asset, the list of potential candidates is getting smaller, with Sabina being one name that sticks out. Of course, Barrick isn't the only name actively looking, but they do benefit from a tax angle in Canada.
(Source: Company Presentation)
Given that Agnico Eagle (AEM) has gone with Hope Bay (TMAC acquisition) instead of Sabina, this has left a window of opportunity open for another suitor temporarily. This is because Agnico is busy looking to optimize Hope Bay and explore that land package, and it's also busy looking at business improvements and synergies following its recent merger. So, while Agnico was the most logical potential suitor for Sabina due to proximity, it's unlikely Agnico will do more M&A in the next 12-18 months since it has a lot on its plate currently. With Sabina trading at less than 0.50x P/NAV, this would be the ideal time for a suitor to look at putting together an offer.
(Source: Company Presentation, Agnico Eagle Presentation)
The other major point worth noting about Sabina is that on top of a ~$800 million After-Tax NPV (5%) at the Goose Project, Sabina has multiple untested targets on its vast ~60,000-hectare land package. For those following the acquisition of TMAC Resources by Agnico, one of the principal reasons for the deal was the land package and exploration upside, with the ability to lock up a district in a very well-endowed region geologically. As the maps above show, Sabina stacks up very well to Hope Bay from a size standpoint, with five mineral claims along an 80-kilometer belt. So, while some might argue that few majors would be interested in a ~225,000-ounce producer, the upside here is significant, with the potential for a second or even third mine here long-term, similar to what Agnico achieved with Amaruq supplying ore to the Meadowbank mill.
(Source: Company Presentation)
Valuation
Based on ~360 million shares outstanding and a share price of US$1.18, Sabina trades at a market cap of ~$425 million, which is a fraction of its After-Tax NPV (5%) of ~$804 million. As discussed earlier, this ~$800 million After-Tax NPV (5%) is based on a conservative $1,600/oz gold price. Relative to Sabina's market cap, this leaves Sabina trading at just ~0.53x NPV (5%), and that's without adding in any exploration upside or upside for resources outside of its reserves. I would argue that this amounts to a value of at least $150 million, suggesting that the stock is dirt-cheap at current levels. However, understandably, after a terrible year of performance, the stock has been a tax-loss selling candidate, and few investors want to own what's out of favor, preferring to chase what's hot today or this week.
Sabina may be out of favor following Agnico's busy year that has reduced the likelihood of a takeover offer, but the stock still remains very much in play from a takeover target standpoint. This is because there are simply not enough great projects out there to go around in Tier-1 jurisdictions, and even fewer that are trading at the right price, evidenced by Sabina's deep discount to net asset value that's well below the price paid for developers over the past decade (~0.80x P/NAV). Therefore, I continue to see Sabina as a top takeover target. At a current share price of US$1.18, I see more than 100% upside to Sabina's fair value, which I believe comes in closer to US$2.40 per share.