Sprott updateTicker: SKE CN Cash: C$69m Project: Eskay Creek Market cap: C$482m Price: C$6.39/sh
Country: Canada, BC REC. (unc): BUY TARGET (+80c): C$13.25/sh RISK RATING (unc): HIGH
The DFS is a beat on our estimates, highlighting a mid-life expansion to 3.7Mtpa for only C$40m additional capex well covered by FCF and increased build capex very much still manageable in our view. Over the last 12M, the capex lift reduced the like-for-like NPV by the same ~C$100m, with losses on grade offset by Y6 expansion, and similarly production flat as expanded mill offsets lower grade. This flows through to AISC down by 7%, with this coming from big drops in processing and G&A cost even through inflation (and small creep in mining cost to US$2.83/t, about bottom end of acceptable).
Net net, the IRR / payback still remarkable here. Updating to match the DFS inputs lifts our previous C$1,632m NAV5%-1850 to C$1,953m for Eskay—an impressive +20% beat. Updating cash and shares for the recent financing, we maintain our BUY rating and lift our PT from C$12.45/sh to C$13.25/sh 0.6xNAV multiple and 105m fully-funded fully diluted share count.
With the stock trading at 0.26xNAV, the interplay between funding, value and dilution is key. The current strategy to secure debt approvals around year end but ~2Y prior to permitting, facilitating equity / streaming in CY23 to commence construction under a bulk sample permit would be excellent.
Debt lenders sadly aren’t known for being user friendly though.
Nonetheless, as exemplified by Sabina and G Mining, issuers have increasing flexibility on streams, lender-equity and other hybrid deals, hence we do see a nice fallback to a simple equity / stream deal next year to fund early works. For now, our FF FD share count is only an approximation of course.
Table 1. Summary production and valuation metrics against 3Q22 PEA and SCP old/new estimates Eskay DFS shows C$1.4bn NPV5%-1,700 / 50% IRR, quick 1-year payback & ~350koz pa AuEq prod. DFS: Processing updated reserves of 3,850koz @ 4g/t AuEq, the DFS sees +13% throughput to >3Mtpa for 349koz pa AuEq over the 2.7Mtpa / 431koz pa PFS LOM, with C$40m expansion planned to 3.7Mtpa from 3Mtpa in Y6. With inflation, build capex lifts to C$592m (+21%).
A reduced strip ratio of 7.5:1 (from 8:1 PFS), combined with mining / processing / G&A costs of C$3.72/t, C$16.90/t and C$4.18/t, respectively, drives US$651/oz AISC, for an after-tax C$1,412m NPV5%-1700 and 50% IRR, one year payback, vs the 2021 PFS (C$450m NPV) net of build capex.
Next steps will see (i) optimization on resource / mine planning, (ii) incorporation of the recently discovered 23 and 21A West Zones into the mine plan for an extended mine life, (iii) additional vendor metallurgical test work, (iv) review of the diversion tunnel for possible cost reduction, and (v) MRE update and permitting. Raise: last week Skeena undertook a C$30m bought deal at C$6.05/sh. C$17m of this will be used to pay Barrick C$17.5m trailing payments. The residual will be used to fund permitting and G&A through CY23 at which point a build finance is targeted.
Our view: DFS is a beat on SCP estimates Against SCPe: The DFS is a beat on our estimates overall, hence our PT lift. The key delta being the throughput expansion to 3.7Mtpa mid-life to offset drop in grade, lifting LOM production to 3.3Mtpa / Eskay Creek (100%) PFS DFS Δ% Old New Δ% Eskay Creek (100%) PFS DFS Δ% Old New Δ% Mining inventory (000t) 26.4 29.9 13% 26.4 29.9 13% G&A cost (US$/t) 6.23 4.18 -33% 6.9 4.18 -39% AuEq grade (g/t) 4.6 4.0 -12% 4.6 4.0 -13% LOM C1 costs (US$/oz AuEq)* 509 571 12% 569 575 1% Ag % of revenue (%) 34% 25% -26% 21% 19% -11% LOM AISC (US$/oz AuEq)* 548 651 19% 611 654 7% Mining inventory AuEq (000oz) 3,880 3,850 -1% 3,898 3,854 -1% Net / gross revenue (%) - - - 76% 80% 5% Strip ratio (x) 8.0 7.5 - 6% 8.0 7.5 - 6% Total build capex (C$m) 488 592 21% 537 592 10% Au recovery (%) 84.2% 84.2% 0% 84.2% 84.2% 0% Sustaining / exp'n capex (C$m) 139 180 30% 139 180 30% Ag recovery (%) 87.3% 88.3% 1% 87.3% 88.3% 1% Closure liability (C$m) 92.4 138 49% 92.4 138 50% LOM avg throughput (Mtpa) 2,696 3,323 23% 2,642 3,323 26% Gold price (US$/oz) 1,550 1,700 10% 1,850 1,850 0% Production AuEq Y1-5 (000oz pa) 450 431 -4% 431 448 4% Silver price (US$/oz) 22.0 19.0 -14% 24.0 24.0 0% Production AuEq LOM (000oz pa) 352 349 - 1% 331 362 9% Project NPV post-tax (C$m) 1,399 1,412 1% 1,632 1,953 20% Mining cost (US$/t) 3.58 3.72 4% 3.94 3.72 - 6% IRR post-tax (%) 56% 50% -10% 52% 54% 6% Processing cost (US$/t) 18.22 16.90 - 7% 20.0 16.90 - 16% Payback (years) 1.40 1.00 - 29% 1.00 1.25 25% Source: SCPe,
*Mine costs, and all concentrate costs included (transp., penalt., TC/RC etc) Source: SCPe, *Mine costs, and all concentrate costs included (transp., penalt., TC/RC etc) SKE SCP SKE SCP 21 September 2022 Page 2 362koz pa AuEq vs our prior 2.6Mtpa / 331koz pa AuEq estimates. On costs, we previously modelled +10- 15% on capex and opex to capture inflation, but still need a 10% lift here on build capex, while the expansion capex added C$40m to our estimates. Also, capex now includes a water diversion tunnel to divert a creek over 1.2km.
Operating costs saw some improvement, driving US$654/oz (+7%), driving a +20% lift in our modelled NPV to C$1,953m discussed in more detail below. Unit costs are generally aggressive compared to producing peers in light of recent inflation. On inventory: The global resource saw modest changes, now at 5.6Moz @ 3.4g/t AuEq (96% M&I) +17% on tonnes, -15% on grade. Similarly the reserve ounces remain roughly unchanged at 3.9Moz albeit slightly lower grade on +13% lift in tonnes. While not in reserves, the UG resource saw an impressive +25% lift in ounces to 279koz @ 5.2g/t AuEq on good conversion to M&I as well.
We highlight these changes below in Table 2, including changes to constraints: gold price, top cuts, and block sizes. Changes are substantial, with a change in modelling method, lifting of top cut, dropping of UG cut-off, and lifting in metal price assumptions, offset by larger blocks and more broad compositing. Table 2. Resources / reserves ‘New vs Old’ summary Processing / TCRC / Payability: With a bond work index of 24kWh/t from 22 Zone later in life, processing / capacity will be some 50% worse than on early years ore averaging 14kWh/t, offset by a coarse grind to >100µm (100-212um in the release) with 15-35µm regrind. Offtake terms aren’t disclosed for the 35g/t concentrate, with economics based on preliminary contract terms / draft term sheets, on which 86% (+2% vs. PFS) / 80% (-3% from PFS) payability was modelled for gold and silver, respectively. LOM penalties dropped considerably from SCPe C$74m down to ~C$50m. With moisture up from SCPe 10% to 13%, and grade down from 45g/t to 35g/t, we expect treatment charges would be expected to rise but these were not disclosed. We previously C$146/t transport costs, which we now lower to C$140/t to match the PFS. Buffer, inflation and future funding: the updated 3Q22 FS for Eskay puts capex at C$592m, we then assume an additional ~C$17.5m to buy back the royalty from Barrick and C$28m of central G&A (the downside of a longer build and complex logistics), and C$47m of inventory, includes SCPe finance + C$32m working capital. This takes total uses of cash to C$669m. With 2Q22 cash plus recent $30m financing, we estimate pro-forma cash of C$89m, plus debt @ 65% gearing and equity at 0.6xNAV (currently trading at 0.3xNAV) gives sources of C$680m for a C$11m buffer—includes C$46.6m contingency to absorb inflation. Although given flexibility on anything from exploration spend, permitting timeline, to divestments and alternative financing such as silver streaming, this is only an approximation for now. Table 3. SCPe Eskay Project capital sources and uses Source: SCP estimates Tonnes AuEq AuEq Au / Ag M&I New (1Q22) Old (2Q21) Eskay 1Q22 MRE (000t) (g/t) (000oz) (%) (%) Methodology OK / ID2 OP: OK Pit global resource 49,928 3.20 5,329 78 / 22 97% Parent block (m) OP: 10x10x5m; UG: 3x3x2m OP: 9x9x4m; UG: 3x3x2m D to 2Q21 (%) +16% -23% -2% 72 / 28 +1% SMU block (m) 5 x 5 x 2.5m pit, 1x1x1 UG 3 x 3 x 2m pit, 1x1x1 UG UG global resource 1,617 5.23 279 81 / 19 85% Composite (m) OP: 2.5m, UG: 1m OP: 2m, UG: 1m D to 2Q21 (%) +26% -3% +25% 88 / 12 +21% Top-cut (g/t) 4.5-600g/t Au; 25kg/t 2-650g/t Au; 25kg/t Ag Global resource 51,545 3.38 5,608 76 / 24 96% OP: 0.7g/t AuEq OP: 0.7g/t AuEq D to 2Q21 (%) +17% -15% -1% 73 / 27 +2% UG: 2.4g/t AuEq LH 2.8g/t AuEq DF UG: ~2.6g/t AuEq 3Q22 DFS LOM 29,911 4.12 3,850 75 / 25 Pit shell price (US$/oz) US$1,700/oz Au US$23.00/oz Ag US$1,615/oz Au US$21.85/oz Ag Source: Skeena, SCP Holes / meters (m) 8,409 / 766,799 8,334 / 756,072 Cut-off (g/t) Funding: uses Funding: sources Build Capex C$592m Pro-forma cash (2Q22 + rse) C$89m SCPe G&A to 1st Au + NSR buyback C$45m Mine debt @ 65% gearing C$385m SCPe pre-production expl'n C$0m Mine build equity at 0.6xNAV C$207m SCPe finance costs + wkg cap C$32m Total proceeds C$680m Total uses C$669m Buffer C$11m *Cash from options expiring pre first pour 21 September 2022 Page 3 Valuation update: maintain our BUY rating and lift PT from C$12.45/sh to C$13.25/sh We model the DFS as filed on Sedar and arrive at C$1,499m NAV (vs. C$1,412m published) with similar inputs, including the C$17.5m payment for 0.5% NSR buyback from Barrick. The Eskay Creek property currently has a total 2.0% NSR outstanding. Lifting the gold / silver pricesto US$1,850/oz / US$24/oz takes this to C$1,953m 1xNAV (+20% higher from previous). From there, we add value for Snip and resources outside reserves at US$75/oz and US$50/oz respectively, then add cash to arrive at a group NAV of C$2,232m NPV5%-1850 before G&A / finance costs. With the stock trading at 0.24xNAV, the interplay between funding, value and dilution is key; as such we maintain our BUY rating and lift our forward looking PT from C$12.45/sh to C$13.25/sh based on 0.6xNAV multiple and 105m fully-funded fully diluted share count. Table 4. 2 (A) SOTP asset-only NPV and NAV (no gearing / finance costs / G&A) and (B) sensitivities Why we like Skeena Resources • Large high-grade open pit with SCPe >500koz upside potential in coming 12-18M • Shift in market dynamics allows concentrate sales for lower capex • Optionality from high-grade Snip mine nearby to blend concentrate or add ounces • Catalyst heavy with drilling, metallurgy, and DFS optimizations in coming 12M Catalysts • 2023: permitting updates • 3Q23: SCPe build start • CY26: SCPe first production • 2H22: Exploration and AWF infill / expansion drilling Research Brock Salier (London) M: +44 7400 666 913 bsalier@sprott.com Eleanor Magdzinski (Toronto) M: +1 705 669 7456 emagdzinski@sprott.c