RE:Key Considerations IMOHere's the latest from Sprott. There is a lot of risk with building and the timeline has many hurdles to jump. Good Project however there's a lot to go wrong to make it into production. Sorry can't posts the graphs.
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This week’s DFS shows a 4.6Moz @ 3.6g/t AuEq reserve being processed at 3-3.5Mtpa plant for 324koz pa, with C$713m capex and US$684/oz AISC driving the published NPV5%-1800-23 C$2.0bn.
Geologically we see tonnes up 33%, grade down 10% for 20% lift in gold with only 6% lift in strip. Combined with grade scheduling, this sees Y1-5 actually lifting from 431koz pa to 455koz pa AuEq at 5.5g/t.
Costs have lifted, with water-treatment lifting processing cost by 28%, offset by 19% drop in mining costs to US$2.18/t, albeit much of this comes from moving some stripping into sustaining capex.
Broadly, we see c. 20% buildcapex inflation, with another 10% from scope additions such as C$45m owner’s-costs and C$31m water treatment, for total C$713m pre-production capex.
Opex inflation is seen in LOM capex lifting from C$910m to C$1.5bn LOM (build, sustaining, closure). Accelerated early-years production and lift in gold and silver (US$1,700 > US$1,800, US$19/oz > US$23/oz) plus a lower-volume of high-grade concentrate offset this, for a pleasing lift in NPV to C$2bn.
A key win here was lifting concentrate grades from 37g/t Au to 55g/t Au for C$400m LOM savings; pre 43-101 we estimate net payability lifting several points from prior 84% (ie net transport / TC-RC / deductions / penalties / credits).
Valuation impact: we match the Skeena DCF for build-start SCPe NPV5%-1800-23 of C$2.0bn, and adjusting for our LT US$1,850/oz and US$24/oz Ag, lifts this to C$2,132m. With the reserve lift we remove the C$301m we had for resources outside reserves at US$50/oz to lift our group NAV from C$2.063m to C$2,282m.
Dropping our 0.6x multiple to 0.5x to reflect weak ECM, we maintain our BUY rating lifting our PT from C$10.90/sh to C$11.00/sh.
Financing and permits next: with an NPV that under almost any inputs, in our view, is multiples of the market cap, the DFS talks to a good asset / study.
Other than Step 3 – Execution, the critical price driver in our view is Step 1 – Financing and Step 2 – Permitting. Silver makes up 30% of revenue, with the company flagging today potential for streams as high as 1xNAV. Given the 29% cost-of-equity implied by the current 0.21xNAV that the stock trades on, that would clearly be an excellent result.
Given roads / mill building / infrastructure can proceed pre-permitting, we think perhaps 2/3 of the spend could proceed ahead of the 1H25 final JA2 permit ahead of CY26 production.
A quietly accumulated regional land package, and drilling on Eskay Deeps, could provide ancillary news flow through the permitting period also, along with PFS-level engineering work on Snip scheduled for mid-next year.
Table 1. DFS summary production and valuation metrics against 3Q22 FS and SCP old/new estimates Eskay Creek DFS hit C$2b NPV (+42% vs 3Q22 FS), PT lifted with potential streaming key next step The DFS for Eskay Creek saw an after tax NPV5%-1800/23 of C$2,003m (+42% vs 3Q22 FS), IRR of 42.9% and LOM AISC of US$684/oz AuEq.
Pre-production capex was C$713m (+21%) for an initial build including C$31m for a water treatment plant that was introduced for the first time, sustaining and expansion capex are now C$570m (+216% vs prior - incl. (i) payments for equipment leasing (prior was captured as opex)
Eskay Creek (100%) 22 FS 23 DFS Δ% Old New Δ% Eskay Creek (100%) 22 FS 23 DFS Δ% Old New Δ% Mining inventory (000t) 29.9 39.8 33% 29.9 39.8 33% Water treatment cost (C$/t) - 2.48 - - 2.48 - AuEq grade (g/t) 4.0 3.6 -10% 4.0 3.5 -13% LOM C1 cost (US$/oz AuEq)* 571 567 -1% 604 595 -2% Mining invent'y AuEq (000oz) 3,850 4,607 20% 3,854 4,464 16% LOM AISC (US$/oz AuEq)* 651 684 5% 688 738 7% LOM (years) 9.0 12.0 33% 9.0 12.0 33% Total build capex (C$m) 592 713 21% 592 713 21% Strip ratio (x) 7.5 8.0 6% 7.5 8.0 6% Sustaining / exp'n capex (C$m) 180 570 216% 180 570 217% Au recovery (%) 84% 84% 0% 84% 84% 0% Closure liability (C$m) 138 175 27% 138 175 27% Ag recovery (%) 88.3% 92.2% 4% 88.3% 92.2% 4% Total capex (C$m) 910 1,458 60% 911 1,458 60% LOM avg throughput (ktpa) 3,323 3,317 0% 3,323 3,317 0% Gold price (US$/oz) 1,700 1,800 6% 1,850 1,850 0% Production AuEq Y1-5 (koz pa) 431 455 5% 448 451 1% Silver price (US$/oz) 19.0 23.0 21% 24.0 24.0 0% Production AuEq LOM (koz pa) 349 324 -7% 362 320 -12% Project NPV post-tax (C$m) 1,412 2,003 42% 1,746 2,132 22% Mining cost (C$/t) 3.72 3.00 -19% 3.72 3.00 -19% IRR post-tax (%) 50% 43% -15% 51% 51% 0% Processing (C$/t) 16.90 19.11 13% 16.90 19.11 13% Payback (years) 1.00 1.20 20% 1.50 1.41 -6% G&A cost (C$/t) 4.18 5.65 35% 4.18 5.65 35% SKE SCP
SKE Source: SCPe, *Mining plus conc. costs (transp.,TC/RC etc), excl deduction; ^SKE recovery shown as metal produced vs metal processed SCP Skeena Resources, 15 November 2023 Page 2 E Q U I T Y R E S E A R C H and (ii) capitalizing larger volumes of waste)) to increase process plant capacity from 3.0Mtpa to 3.5Mtpa in Y5 and C$175m for closure costs, for a total capex of C$1,458m (+60% vs 3Q22). LOM production averages 324koz pa AuEq (Y1-5 455koz pa) over a 12-year mine life (vs 9-year in 3Q22), based on updated reserves of 4.6Moz AuEq, representing a +19% increase of LOM inventory that comes with a -10% drop on grade compared to 3Q22 FS.
An alternative / simplified flowsheet achieved recoveries of 83% for Au (vs 84.2% prior) and 91% for Ag (vs 88.3% before) resulting in improved mass pull and higher-grade concentrates.
Table 2. Updated Eskay Creek Reserves against 3Q22 FS Other changes from the CY22 FS include moving from face shovels to regular backhoes for more selective mining. Changes to the flow sheet have allowed lower mass-pull, for higher concentrate grade, which is associated with some C$400m savings of downstream costs (transport, TC/RC etc) from 1.2-1.3Mt of concentrate volumes being reduced.
This results from an increased up-front reagent, and refined flotation, plus increased credits, as well as moving from 100-212um primary grind with 15-35um regrind in three mils to simple 45um coarse grind and single 10um regrind in single stage. An increased mining fleet to stockpile in non-snow season and improved mill buildings address mitigate risk from snow.
Additional work will be undertaken to steepen pit slopes also, along with bringing in Snip into the back end of the mine plan. Three rigs are now turning at Eskay Deeps, which should continue into December before taking a break and coming back, potentially focused on seismic targets.
Next steps include a maiden engineering study for Snip as a satellite operation to the Eskay Creek project is expected to be completed by 1H24 and further investigation for concentrate value optimization through revenue from base metals (Pb/Zn). Figure 1. Eskay Creek NSR (USD/oz AuEq) over LOM Source: Skeena Tonnes Grade AuEq Eskay Creek 4Q23 Reserves (000t) AuEq (g/t) (000oz) Proven 28,000 4.10 3,700 D to 3Q22 (%) +62% -17% +36% Probable 11,900 2.30 900 D to 3Q22 (%) -6% -16% -20% Total Reserves 39,800 3.6 4,600 D to 3Q22 (%) +33% -10% +19%
Source: Skeena, SCP Skeena Resources, 15 November 2023 Page 3 E Q U I T Y R E S E A R C H Why we like Skeena 1. Large high-grade open pit with SCPe >500koz upside potential in coming 12-18M 2. Shift in market dynamics allows concentrate sales for lower capex 3. Optionality from high-grade Snip mine nearby to blend concentrate or add ounces 4. Catalyst heavy with drilling, metallurgy, and DFS optimizations in coming 12M Catalysts 1. CY24: Potential streaming package 2. CY24: Long lead orders and civil (pre-permitting) construction start 3. 2Q24: PFS-level study on Snip based on M&I 4. Mid 2025: permits complete 5. Mid 2026: production start up