Seabridge improves economics at KSM, drills new zone

Seabridge Gold (TSX: SEA; NYSE: SA) has published two more economic studies at its large-scale KSM gold-copper project in northern B.C., confirming the project’s long life and low costs.

In late September, Seabridge updated a 2012 prefeasibility (PFS) — used to complete its environmental assessment in 2014 — by incorporating the slightly larger 2016 reserve estimate and lower metal price assumptions.

Located 65 km northwest of Stewart, B.C., the KSM project hosts four core deposits: Kerr, Sulphurets, Mitchell and Iron Cap. It contains 38.8 million oz. gold reserves and 10.2 billion lb. copper (from 2.2 billion tonnes grading 0.55 gram gold and 0.2% copper per tonne). This makes it one of the world’s largest undeveloped gold-copper deposits.

“It’s a giant, and it happens to be in one of the safest political jurisdictions in the world: Canada. We also de-risked it by going through an environmental assessment process,” Seabridge’s chairman and CEO Rudi Fronk says.

The 2016 PFS — prepared by Tetra Tech — envisions KSM as a combined open-pit and underground block-caving mining operation that could operate for 53 years. Annual production should average 540,000 oz. gold and 156 million lb. copper a year over the mine’s life.

The study proposes open-pit and underground block-cave mining at the Mitchell deposit, supplemented by open-pit mining at Sulphurets and Kerr, and underground block caving at Iron Cap. The maximum mill throughput would reach 130,000 tonnes a day.

The cost of getting the mine up and running is a staggering US$5 billion, down 12% from the 2012 PFS. Estimated sustaining costs are US$5.5 billion.

Total costs are US$673 per oz. gold produced, net of copper and silver credits. That “remains well below the industry average for operating mines,” Seabridge says.

Using a 5% discount rate, KSM has a base-case, after-tax net present value (NPV) of US$1.5 billion and an 8% internal rate of return (IRR). Payback should occur within 6.8 years. The study assumed lower metal prices of US$1,230 per oz. gold, US$2.75 lb. copper and US$17.75 per oz. silver, and a lower U.S. to Canadian dollar exchange rate of 0.80.

(The 2012 PFS had an 11.5% pre-tax IRR. The study did not disclose after-tax numbers.)

On Oct. 6, Seabridge released a preliminary economic assessment (PEA) to show how the project’s economics in the 2016 PFS could improve by including the high-grade Deep Kerr and Iron Cap Lower zones. The study left out these zones, as they contain only inferred resources.

In total, the PEA incorporated an inferred resource of 2.7 billion tonnes at 0.35 gram gold and 0.3% copper, of which some were also on the project’s core deposits.

The field camp at Seabridge Gold’s KSM gold-copper project, 65 km northwest of Stewart, British Columbia. Credit: Seabridge Gold.

The study recommends that mining at both the Kerr deposits should occur together by underground block caving. It also suggests the same for the Iron Cap deposits, while shrinking the earlier proposed open pits.

It envisages KSM as a 51-year mine, where open-pit mining would account for 22% of the total production, compared to 70% in the 2016 PFS. This would result in the mine’s total waste rock shrinking 81%, or 2.4 billion tonnes, which lowers the project’s footprint.

By including Deep Kerr, the maximum mill throughput will jump to 170,000 tonnes per day. The higher throughput would lead to more annual metal production and declining costs.

The PEA estimates total costs of US$358 per oz. gold, net of by-product credits, down 47% from earlier. Expected life-of-mine operating costs would come in at negative US$179 per oz., including copper and silver credits, versus US$277 in the PFS.

The downside of transitioning the project to a mostly underground operation is the higher capital requirement. Estimated start-up costs are US$5.5 billion, with life-of-mine sustaining costs of US$10 billion.

Commenting on the higher sustaining costs, Fronk notes the PEA removed 2.4 billion tonnes of waste from the mine plan, resulting in lower stripping and water treatment costs. “At a $2-per-tonne mining cost, that is essentially equal to the $5 billion of incremental sustaining capital,” he says.

Using the same parameters as in the PFS, the PEA’s base-case after-tax NPV and IRR improve to US$3.4 billion and 10%. The payback period is 6.4 years.

In the PEA’s alternate case, where it uses higher metal prices of US$1,500 per oz. gold, US$3 per lb. copper and US$25 per oz. silver, the NPV and IRR increase to US$6 billion and 13.4%. The payback period falls to 4.7 years.

Fronk notes the IRR and NPV fail to capture the value of a long-life asset like KSM, adding the payback period is a better indicator. The PEA’s alternate case estimates it would take five years to recoup the project’s initial costs. “That’s one-tenth of the mine life. That’s about as good as it gets in terms of capital efficiency,” he says.

Although some of the large gold companies have a “12% to 15% hurdle rate,” KSM benefits from being de-risked and its location in a politically safe jurisdiction, which Fronk says would allow a lower hurdle rate.

Seabridge prefers to develop the “shovel-ready” project in a joint venture, where it could stay on as a minority owner and minimize its capital requirement. The executive notes the company is in talks with potential partners, and could likely sign an agreement next year, if market conditions improve.

On Oct. 11, Seabridge received permits from the B.C. government to develop an exploration adit into the large Deep Kerr deposit. With the 2,100-metre adit, Seabridge can drill the deposit from underground, which is cheaper than drilling from surface. The drilling will help the company upgrade the deposit’s inferred resource to higher categories.

A week later, the junior reported favourable results from a mid-year drill hole that tested the Iron Cap Lower zone at depth. While the hole confirms the extension of the zone, it also intersected a new high-grade gold-copper zone. It returned 61 metres of 1.2 grams gold and 0.95% copper, which are among the best grades found to date on the KSM project.

The company says the zone could represent a new core zone. It aims to follow up on the result in its 2017 drill campaign.

Seabridge shares ended Oct. 20 at $14.99 per share. The company has an $811-million market capitalization. Fronk expects the firm will end 2016 with $10 million in the bank.