Positive PEA for Seabridge’s KSM project

Vancouver – A preliminary economic assessment has tagged the Kerr-Sulphurets-Mitchell (KSM) project in northwest British Columbia with a US$3.4-billion development cost, but the investment would buy a 30-year mine life with a handsome production profile for owner Seabridge Gold (SEA-T, SA-X).

In a news release about the report Seabridge president and CEO Rudi Fronk stressed the project’s many favourable characteristics. “There are very few undeveloped gold projects in the world today with the attributes of KSM: long mine life, significant annual production, cash operating costs well below the gold industry average, and substantial exploration upside, all in a politically stable environment,” he said.

The PEA investigated the merits of an open-pit mine churning out 120,000 tonnes of ore daily to feed a flotation mill that would produce a combined gold-copper-silver concentrate. The concentrate would then travel by truck or pipeline to the nearby deep-sea port at Stewart. The processing facility would also produce a separate molybdenum concentrate as well as gold-silver dore.

It is certainly a project of scale. The mill would process 43.2 million tonne of ore each year, which adds up to 1.28 billion tonnes of ore by the end of its 30-year mine life. Total production over the life of mine: 19.1 million oz. gold, 5.4 billion lbs. copper, 64.1 million oz. silver, and 32.3 million lbs. molybdenum.

Over the first eight years of production the mine would tap into higher-grade ore from the Mitchell zone, carrying average grades of 0.67 gram gold per tonne, 0.3% copper, 2.21 grams silver per tonne, and 0.029% molybdenum. Over the mine’s lifespan most of the grades drop slightly – gold to 0.6 gram, copper to 0.23%, and silver to 2.14 grams – though the molybdenum grade rises to 0.0398%.

On a yearly basis, the production numbers are significant. In years one to eight the mine will each year produce 722,000 oz. gold, 253 million lbs. copper, 2.2 million oz. silver, and 655,000 lbs. molybdenum; annual production over the mine’s total life averages to 648,000 oz. gold, 183 lbs. copper, 2.2 million oz. silver, and 1.27 million lbs. moly.

The cost to develop a project of such scale, however, is steep. Initial capital costs, including contingencies, come in at US$3.4 billion. Sustaining capital, closure, and reclamation costs add US$943 million.

The report evaluated the project using four sets of prices. The base case scenario used three-year trailing average metal prices; a second assessment used one-year average prices and a second used two-year average prices; and a fourth calculation used recent spot prices (US$750 per oz. gold, US$1.75 per lb. copper, US$10 per oz. silver, and US$25 per lb. moly). The first three scenarios used a US-Canadian-dollar exchange rate of 0.92; the spot price evaluation used 0.8.

At the base case, KSM carries a net present value (NPV) of US$2.8 billion, using a 5% discount rate, and a 13% internal rate of return. Payback is achieved in just under seven years. The total cost to produce each ounce of gold in the base case is US$233.

In the spot price scenario, KSM has a NPV of US$900 million and an 8% internal rate of return. The project pays back capital investment in just under 10 years and the total cost to produce each ounce of gold sits at US$494.

KSM is located in the Iskut-Stikine River region, roughly 65 km northwest of Stewart. Access to the property is by helicopter. An independent road access study for KSM proposed building two routes. One would extend from the Eskay Creek mine some 32 km south to the KSM deposits. That raod would require building two bridges. The other road would stretch from Highway 37 southwest to the mill site. The mill site is to be connected to the deposits via an conveyor tunnel some 10 km long.

The Mitchell deposit sits at the north end and is the largest of the three deposits. Mitchell is home to 734.1 million indicated tonnes grading 0.69 gram gold and 0.18% copper as well as 667.4 million inferred tonnes averaging 0.62 gram gold and 0.15% copper.

At the south end of the line, Kerr host 206.3 million indicated tonnes grading 0.25 gram gold and 0.45% copper plus 51.4 million inferred tonnes averaging 0.21 gram gold and 0.45% copper. And sitting in the middle is Sulphurets, which holds 74.7 million indicted tonnes grading 0.75 gram gold and 0.24% copper and 33.6 million inferred tonnes grading 0.62 gram gold and 0.2% copper.

The resource numbers come from an estimate completed almost a year ago. Since then Seabridge has drilled 17,000 metres at KSM. The summer program involved infill drilling to upgrade inferred resources to indicated status, geotechnical drilling in the pit area, and expansion drilling. All intercept are interpreted as true widths.

Several drill holes expanded the Mitchell zone to the northwest, identifying a new down-plunge zone. Hole 73, for example, cut 584.8 metres grading 0.62 gram gold and 0.17% copper. Other holes outlined a higher-grade body within the Mitchell zone: hole 86 cut 805 metres grading 0.56 gram gold and 0.34% copper, including a 106-metre breccia intercept carrying 1.22% copper and a 155-metre segment carrying 1.08 grams gold.

Infill drilling in some areas returned better grades than expected and the new results are expected to improve the new resource estimate. And in a pleasant surprise, several geotechnical holes drilled to test the proposed north and south pit walls identified several zones of mineralization within the conceptual pit that had been classified as waste. Hole 79, for example, hit 143 metres grading 0.16 gram gold and 0.36% copper.

The last set of results from the drill program is expected shortly. Seabridge plans to calculate a new resource estimate by February and then rework the PEA by the second quarter of 2009, including the updated resource as well as a new mine plan and revised cost estimates.

And recent metallurgical testwork showed standard flotation recovers 77.4% of the gold in KSM ore and 84.8% of its copper. The concentrate produced graded 25% copper.

Seabridge bought KSM in 2000, when gold traded for US$260 per oz. and copper at US65¢. The then-junior paid just $200,000 for the project from previous owner Placer Dome. In late 2002 Seabridge optioned the property to Noranda, which became Falconbridge and then Xstrata (XSRAF-O, XTA-L), giving it the right to earn in a 50% interest by spending $6 million on exploration in six years. In 2006 Seabridge re-acquired a 100% interest in the property from Falconbridge for shares and warrants that became worth roughly $27 million.

According to its third quarter results, Seabridge holds over $10 million in working capital. News of the KSM PEA did not seem to impress shareholders, who pummelled Seabridge’s share price down $1.27 to $12.53. The company has a 52-week trading range of $7.50 to $23.29 and has 37.3 million shares issued.