Sabina’s PEA paints a rosy picture at Back River

A recent preliminary economic assessment (PEA) for Sabina Gold & Silver’s (SBB-T) Back River has sketched a favourable prospect, highlighting high grades and lower-than-expected start-up costs for the gold project in Nunavut’s West Kitikmeot region.

The study envisions Back River as an open-pit and underground operation, with annual production of 300,000 oz. gold at cash costs of $542 per oz. over a projected 12.3-year mine life.

Over that time, miners would process 20.7 million tonnes averaging 6.13 grams gold to generate 3.7 million oz. gold, or 63% of Back River’s total resource.

The mine could come online in late 2016 or early 2017.  

“The PEA outlines a robust project with higher life-of-mine grades and a longer mine life than previously forecast,” BMO Capital Markets analyst Andrew Kaip writes in a May 30 note.

Anticipated start-up costs are $450 million, with life-of-mine sustaining capital coming in at $388 million. Combined, the project boasts an $839-million price tag.

 “For a mine of this size I think that’s very reasonable,” remarks Rob Pease, Sabina’s president and CEO, adding that some analysts have criticized the costs for appearing a bit low.

While initial capital expenditure (capex) is 36% below BMO’s estimate, Kaip writes he “continues to remain cautious on the arctic environment and models higher capital and operating cost assumptions.”

Kaip has pegged start-up costs at US$650 million — significantly higher than the $450 million calculated in the PEA — to account for cost escalation that would likely occur in the next two years, as Sabina moves Back River towards feasibility.  

It’s hard to forget that earlier this year Agnico-Eagle Mines (AEM-T, AEM-N) announced a US$645-million partial writedown on its Meadowbank gold mine in Nunavut following consistently high operating costs.

But Sabina’s CEO says he’s confident the company won’t run into costs issues like Agnico-Eagle, because the Back River project is higher grade and smaller in scope.  

“We are building a fairly small mine relative to today’s standards,” Pease contends. “The reason it’s not a billion-dollar capex project upfront is because we are not talking about building a 30,000 or 40,000-tonne-per-day mine, and mining 1 or 2 grams of material. We are talking about building a 5,000-tonne-per-day mine, which is feeding a head grade in excess of 6 grams per tonne.”

Of the 3.7 million oz. slated to be recovered over the mine’s life, 1.6 million oz. grading 5.76 grams gold would be extracted from the pit, while 2.1 million oz. averaging 6.44 grams would come from ­underground.

Using a base-case gold price of $1,250 per oz. and a 5% discount rate, the project Sabina acquired from Dundee Precious Metals (DPM-T) in 2009 has a post-tax net present value of $650 million and a 25% internal rate of return. Payback is expected within three years.

The debt-free junior is following up the PEA with a prefeasibility study and an initial permitting process.

The prefeasibility study should take a year to complete and will incorporate results from the company’s ongoing 2012 exploration and infill drill program, where it has budgeted $44 million to drill over 60,000 metres to expand known resources, locate new discoveries and upgrade resources.

Sabina has 8 drills turning on the property and in early June announced additional drill highlights, including 21.8 grams gold per tonne over 12 metres from the Llama zone and 9.5 grams gold over 7 metres from the Umwelt zone.

It also reported hitting a new zone dubbed Goose Hook 300 metres west of the Goose deposit, where results returned 3.7 grams gold over 9 metres.

All the deposits at Back River remain open at depth. “So there’s a lot of opportunity to grow,” Pease says. The drill program will continue until early October, and by year-end Sabina intends to release an updated resource for the project.

Sabina also plans to spend another $11 million this year on environmental and engineering work.

To finance the project, the company has a few avenues to explore, including the possible sale of all or part of its silver royalty held on Xstrata Zinc Canada’s Hackett River, which lies 45 km to the west.

Sabina, which sold the silver-zinc project to Xstrata (XTA-L) late last year, retains a 22.5% royalty on the first 190 million oz. silver produced, and a 12.5% royalty on the remaining silver output.

Analysts have estimated the royalty’s average present value at around $300 million, according to Pease. Even if it’s lower by $250 million, it more than covers half of the initial capex, he says. If Xstrata keeps de-risking the project the value of the royalty is expected to rise.

Sabina also plans to team up with Xstrata on the proposed Bathurst Inlet Port and Road (BIPR) project. The companies envision building a deepwater port at Bathurst Inlet, which is 70 km north of Back River, and an all-weather road linking the port to existing ice roads. This would allow the companies to share some of the infrastructure and associated costs.

But because that project is still in its early days, Sabina says the recent PEA didn’t include BIPR’s potential infrastructure benefits. The company is considering building processing facilities for Back River near the Umwelt deposit, a small camp at Bathurst Inlet to store fuel and other supplies, an all-weather airstrip, an annual ice road and roads to the waste-rock dumps and tailings facility.

In terms of geology, Pease says Back River is similar to Goldcorp’s (G-T, GG-N) Musselwhite gold mine in northwestern Ontario, where mineralization is mainly hosted in banded-iron formation. These deposits are known for their continuity, he says, making it easier to mine.

Back River is made up of seven claim blocks of which only two — Goose and George — have seen exploration and resource drilling. The Llama, Umwelt and Goose deposits are all on the Goose block, while the George block hosts the satellite George deposits.

“There are not very many projects in the world right now like [Back River]. There’s enough material and wide-enough material [to extract], which gives us the opportunity to be a 300,000-oz.-per-year producer, which puts us in the league of being a very significant gold producer.”

The company ended March with $147.4 million, and plans to exit the year with $90 million in hand.

BMO’s Kaip has a “speculative outperform” rating, and a $4.25 target on the stock.