Seabright sits on jewel of east

On the threshhold of crossing that magic line which separates exploration companies from gold producers is Toronto-listed Seabright Resources. This Halifax- based company plans to produce from its Beaver Dam and Forest Hill properties, both in north- eastern Nova Scotia, by this July.

After analysing the reserves and operating plan for these projects, Wood Gundy’s George Brack concludes the company’s shares offer the potential for superior returns relative to the shares of established gold producers. Not only that, but the company has several interesting exploration properties.

Purchase of Seabright shares is recommended by Mr Brack for investors willing to bear the risk associated with a company developing new mines.

Referring to the Beaver Dam property as the “jewel of the east,” Mr Brack notes total proven, probable and possible reserves at the property stand at 2.95 million tons grading 0.27 oz gold per ton.

Management confirmed its plan to put the Beaver Dam into production this past February after receiving the positive results of a feasibility study done by Kilborn Ltd.

The study was confined to 1.1 million tons of ore with a mineable grade of 0.307 oz gold per ton. This ore exists above a depth of 300 m. The operating plan calls for a shrinkage stope mining method using a 1.5-m mining width. A decline ramp will provide access to the working areas of the mine. Production this July

Seabright plans to begin production this July at a daily rate of 330 tons. As more working areas are opened up, production will increase gradually to a daily rate of 770 tons by 1990.

At these rates, the ore above the 300-m depth will be enough for seven years of mining. Mr Brack believes that the additional 1.6 million tons of probable and possible reserves located below the 300-m depth will also be developed, extending the mine life to 15 years at planned production rates.

Looking at production and cost estimates for Beaver Dam, Mr Brack forsees 11,585 oz gold recovered this year at an average cost of $276(US) per oz. This cost per oz figure decreases the following year to $247 with an estimated 27,035 oz gold produced. In 1989 estimated production amounts to 37,850 oz at cost of $195 per oz, while 1990 sees an estimated 49,430 oz produced at a cost of $194 per oz. Forest Hill

To the east of its Beaver Dam project, Seabright is carrying out underground exploration and development on its Forest Hill gold property.

Surface drilling and underground muck-sampling has indicated the potential for a high grade narrow vein gold orebody, says Mr Brack.

Proving reserves in such a deposit, however, requires very closely spaced drilling and extensive sampling, he says. So early last year, Seabright elected to sink a 230-m shaft and conduct underground exploration to delineate and better define the deposit. Development has reached the high grade zones indicated from surface drilling, and a bulk sample will be tested in the near future to confirm mineable grade, he says.

Mr Brack says there is no available estimate on reserves at Forest Hill. However, the company’s 1985 annual report notes its drilling program, which resulted in 25 intersections of gold bearing veins along a length of 900 m at depths between 120 m and 240 m, suggests drill- inferred ore potential of 300,000 tons grading 0.55 oz.

Seabright plans to begin producing 110 tons of ore per day this May, he says.

Production and cost estimates are that Forest Hill will produce 2,480 oz gold this year at an average cost of $295 per oz. Some 6,200 oz are estimated to be produced the following year at a cost of $311 per oz. In 1989, 6,200 oz are estimated at a cost of $332 per oz. The same amount of gold is estimated to be produced the following year but at the higher cost of $346 per oz. Gays River mill

Through its purchase of the Gays River lead-zinc mine and mill from Esso Resources for $3.4 million in 1985, Seabright has been able to avoid the significant captial cost of building a new mill to process its ore.

Seabright has modified the mill to allow processing of 770 tons of ore per day. This ore can be trucked from Beaver Dam , Forest Hill and several potential deposits located within economic hauling distance, he says.

The cost of the modification was $400,000. Kilborn has estimated the replacement cost of the mill to be $26.5 million.

A further expenditure of $350,000 would bring the mill capacity to 1,300 tons per day. Total planned production from Forest Hill and Beaver Dam will start at 440 tons per day this year and reach 880 tons per day in 1990. Consequently, Seabirght has excess milling capacity which it can use to process ore from other sources.

Through its 51%-owned subsidiary, Seabright Explorations, the company is engaged in exploration at various stages on several properties, two of which are at the advanced stage. The Caribou and Moose River properties are both former gold producers and will see drilling and underground exploration this year. Shares to $11

At the time of Mr Brack’s report, Seabright shares were trading at the $8.75 level. He believes, however, these shares could reach $11 by 1988.

The discounted cash flow value of Beaver Dam and Forest Hill operations is projected to be $2.45 per share in 1988. In the current market, gold producers trade on average at four times their discounted cash flow value. Applying this multiple to Seabright shares suggests a market value for the operations to be $9.80 per share. In addition, share investments currently worth about $1.65 per Seabright share bring the total value per share to $11.45.

Mr Brack also values the shares on a p/e basis. Typically the market applies 30-40 times multiples on the earnings of gold producers. By 1988, if Seabright’s mines are developed as planned and the company proves itself as a producer, the shares could trade at a 35 times multiple of 1989 earnings, which he estimates to be 50 cents per share. On this basis, the stock could reach $10.50 in 1988. Added potential

Furthermore, says Mr Brack, Seabright enjoys expansion potential from at least four other sources, and none of these appears to be reflected in the current stock price. They are:

* Potential daily production increases at Beaver Dam and/or Forest Hill.

* The delineation of further reserves at depth and along strike to the west at Beaver Dam.

* If mining grade at Forest Hill proves to be as high as the grade indicated by surface drilling, annual gold production and financial performance will be enhanced. In his model, Mr Brack uses an ore grade of 0.25 oz gold per ton, pending confirmation of the mineable grade from results of a bulk sample.

* Success on one of its other exploration projects.

Among the risks in investing in Seabright, Mr Brack notes the company plans to use the shrinkage stope mining method at its projects. “This type of mining requires a skilled labor force that could take time to recruit and/or train,” he says.