One of the great advantages of being a writer is we get to take advantage of what is called “artistic license” when composing headlines designed to grab the attention of a large audience. Obviously, I was successful, based upon the fact that you are now reading the article. However, I must confess that the idea presented here will not allow you to buy gold for $10.95/ounce; you will be able to buy it for much less than that. As a matter of fact, I am going to show you how to buy $83.458 billion worth of metal for only $407.25 million! There is just one catch; the metal is still in the ground and that is what creates the spectacular opportunity presented in shares of Seabridge Gold (SA, Financial) today.
$83 Billion? Really?
I know it sounds too good to be true. I also know that generally means that it is. I think this case is an exception to the rule. Here’s why:
- Seabridge Gold’s KSM project has proven and probably gold reserves of 38.2 million ounces. At $1,300/ounce, that gold would be worth $49.66 billion.
- The KSM property contains proven and probable copper reserves of 9.9 billion pounds. At a price of $3/pound, the copper is worth $29.7 billion.
- The property also contains proven and probable silver reserves of 191 million ounces when valued at $20/ounce would be worth $3.82 billion.
- As a final piece of added value, the property also contains proven and probable molybdenum reserves of 213 million pounds. At the current market price of about $28,000/ton this adds about $2.98 billion of metal value to the project.
How Can Assets With This Value Be Price At This Level?
When considering any investment in assets that appear to be undervalued to a ridiculous extent, it is critical to develop a deep understanding of why the undervaluation exists and whether it is based upon legitimate concerns as to the viability of the business, based on a broad misunderstanding or even driven by fear and emotion. In the case of Seabridge Gold, I believe I have found the perfect storm of negative emotions, fear and misunderstanding that have been coupled with a brutal, industry specific bear market in the mining industry. These factors have combined to create what could be a life-changing investment for those willing to buy the shares now.
Since gold prices peaked right at $1,900/ounce in September of 2011, they entered into what became a three-year bear market that saw a fall to below $1,200/ounce at the low point. The mining sector was hit even harder and many companies saw their shares devalued by up to 90% or more. Many smaller participants failed to survive. While shares of Seabridge Gold were crushed right along with the rest of the industry, the business itself continued right along its previous path. It has been able to do so because it is not a mining business, it is an exploration and development business and it is a very, very well managed one. Even better, it operates in a segment of the mining industry that is not clearly understood by most investors. This misconception has greatly aided in creating the opportunity we have before us today.
For the purpose of this analysis, I will only be focusing on Seabridge Gold’s KSM project as it is the major asset of the business and the only one that I believe is close enough to an “event” or, more properly, a series of events that will produce a windfall profit for those who are willing to buy now. 18th century British nobleman, Baron Rothschild, a member of the famed Rothschild banking family, is credited with saying: “The time to buy is when there is blood in the streets.” There is currently blood in the streets of the resource industry; it won’t be there forever.
The trick to buying low for big gains is to be able to identify what event or series of events will drive the share price higher and having a solid theory as to when those events will occur.
Here Are The What’s And The When Is About To Happen Now?
It is a bit ironic that that some of the very things those who are negative toward Seabridge as an investment are the very same things that will soon become the catalysts and events that will cause its share price to soar.
One of the highest risks in the mining business can be the inability to receive the environmental approvals required at the local and national levels. You could own the richest deposit on the face of the earth and have it be worthless if governments refuse to allow you to develop it. Several factors go into the approvals or rejections of mining projects and, anytime there are governments involved, you can bet politics will come into play. Many people have been highly skeptical of Seabridge’s ability to clear the regulatory hurdles for obtaining environmental approvals. They pointed to strong oppositions from native tribes of similar projects in Alaska in recent years where very promising projects were brought to a halt by local opposition and presumed the same would happen to Seabridge. They were recently proven wrong when Seabridge announced agreements with major First Nations tribes in the area who have now endorsed the KSM project. The concern was a legitimate question; the fear of a negative outcome was overblown. It was a large risk factor in the minds of many that has now been minimized. Seabridge Gold CEO, Rudi Fronk, expects to receive final environmental approvals at the provincial level within the next few weeks and the federal versions by late this year or early next year. With the First Nations endorsements, these approvals seem to be assured. The company just announced clearance of another major hurdle toward that end on July 22nd.
One of the most puzzling arguments I have heard from the Seabridge skeptics is that building the mine and ore processing operations could cost up to $6 billion and a company with a market capitalization of $407 million could never undertake the funding of a project that size. This is where the misunderstanding of what Seabridge is and what they really do works to our advantage in creating a huge opportunity. Rudi Fronk and Seabridge Gold have never intended to build and operate a mine at the KSM deposit. Their intention from day one has been to determine the value of the metal on the property, obtain the permits and perform the preliminary studies required to prove project feasibility and then sell the project to a major mining company or bring them in as a partner to cover the construction and operation of the mining and processing aspects of the mine. To say that this will not happen because the market value of Seabridge Gold is only $407 million is the equivalent of saying that a major oil company would not pay billions of dollars for a piece of property containing $83 billion of oil simply because the landowner doesn’t currently have a large net worth. It is just silly and it is based upon a complete misunderstanding of value and valuations.
Once the environmental approvals are in place and the results of this summer’s drilling program are known, we can expect Seabridge to become an attractive target for one of the major mining operations interested in the gold or copper reserves. Rudi Fronk has recently stated that the projected all-in cost of the gold production from a mine and processing facility at KSM will be somewhere around $700/ounce. This figure includes the credits that would be received from the sale of the other minerals but also includes the project capital cost for the operation of the facility as well as the eventual closure. That would place the net value of the metal at somewhere around $30 billion over the life of the project. If the project were to receive a market value of only 13.3% of that figure, it would value Seabridge at around $80/share. Today, the price is $8.65.
The Time To Act Is Now And Probably Not For Long
Over the next 12 to 24 months, there appears to be a chain of events scheduled to unfold any one of which could have served as a major catalyst for a stock price; in combination, they could prove to be explosive. It almost appears to me that the perfect storm of negative conditions that created this opportunity in the first place is about to be replaced by a perfect storm of positive events that could produce truly life-changing results for those willing to act while there is still some blood in the streets.
In the interest of full disclosure, I do wish to advise that I am holding a rather significant long position in shares of Seabridge Gold and have also sold naked put options with a $9 strike price and expiration of August 16th in hopes of increasing my holding if the shares will stay below $9 until then. I am not optimistic about being assigned these shares as I expect the announcement of the provincial environmental approvals any day and I believe that announcement will begin the march of the shares toward much higher levels.
